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Network Planning

Network Planning

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Logistics and Supply Chain Management
Logistics and Supply Chain Management

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Categories:Types, Research
Published by: Abhishek Pratap Singh on Jan 19, 2013
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  • Why Network Planning?
  • Three Hierarchical Steps
  • Network Design
  • Reevaluation of Infrastructure
  • Key Strategic Decisions
  • Objective and Trade-Offs
  • Data Collection
  • Data Aggregation
  • Transportation Rates
  • Internal Transportation Rate
  • External Transportation Rate
  • Warehouse Costs
  • Determining Fixed Costs
  • Determining Storage Costs
  • Warehouse Capacity
  • Warehouse Capacity Example
  • Potential Locations
  • Service Level Requirements
  • Future Demand
  • Industry Benchmarks: Number of Distribution Centers
  • Model Validation
  • Solution Techniques
  • Example
  • Unit Distribution Costs
  • Heuristic #1:
  • Heuristic #2:
  • Optimal Solution
  • Simulation Models
  • Which One to Use?
  • Key Features for Network Design
  • 2-Stage System
  • Key Points
  • Local vs. Global Optimization
  • Global Optimization
  • Three Different Product Categories
  • Resource Allocation
  • Global Optimization and DSS
  • Focus of the Output

Network Planning

Why Network Planning?

Find the right balance between inventory, transportation and manufacturing costs Match supply and demand under uncertainty by positioning and managing inventory effectively Utilize resources effectively by sourcing products from the most appropriate manufacturing facility

Three Hierarchical Steps

Network design
   

Number, locations and size of manufacturing plants and warehouses Assignment of retail outlets to warehouses Major sourcing decisions Typical planning horizon is a few years. Identifying stocking points Selecting facilities that will produce to stock and thus keep inventory Facilities that will produce to order and hence keep no inventory Related to the inventory management strategies Determine whether production and packaging of different products is done at the right facility What should be the plants sourcing strategies? How much capacity each plant should have to meet seasonal demand?

Inventory positioning:
   

Resource allocation:
  

Network Design

Physical configuration and infrastructure of the supply chain. A strategic decision with long-lasting effects on the firm. Decisions relating to plant and warehouse location as well as distribution and sourcing

Reevaluation of Infrastructure

Changes in:
  

demand patterns product mix production processes

sourcing strategies
cost of running facilities.

Mergers and acquisitions may mandate the integration of different logistics networks

Key Strategic Decisions       Determining the appropriate number of facilities such as plants and warehouses. the allocation of customers to warehouse . Determining the size of each facility. i. Determining sourcing requirements. Allocating space for products in each facility.e. Determining distribution strategies.. Determining the location of each facility.

.Objective and Trade-Offs  Objective: Design or reconfigure the logistics network in order to minimize annual system-wide cost subject to a variety of service level requirements Increasing the number of warehouses typically yields:       An improvement in service level due to the reduction in average travel time to the customers An increase in inventory costs due to increased safety stocks required to protect each warehouse against uncertainties in customer demands. An increase in overhead and setup costs A reduction in outbound transportation costs: transportation costs from the warehouses to the customers An increase in inbound transportation costs: transportation costs from the suppliers and/or manufacturers to the warehouses.

All products. and special transport modes (e. Customer service requirements and goals. Annual demand for each product by customer location.Data Collection          Locations of customers. Production and sourcing costs and capacities . and suppliers. including labor. Warehousing costs. Order processing costs. including volumes. and fixed operating costs.g.. manufacturing facilities. Transportation rates by mode. Shipment sizes and frequencies for customer delivery. retailers. existing warehouses and distribution centers. inventory carrying charges. refrigerated).

  Product Groups   Product type  product models or style differing only in the type of packaging. Replace all customers within a single cluster by a single customer located at the center of the cluster Five-digit or three-digit zip code based clustering. .Data Aggregation  Customer Zone    Aggregate using a grid network or other clustering technique for those in close proximity. Distribution pattern Products picked up at the same source and destined to the same customers  Logistics characteristics like weight and volume.

Replacing Original Detailed Data with Aggregated Data    Even if technology exists to solve the logistics network design problem with the original data. Data aggregation still useful because forecast demand is significantly more accurate at the aggregated level. Aggregating customers into about 150-200 zones usually results in no more than a 1 percent error in the estimation of total transportation costs .

Transportation Rates  Rates are almost linear with distance but not with volume Differences between internal rate and external rate  .

Internal Transportation Rate   For company-owned trucks Data Required:     Annual costs per truck Annual mileage per truck Annual amount delivered Truck’s effective capacity  Calculate cost per mile per SKU. .

External Transportation Rate Two modes of Truck Transportation   Truckload. TL Less-Than-Truckload. LTL .

  Typical values:   ρ = 1. Multiply Dab by ρ. ρ  Equations underestimate the actual road distance.Circuity Factor.14 for inter-city areas .3 in intra-city areas ρ = 1.

