ROMA

TRE  degli Studi di Roma Tre

Universita
Dipartimento di Informati a e Automazione
DIA Via della Vas a Navale, 79 { 00146 Roma, Italy

Optimal allo ation plan for

distribution enters of a frozen
food ompany

1 2
Gaia Ni osia , Andrea Pa ifi i

RT-DIA-70-02 Gennaio 2002

(1) Dipartimento di Informati a e Automazione

Universita di Roma Tre,
Via della Vas a Navale, 79
00146 Roma, Italy.
(ni osiadia.uniroma3.it)

(2) Dipartimento di Informati a Sistemi e Produzione,

Universita di Roma \Tor Vergata",
via di Tor Vergata 110
I-00133 Roma, Italy.
(pa ifi idisp.uniroma2.it)
 ABSTRACT

In this paper we analyze the distribution system of an Italian ompany operating in the
i e ream and frozen food market. In parti ular, we address the problem of optimally
allo ating produ ts demand to distribution enters spread over the Italian territory and
develop a mixed integer programming model. We present our omputational experien e
in whi h the optimal solution is ompared with the a tual distribution poli ies and show
how to use our model as a de ision support tool for the ompany management.

2
1 Introdu tion
Logisti s a tivities in lude transportation, inventory maintenan e, order pro essing, ware-
housing, and materials handling. These a tivities provide a bridge between produ ers of
goods and the market onsumers who are separated by time and distan e. It has been
estimated that logisti s a tivities represent a large portion of a rm's osts. (A ord-
ing to the National Coun il of Physi al Distribution, already in 1978, people and goods
transportation expenses in the US were about the 15% of the US GDP). In fa t, re ently,
interest has in reasingly grown in the eld of optimal material ow to improve market
ompetition through the redu tion of produ tion ost and the satisfa tion of ustomers,
and mu h resear h has dealt with the optimization of the design and management of
distribution systems (see, for instan e, [1, 4, 5, 6, 9℄).
This work des ribes the results of a study that was undertaken to analyze and improve
the distribution system performan e of an Italian ompany, Sagit S.p.A., operating in the
i e ream and frozen food market. In parti ular, the problem of optimally allo ating
produ ts demand to distribution enters spread over the Italian territory is addressed.
The ompany is the leader in the frozen food and i e ream Italian market with a market
share of 35 57% for i e ream and 41% for frozen food (Sour e: Nielsen, 1999). In 1998,
turnover was around 1'400 millions of Euro; sales were around 420'000 pallets of produ t,
orresponding to moving about 1'500'000 ube meter of produ t on 500 tru ks (TIR) per
day.
Frozen food and i e ream market in Italy is hara terized by very few ompetitors.
This is mostly due to the extremely high sto k buildings and transportation osts. It has
been shown that the quality and duration of frozen food produ ts depends on two main
fa tors. The perishability of a produ t depends on the temperature food is stored at; in
fa t, the lower is the sto king temperature the longer the produ t lasts. Moreover, food
organolepti hara teristi s are better preserved if the temperature is kept in a narrow
range during the sto king period.
Hen e, sto k buildings are a tually \huge freezers" that must guarantee a steady
and extremely low temperature and an asepti environment. The loading and unloading
operations from/to warehouses must be performed in a old and prote ted environment.
Therefore, transportation and handling osts are usually higher than in other types of
market In this ontext, logisti s de isions play a fundamental role and have relevant
impa t on operations management expenses.
The obje t of our analysis may be viewed as a divergent serial multi-e helon distri-
bution system with non-identi al warehouses. Non-identi al warehouses are typi al of
pra ti al situations, the dieren es among warehouses being, for instan e, the shipment
lead times, and the apa ities. The initial resear h on multi-e helon inventory models is
generally attributed to Clark and S arf ([3℄), who studied a n-e helon serial system oper-
ating under periodi review ordering poli ies. The problem most ommonly addressed in
the literature is the depot-warehouse problem (two-e helon system). A typi al assump-
tion is that the warehouses are all identi al, re ently though,in [1℄ allo ation poli ies when
the warehouses are not identi al are onsidered.
Here we onsider a distribution system onsisting of three stages, where dierent de-
pots are to supply several non-identi al warehouses ( alled Primary Distribution Centers,
PDC) whi h in turn supply other warehouses ( alled Se ondary Distribution Centers,
SDC). Ea h SDC then serves a number of retailers, thus dening a retail distribution

3
system with a single warehouse. This general problem of allo ating inventories from a
entral warehouse to dierent retailers has been widely studied in the literature. See,
for instan e [8℄, where a omplete and extensive survey of referen es to this problem is
provided. See also [7, 2℄.
In this paper, we model the problem as a deterministi apa itated multi-period multi-
ommodity lo ation-allo ation Mixed Integer Program. We do not address the problem
that deals mainly with order poli ies, in fa t, we onsider lead times as negligible and
address ommodity ow optimization. We assume that periodi demands are known and
the produ tion volume is suÆ ient to supply them.
The paper is organized as follows. The next se tion is introdu tory and gives a detailed
des ription of the distribution system of the ompany. In Se tion 3 a Mixed Integer
Programming model for the system is introdu ed. Se tion 4 presents the results of our
omputational experien e and nally, in Se tion 5, some on lusions are drawn.

