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. distribution centers and warehouses 2. Design of transportation facilities. etc. . communications equipment. data processing means. Determination of the number. location and size of new plants. Acquisition of new production equipment and the design of working centers within each plant 3.

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

Vehicle scheduling . The assignment of customer orders to individual machines 2. expediting and processing orders 3. Dispatching.Decision Classifications • Operational Control: Includes day-to-day operational decisions 1.

Network Design: Key Issues • Pick the optimal number. 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 . location.

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. 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 . sizing.

Mapping Allows You to Visualize Your Supply Chain .

Displaying the Solutions Allows you To Compare Scenarios .

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

Distances 2.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. Transportation costs • New technology exists for Geocoding the data based on Geographic Information System (GIS) .

We refer to a cell or a cluster as a customer zone.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. .

Needless complexity • What affects the efficiency of the aggregation? 1. that is the number of different zones 2. The number of aggregated points.Impact of Aggregating Customers • The customer zone balances 1. The distribution of customers in each zone. . Loss of accuracy due to over aggregation 2.

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 .

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 . 1 Product • Considering transportation costs only • Customer data – Original Data had 18.Testing Customer Aggregation • 1 Plant.

Comparing Output Total Cost:$5.000 Total Customers: 800 Cost Difference < 0.000 Total Customers: 18.05% .796.793.000 Total Cost:$5.

Variations in product models and style 2.Product Grouping • Companies may have hundreds to thousands of individual items in their production line 1. Same products are packaged in many sizes • Collecting all data and analyzing it is impractical for so many product groups .

aggregate the SKU’s by similar logistics characteristics – Weight – Volume – Holding Cost .A Strategy for Product Aggregation • Place all SKU’s into a source-group – A source group is a group of SKU’s all sourced from the same place(s) • Within each of the source-groups.

0 60.0 0.0 Weight (lbs per case) 40.090 0.080 0.060 0.0 20.020 0.030 0. 10.010 0. Aggregate Products by Similar Characteristics 70.100 Volume (pallets per case) .0 50.Within Each Source Group.000 0.0 Rectangles illustrate how to cluster SKU’s.0 0.050 0.040 0.0 30.070 0.

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 .

000 Total Products: 46 Total Cost:$104.599.564.000 Total Products: 4 Cost Difference: 0.03% .Sample Aggregation Test: Product Aggregation Total Cost:$104.

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 0 2 4 6 8 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 .

High margin product . Davis & Co. LogicTools . Herbert W.Service very important . # of WH 3 .Industry Benchmarks: Number of Distribution Centers Pharmaceuticals Food Companies Chemicals Avg.Inventory expensive relative to transportation 14 25 .Outbound transportation expensive relative to inbound Sources: CLM 1999.Service not important (or easy to ship express) .Low margin product .

• 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 Network Design Model • Several products are produced at several plants.

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 .

very difficult problems. and – the number of warehouses located. – the number of potential locations for warehouses. .Complexity of Network Design Problems • Location problems are. • The complexity increases with – the number of customers. – the number of products. in general.

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. .Solution Techniques • Mathematical optimization techniques: 1.

000 units.000. • There are three markets areas c1. . 100.c2 and c3 with demands of 50.000 units.Heuristics and the Need for Exact Algorithms • Single product • Two plants p1 and p2 – Plant P1 has an annual capacity of 200. respectively. • The two plants have the same production costs. • There are two warehouses w1 and w2 with identical warehouse handling costs.000 and 50.000. – Plant p2 has an annual capacity of 60.

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 .

warehousing costs are the same .000 $5 $4 $3 $4 $5 D = 50.Why Optimization Matters? $0 Cap = 200.000 $2 D = 50.000 Production costs are the same.000 $2 $1 $2 Cap = 60.000 D = 100.

000 $2 x 50.000 D = 50. Then assign each plant based on cost.000 Total Costs = $1.000 Cap = 60.000 $2 x 50.000 $1 x 100.000 $2 x 60. D = 50.000 .120.000 $5 x 140.000 Cap = 200.Traditional Approach #1: Assign each market to closet WH.000 D = 100.

000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3 Cap = 60.000 $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 $5 $7 $9 $4 .000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4 D = 100.Traditional Approach #2: Assign each market based on total landed cost $0 Cap = 200.000 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.Traditional Approach #2: Assign each market based on total landed cost $0 Cap = 200.000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4 D = 100.000 $5 $4 $3 $4 $5 $2 $2 $1 $2 D = 50.000 D = 50.000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3 Cap = 60. Markets 2 and 3 are served by WH2 .

000 $3 x 50.000 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 = 100.000 D = 50.000 D = 50.Traditional Approach #2: Assign each market based on total landed cost $0 x 50.000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4 Total Cost = $920.000 .000 $1 x 100.000 $2 x 50.000 P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4 $5 x 90.000 Cap = 200.

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

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

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. .

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