 Fixed costs   All cost components not proportional to the amount of flow Typically proportional to warehouse size (capacity) but in a nonlinear way.Warehouse Costs  Handling costs   Labor and utility costs Proportional to annual flow through the warehouse.  Storage costs   . Inventory holding costs Proportional to average positive inventory levels.

Determining Fixed Costs Warehouse fixed costs as a function of the warehouse capacity .

Determining Storage Costs   Multiply inventory turnover by holding cost Inventory Turnover = Annual Sales / Average Inventory Level .

picking. sorting and processing facilities AGVs  Typical factor value = 3 .Warehouse Capacity     Estimation of actual space required Average inventory level = Annual flow through warehouse/Inventory turnover ratio Space requirement for item = 2*Average Inventory Level Multiply by factor to account for     access and handling aisles.

Total space required for the warehouse is about 6.000 sqft.000 square feet .000 units Inventory turnover ratio = 10. of space Required space for products = 2.0 Average inventory level = 100 units    Assume each unit takes 10 sqft.Warehouse Capacity Example    Annual flow = 1.

Natural resources and labor availability.Potential Locations    Geographical and infrastructure conditions. Local industry and tax regulations. Not many will qualify based on all the above conditions  .  Public interest.

Service Level Requirements  Specify a maximum distance between each customer and the warehouse serving it Proportion of customers whose distance to their assigned warehouse is no more than a given distance   95% of customers be situated within 200 miles of the warehouses serving them Appropriate for rural or isolated areas  .

Future Demand   Strategic decisions have to be valid for 3-5 years Consider scenario approach and net present values to factor in expected future demand over planning horizon .

Number of Warehouses $90 $80 Optimal Number of Warehouses Cost (millions $) $70 $60 $50 $40 $30 $20 $10 $Total Cost Transportation Cost Fixed Cost Inventory Cost 0 2 4 6 8 10 Number of Warehouses .

Industry Benchmarks: Number of Distribution Centers Pharmaceuticals Food Companies Chemicals Avg.Outbound transportation expensive relative to inbound . # of WH 3 .Service not important (or easy to ship express) .Low margin product .Inventory expensive relative to transportation 14 25 .High margin product .Service very important .

Does the model make sense? Are the data consistent? Can the model results be fully explained? Did you perform sensitivity analysis?  Answer the following questions:     .Model Validation    Reconstruct the existing network configuration using the model and collected data Compare the output of the model to existing data Compare to the company’s accounting information  Often the best way to identify errors in the data.  Positing a variety of what-if questions. problematic assumptions. modeling flaws.  Make local or small changes in the network configuration to see how the system estimates impact on costs and service levels.

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

000. 100.c2 and c3 with demands of 50.000 and 50.   The two plants have the same production costs. respectively. There are two warehouses w1 and w2 with identical warehouse handling costs. There are three market areas c1.000.000 units.Example  Single product  Two plants p1 and p2  Plant p2 has an annual capacity of 60.  .

Unit Distribution Costs Facility warehouse w1 w2 p1 p2 c1 c2 c3 0 5 4 2 3 2 4 1 5 2 .

000 $2 x 50.000 $2 x 60.000 .120.000 D = 50.000 $1 x 100.000 D = 100.000 Cap = 60.Heuristic #1: Choose the Cheapest Warehouse to Source Demand D = 50.000 Total Costs = $1.000 $5 x 140.000 $2 x 50.

Heuristic #2: Choose the warehouse where the total delivery costs to and from the warehouse are the lowest [Consider inbound and outbound distribution costs] $0 $3 $4 $2 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 WH1.000 D = 50.000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4 $5 $5 $4 $1 $2 $2 D = 100. Markets 2 and 3 are served by WH2 .000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3 Cap = 60.

000 $2 x 60.Heuristic #2: Choose the warehouse where the total delivery costs to and from the warehouse are the lowest [Consider inbound and outbound distribution costs] $0 x 50.000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3 Cap = 60.000 $3 x 50.000 .000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4 Total Cost = $920.000 D = 50.000 D = 50.000 D = 100.000 $1 x 100.000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4 Cap = 200.000 $2 x 50.000 $5 x 90.

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

c1) + 4x(w1.c2) + 5x(w1.c2) + x(w1.c1) + 2x(w2.w1) = x(w1.c2) = 100000 x(w1.w1) + x(p2.c3) + 2x(w2.w2) + 4x(p2.c3) x(p1. .w2) = x(w2.w1) + 2x(p2.c1) = 50000 x(w1.c2) + x(w2.w1) + 5x(p1.c3) x(w1.c2) + x(w2.c3) subject to the following constraints: x(p2.c1) + x(w1.c3) + x(w2.w2)  60000 x(p1.c1) + x(w2.The Optimization Model The problem we want to solve is: min 0x(p1.w1) + x(p2.w2) + x(p2.w2) + 3x(w1.c1) + x(w2.c3) = 50000 all flows greater than or equal to zero.