2 Distribution network
In this se tion we des ribe the a tual distribution system and poli ies of the ompany.
In Figure 1 we sket h the distribution network and ows. The network onsists of four
levels: Supply sites, Primary Distribution Centers, Se ondary Distribution Centers, and
Retailers. Four types of dierent distribution ows take pla e between levels.

Stage 3 Stage 2 Stage 1

Supply Primary Secondary
Supply PDC SDC Retailer
Flow Flow Flow
Inter-Pole Flow

PDC

Figure 1: Distribution ows.

2.1 Produ t types

The dierent types of produ ts an be lustered into four main ategories, depending
on the destination market (gro ery stores or afeterias/restaurants) and on the format
hara teristi s of produ t pa k.
Produ t quantities are expressed in a volume unit denoted as IP (Industrial Pallet),
whi h is equal to 100  120  180 m3 . The a tual quantity of produ t ontained in a
IP may substantially vary depending on the nal destination market. For instan e, as
regards i e reams, in gro ery stores they are sold in eye- at hing and robust pa ks, alled
multipa ks, ontaining from 4 to 12 servings. Those for afeterias, where i e reams are
stored in display abinets and served one at a time, are larger and may hold roughly 20
to 40 servings.
Thus, we distinguish the following four ommodities: (i) i e ream for gro ery stores,
(ii) i e ream for afeterias or restaurants, (iii) frozen food for gro ery stores, and (iv )
frozen dessert for afeterias and restaurants.

4
2.2 Logisti poles and distribution ows
The nished produ ts are made in 35 produ tion plants lo ated in Italy and abroad (by
the so alled o-pa kers). In our model, these fa ilities have been aggregated into two

14,00% 20,00%
18,00%
12,00%
16,00%

Percentageoftotalproduction
Percentageoftotalproduction

10,00% 14,00%
12,00%
8,00%
10,00%
6,00% 8,00%

4,00% 6,00%
4,00%
2,00%
2,00%
0,00% 0,00%

Dicember
April

July
January

February

May
March

September

October

November
August
June
Dicember
April

July
March

June

September
January

February

October

November
May

August

Months Months

(a) (b)
Figure 2: Produ tion trends in 1998 for frozen food (a) produ ed at Latina (dark grey)
and by opa kers (light grey), and for i e ream (b) produ ed at Napoli, Cagliari (dark
grey) and by o-pa kers (light grey).

produ tion poles lo ated in Naples (whi h in ludes the plant in Cagliari also) and Latina,
plus an extra eleven \external supply sites" whi h are the olle tion points of goods oming
from abroad. In Figure 2 and Table 1 produ tion data of 1998 are reported.
Supply Sites I e Cream I e Cream Frozen Food Frozen Food
for Gro ery Stores for Cafeterias for Gro ery Stores for Cafeterias
1. Latina 0 0 119186 5884
2. Napoli 74988 128083 0 0
3. Verona 580 991 18135 895
4. An ona 0 0 4372 216
5. Teramo 0 0 374 18
6. Modena 0 0 3859 191
7. As oli 0 0 693 34
8. Ortu hio 0 0 8454 417
9. Matera 0 0 4608 227
10. Milano 0 0 669 33
11. Courmayeur 1596 2726 25694 1268
12. Genova 464 793 416 21
13. Livorno 0 0 2890 143

Table 1: Annual produ tion data at supply sites per ea h ommodity.

From the supply sites the nished produ ts are distributed to 14 Primary Distribu-
tion Centers where quality he ks are performed and sto ks are formed. Goods must be
transshipped to PDC's as soon as they are available at the supply sites (in fa t, one may
assume that supply sites do not have sto king fa ilities). We refer to the material ow
from supply sites to PDC's as the supply ow.
The PDC's are very large warehouses where produ ts are stored at 27Æ C in an asepti
environment. The 14 primary distribution enters an be aggregated into 4 lusters where

5
two elements in the same luster are so lose that transportation osts between them
be ome negligible, as it appears in pra ti e. In our model we onsider these lusters as
the a tual PDC's. For ea h PDC the maximum sto k apa ity, the handling and sto king
osts are known and xed throughout the whole time horizon (see Table 3). Noti e
that, as produ ts are perishable, their pi king follows a First-In-First-Out poli y, thus
not allowing the utilization of the whole available spa e. As a onsequen e, there is a
gap around 20% between nominal (available volume) and a tual apa ities of Primary
Distribution Centers.
Next, produ ts are transferred to about 200 Se ondary Distribution Centers (SDC),
whi h are lo ated all over the Italian national territory. This distribution ow is referred
to as the primary ow. Like the PDC's, we aggregated the SDC's redu ing their number
to 90. Aggregated demand data for all the 90 SDC's are known for ea h time period and
for ea h ommodity.
Region # of SDC's Total Demand Max SDC Demand
(IP) (IP)
Valle D'Aosta 1 2194 2194
Piemonte 6 20287 6142
Lombardia 11 87116 19941
Triveneto 12 34038 9834
Liguria 3 9457 5315
Emilia Romagna 8 27256 9672
Tos ana 7 21690 10015
Mar he 2 10745 8065
Umbria 2 6584 4396
Lazio 6 55018 26401
Abruzzo 4 10569 4991
Campania 8 36277 13386
Basili ata 2 5331 3974
Puglia 6 21311 10709
Calabria 2 13388 12530
Si ilia 9 34781 12675
Sardegna 1 12877 12877
Total 98 408919 26401

Table 2: Aggregated annual demand data.

