Logistics Network Configuration

Outline
What is it? Methodology
Modeling Data Aggregation Validation

Solution Techniques.

The Logistics Network

The Logistics Network consists of:

Facilities: Vendors, Manufacturing Centers, Warehouse/ Distribution Centers, and Customers Raw materials and finished products that flow between the facilities.

Sources: plants vendors ports

Regional Warehouses: stocking points

Field Warehouses: stocking points

Customers, demand centers sinks

Supply

Production/ purchase costs

Inventory & warehousing costs Transportation costs Inventory & warehousing costs

Transportation costs

Logistics Design Decisions

Determine the appropriate number of warehouses Determine the location of each warehouse Determine the size of each warehouse Allocate space for products in each warehouse Determine which products customers will receive from each warehouse

Decision Classifications
Strategic Planning: Decisions that typically involve major capital investments and have a long term effect
1. Determination of the number, location and size of new plants, distribution centers and warehouses 2. Acquisition of new production equipment and the design of working centers within each plant

3. Design of transportation facilities, communications equipment, data processing means, etc.

Decision Classifications
Tactical Planning: Effective allocation of manufacturing and distribution resources over a period of several months
1. Work-force size 2. Inventory policies 3. Definition of the distribution channels 4. Selection of transportation and trans-shipment alternatives

Decision Classifications

Operational Control: Includes day-to-day operational decisions

1. The assignment of customer orders to individual machines

2. Dispatching, expediting and processing orders 3. Vehicle scheduling

Network Design: Key Issues

Pick the optimal number, location, and size of warehouses and/or plants Determine optimal sourcing strategy
Which plant/vendor should produce which product

Determine best distribution channels

Which warehouses should service which customers

Objective of Logistics Management

Design or configure the logistics network so as to minimize annual system-wide cost subject to a variety of service level requirements

Network Design: Key Issues

The objective is to balance service level against

Production/ purchasing costs

Inventory carrying costs Facility costs (handling and fixed costs)

Transportation costs
That is, we would like to find a minimal-annual-cost configuration of the distribution network that satisfies product demands at specified customer service levels.

Network Design Tools: Major Components

Mapping
Mapping allows you to visualize your supply chain and solutions Mapping the solutions allows you to better understand different scenarios Color coding, sizing, and utilization indicators allow for further analysis

Data
Data specifies the costs of your supply chain The baseline cost data should match your accounting data The output data allows you to quantify changes to the supply chain

Engine
Optimization Techniques

Mapping Allows You to Visualize Your Supply Chain

Displaying the Solutions Allows you To Compare Scenarios

Data for Network Design

1. A listing of all products 2. Location of customers, stocking points and sources 3. Demand for each product by customer location 4. Transportation rates 5. Warehousing costs 6. Shipment sizes by product 7. Order patterns by frequency, size, season, content 8. Order processing costs 9. Customer service goals

Too Much Information

Customers and Geocoding Sales data is typically collected on a by-customer basis Network planning is facilitated if sales data is in a geographic database rather than accounting database 1. Distances 2. Transportation costs New technology exists for Geocoding the data based on Geographic Information System (GIS)

Aggregating Customers
Customers located in close proximity are aggregated using a grid network or clustering techniques. All customers within a single cell or a single cluster are replaced by a single customer located at the centroid of the cell or cluster.
We refer to a cell or a cluster as a customer zone.

Impact of Aggregating Customers

The customer zone balances

1. Loss of accuracy due to over aggregation

2. Needless complexity What affects the efficiency of the aggregation? 1. The number of aggregated points, that is the number of different zones 2. The distribution of customers in each zone.

Why Aggregate?
The cost of obtaining and processing data
The form in which data is available

The size of the resulting location model

The accuracy of forecast demand

Recommended Approach
Use at least 300 aggregated points
Make sure each zone has an equal

amount of total demand

Place the aggregated point at the center of

the zone

Testing Customer Aggregation

1 Plant; 1 Product Considering transportation costs only Customer data
Original Data had 18,000 5-digit zip code ship-to locations Aggregated Data had 800 3-digit ship-to locations Total demand was the same in both cases

Comparing Output
Total Cost:$5,796,000 Total Customers: 18,000 Total Cost:$5,793,000 Total Customers: 800

Cost Difference < 0.05%

Product Grouping

Companies may have hundreds to thousands of individual items in their production line

1. Variations in product models and style

2. Same products are packaged in many sizes Collecting all data and analyzing it is impractical for so many product groups

A Strategy for Product Aggregation

Place all SKUs into a source-group
A source group is a group of SKUs all sourced from the same place(s)

Within each of the source-groups, aggregate the SKUs by similar logistics characteristics
Weight Volume Holding Cost

Within Each Source Group, Aggregate Products by Similar Characteristics

70.0 60.0

50.0

Weight (lbs per case)

40.0

30.0

20.0

Rectangles illustrate how to cluster SKUs.