000 50.000 0 40.000 0 Total cost for the optimal strategy is $740.000 .000 0 0 60.000 60.000 50.Optimal Solution Facility warehouse w1 w2 p1 p2 c1 c2 c3 140.

Examine:   Individual ordering pattern.  Inventory movements inside the warehouse. Specific inventory policies.   Not an optimization model Can only consider very few alternate models .Simulation Models  Useful for a given design and a micro-level analysis.

 Use a simulation model to evaluate the solutions generated in the first phase.Which One to Use?   Use mathematical optimization for static analysis Use a 2-step approach when dynamics in system has to be analyzed: Use an optimization model to generate a number of least-cost solutions at the macro level. taking into account the most important cost components.  .

data variability or specific settings  Robustness  .Key Features for Network Design  Flexibility to incorporate a large set of preexisting network characteristics. like       Customer-specific service level requirements. Existing warehouses kept open Expansion of existing warehouses Specific flow patterns maintained Warehouse-to-warehouse flow possible Production and Bill of materials details may be important Relative quality of the solution independent of specific environment.

decide on where to keep safety stock? Which facilities should produce to stock and which should produce to order? .Inventory Positioning and Logistics Coordination     Multi-facility supply chain that belongs to a single firm Manage inventory so as to reduce system wide cost Consider the interaction of the various facilities and the impact of this interaction on the inventory policy of each facility Ways to manage:    Wait for specific orders to arrive before starting to manufacture them [make-to-order facility] Otherwise.

Single Product. T: Processing Time at the facility. Single Facility Periodic Review Inventory Model  Assume  SI: amount of time between when an order is placed until the facility receives a shipment (Incoming Service Time) S: Committed Service Time made by the facility to its own customers. SI  T  S      Net Lead Time = SI + T .S Safety stock at the facility: zh SI  T  S .

2-Stage System  Reducing committed service time from facility 2 to facility 1 impacts required inventory at both facilities   Inventory at facility 1 is reduced Inventory at facility 2 is increased  Overall objective is to choose:    the committed service time at each facility the location and amount of inventory minimize total or system wide safety stock cost. .

or local. optimization by a globally optimized supply chain strategy.  Replacing traditional supply chain strategies that are typically referred to as sequential. .Key Points   Identifying the Push-Pull boundary Taking advantage of the risk pooling concept  Demand for components used by a number of finished products has smaller variability and uncertainty than that of the finished goods.

Local vs. Global Optimization Trade-off between quoted lead time and safety stock .

Global Optimization  For the same lead time.  . cost is reduced significantly For the same cost. lead time is reduced significantly Trade-off curve has jumps in various places    Represents situations in which the location of the Push-Pull boundary changes Significant cost savings are achieved.

with resulting increased transportation costs  This typically yields leads to:    . Low inventory turns Inconsistent service levels across locations and products. and The need to expedite shipments.Problems with Local Optimization  Prevalent strategy for many companies:    try to keep as much inventory close to the customers hold some inventory at every location hold as much raw material as possible.

OR Some SKU be positioned only at the primary while others only at the secondary? .Integrating Inventory Positioning and Network Design  Consider a two-tier supply chain   Items shipped from manufacturing facilities to primary warehouses From there. they are shipped to secondary warehouses and finally to retail outlets  How to optimally position inventory in the supply chain?   Should every SKU be positioned both at the primary and secondary warehouses?.

Integrating Inventory Positioning and Network Design Sample plot of each SKU by volume and demand .

and Low variability .high volume products.low volume products Low variability .low volume products.Three Different Product Categories    High variability . .

Require more analysis since other characteristics are important.Supply Chain Strategy Different for the Different Categories  High variability low volume products   Inventory risk the main challenge for Position them mainly at the primary warehouses  demand from many retail outlets can be aggregated reducing inventory costs. such as profit margins. etc.  Low variability low volume products  .  Low variability high volume products   Position close to the retail outlets at the secondary warehouses Ship fully loaded tracks as close as possible to the customers reducing transportation costs.

Resource Allocation  Supply chain master planning The process of coordinating and allocating production. and distribution strategies and resources to maximize profit or minimize system-wide cost Process takes into account:  interaction between the various levels of the supply chain  identifies a strategy that maximizes supply chain performance  .

etc. product and time. distribution centers and demand points Transportation resources including internal fleet and common carriers Products and product information Production line information such as min lot size. . capacity. Warehouse capacities and other information such as certain technology (refrigerators) that a specific warehouse has and hence can store certain products Demand forecast by location.Global Optimization and DSS FACTORS TO CONSIDER       Facility locations: plants. costs.

. OR  Supply Chain Master Plan:  production quantities.Focus of the Output  Sourcing Strategies:  where should each product be produced during the planning horizon. shipment size and storage requirements by product. location and time period.

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