10.0

0.0 0.000

0.010

0.020

0.030

0.040

0.050

0.060

0.070

0.080

0.090

0.100

Volume (pallets per case)

Test Case for Product Aggregation

5 Plants 25 Potential Warehouse Locations Distance-based Service Constraints Inventory Holding Costs Fixed Warehouse Costs Product Aggregation
46 Original products 4 Aggregated products Aggregated products were created using weighted averages

Sample Aggregation Test: Product Aggregation

Total Cost:$104,564,000 Total Products: 46 Total Cost:$104,599,000 Total Products: 4

Cost Difference: 0.03%

Minimize the cost of your logistics network without compromising service levels
$90 $80

Optimal Number of Warehouses

Cost (millions $)

$70 $60 $50 $40 $30 $20 $10 $Total Cost Transportation Cost Fixed Cost Inventory Cost

10

Number of Warehouses

The Impact of Increasing the Number of Warehouses

Improve service level due to reduction of average service time to customers
Increase inventory costs due to a larger safety stock Increase overhead and set-up costs Reduce transportation costs in a certain range Reduce outbound transportation costs

Increase inbound transportation costs

Industry Benchmarks: Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg. # of WH

3
- High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation

14

25
- Low margin product - Service very important - Outbound transportation expensive relative to inbound

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

A Typical Network Design Model

Several products are produced at several plants. Each plant has a known production capacity. There is a known demand for each product at each customer zone. The demand is satisfied by shipping the products via regional distribution centers. There may be an upper bound on total throughput at each distribution center.

A Typical Location Model

There may be an upper bound on the distance between a distribution center and a market area served by it

A set of potential location sites for the new facilities was identified
Costs: Set-up costs Transportation cost is proportional to the distance Storage and handling costs Production/supply costs

Complexity of Network Design Problems

Location problems are, in general, very difficult problems.

The complexity increases with

the number of customers, the number of products, the number of potential locations for warehouses, and the number of warehouses located.

Solution Techniques
Mathematical optimization techniques:
1. Heuristics: find good solutions, not necessarily optimal 2. Exact algorithms: find optimal solutions Simulation models: provide a mechanism to evaluate specified design alternatives created by the designer.

Heuristics and the Need for Exact Algorithms

Single product Two plants p1 and p2
Plant P1 has an annual capacity of 200,000 units.

Plant p2 has an annual capacity of 60,000 units.

The two plants have the same production costs. There are two warehouses w1 and w2 with identical warehouse handling costs. There are three markets areas c1,c2 and c3 with demands of 50,000, 100,000 and 50,000, respectively.

Heuristics and the Need for Exact Algorithms

Table 1 Distribution costs per unit
Facility Warehouse W1 W2 P1 0 5 P2 4 2 C1 3 2 C2 4 1 C3 5 2

Why Optimization Matters?

$0

Cap = 200,000
$5
$4

$3 $4 $5

D = 50,000

D = 100,000
$2 $1 $2

Cap = 60,000

$2

D = 50,000

Production costs are the same, warehousing costs are the same

Traditional Approach #1:

Assign each market to closet WH. Then assign each plant based on cost.

D = 50,000 Cap = 200,000

$5 x 140,000
$2 x 50,000 $1 x 100,000 $2 x 50,000

D = 100,000

Cap = 60,000

$2 x 60,000

D = 50,000

Total Costs = $1,120,000

Traditional Approach #2:

Assign each market based on total landed cost

$0

Cap = 200,000
$5
$4

$3 $4 $5 $2 $2 $1 $2

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4

D = 100,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3

Cap = 60,000

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4

Traditional Approach #2:

Assign each market based on total landed cost

$0

Cap = 200,000
$5
$4

$3 $4 $5 $2 $2 $1 $2

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4

D = 100,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3

Cap = 60,000

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4

Market #1 is served by WH1, Markets 2 and 3 are served by WH2

Traditional Approach #2:

Assign each market based on total landed cost

$0 x 50,000

Cap = 200,000

$3 x 50,000

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4

$5 x 90,000
$1 x 100,000 $2 x 50,000

D = 100,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3

Cap = 60,000

$2 x 60,000

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4

Total Cost = $920,000

The Optimization Model

The problem described earlier can be framed as the following linear programming problem. Let x(p1,w1), x(p1,w2), x(p2,w1) and x(p2,w2) be the flows from the plants to the warehouses. x(w1,c1), x(w1,c2), x(w1,c3) be the flows from the warehouse w1 to customer zones c1, c2 and c3. x(w2,c1), x(w2,c2), x(w2,c3) be the flows from warehouse w2 to customer zones c1, c2 and c3

The Optimization Model

The problem we want to solve is:
min 0x(p1,w1) + 5x(p1,w2) + 4x(p2,w1) + 2x(p2,w2) + 3x(w1,c1) + 4x(w1,c2) + 5x(w1,c3) + 2x(w2,c1) + 2x(w2,c3)

subject to the following constraints:

x(p2,w1) + x(p2,w2) 60000 x(p1,w1) + x(p2,w1) = x(w1,c1) + x(w1,c2) + x(w1,c3) x(p1,w2) + x(p2,w2) = x(w2,c1) + x(w2,c2) + x(w2,c3) x(w1,c1) + x(w2,c1) = 50000 x(w1,c2) + x(w2,c2) = 100000 x(w1,c3) + x(w2,c3) = 50000

all flows greater than or equal to zero.

The Optimal Strategy

Table 2 Distribution strategy

Facility Warehouse W1 W2 P1 140000 0 P2 0 60000 C1 50000 0 C2 40000 60000 C3 50000 0

The total cost for the optimal strategy is 740,000.