In Table 2, we summarize the total annual demand of Se ondary Distribution Centers

for ea h region of the Italian national territory. Note that, in our model there may be
more than one SDC in a region. In the last 5 years, market annual growth has been
steady and it has been measured around 1% per year. Su h a stable behavior allows the
use of deterministi models based on histori al aggregated data, and as a onsequen e,
produ tion planning an be ee tively optimized by ompany management.
In Figure 3 demand trends during the year for i e ream and frozen food are shown.
Note that remarkable demand hanges may o ur from period to period. In parti ular,
i e ream demand has a pi k during warmer months whereas frozen food shows an almost
opposite trend: for instan e, people buy frozen vegetables when fresh produ t is not
available. On the other hand, on the whole, produ tion has an almost steady ow all over
the year (see Figure 2). In this ase, it is lear how PDC's a t as buers between demand
and produ tion ows.

6
 25%

Percentageoftotaldemand %
20%

15%

10%

5%

0%

April

July
June
January

February

May

October

November

December
March

August

September
Months

Figure 3: Demand trends for i e ream and frozen food.

The Company management, mainly for administrative purposes, imposes that ea h

SDC demand must be satised by only one PDC. In order to adjust sto k levels, how-
ever, produ ts stored at a PDC may also be transshipped to another PDC, whi h has
to be temporarily replenished. This parti ular kind of distribution ow between PDC's
is referred to as inter-pole ow (see Figure 1). Finally, produ ts are sent to the a tual
retail sites (gro ery stores/ afeterias). This distribution ow is alled se ondary ow. It
is assumed that the opportunity for transshipment between SDC's and sto k returns to
the warehouse are pre luded.
Optimization of se ondary ow is not analyzed in this paper. As we have already
observed, ea h SDC denes a retail distribution system with a single warehouse, whi h
an be optimized eÆ iently with standard te hniques (see [8℄).

2.3 Costs
In this work we deal with the optimization of the supply and primary ows that minimize
a total distribution ost fun tion. The latter obje tive fun tion takes into a ount:
1. sto king osts summed over all the PDC's, all the time periods and all the om-
modities ( osts for dierent ommodities may dier at the same PDC be ause of
the pa kage hara teristi s);
2. handling osts at all PDC's and during ea h time period, and
3. transportation osts for the three types of distribution ows (supply, primary, inter-
pole: for the ost per kilometer to tranship a pallet, from a supply point to a PDC,
may dier from the ost for moving the same pallet from a PDC to a SDC).
In Table 3 handling and sto king osts for all PDC's are reported.
Primary ow involves handling of about 800'000 IP per year, whi h takes pla e on
approximately 700 tru ks. Almost all these vehi les may host around 65 IP in a tempera-
ture ontrolled (refrigerated) environment. The ompany entrusts transportation servi es
to third parties alled ve tors whi h are small private business owning the vehi les. For
almost all ve tors Sagit S.p.A. is in fa t their unique lient. As a onsequen e, Sagit may
exert a strong in uen e on ve tors in terms of servi e quality he ks (in luding omplian e

7
 PDC Sto king Cost Handling Cost A tual Capa ity
(Euro  month/IP) (Euro/IP) (IP)
1. Alanno 7:4 10.0 38000
2. Naples 7:5 10:3 30500
3. Milan 11:2 14:6 4700
4. Latina 10:6 14.6 46350

Table 3: A tual apa ities, storage and handling osts at aggregated PDC's.

with pi k-up and delivery dates) and transportation fees. At the moment, Italian stan-
dards on freight transportation establish upper and lower bounds on ost per kilometer.
This ost depends on vehi les apa ity (though not by the tru k load) and de reases as
the total distan e traveled grows. The a tual fees paid by the ompany are the obje t of
a negotiation between the ompany and the ve tors: tipi ally, smaller fees are obtained
assigning larger amounts of servi e to the same ve tor/tru k. It is important to observe
that unit transportation fees may substantially dier from ea h other, depending on the
parti ular region of the ountry. During the negotiation phase, also tru k routes are
de ided, i.e., the distribution enters visiting sequen e and the asso iated pi k-up and
delivery dates. On the other hand, the driver may always de ide autonomously the a -
tual vehi le journey. As a matter of fa t, at the moment, a pres riptive de ision model,
in luding the optimization of this parti ular fun tion, is unusable. Leaving appropriate
de isional autonomy to the ve tors and maintaining good terms with them has a greater
strategi and so ial priority than optimizing vehi les routings. Moreover, analysis on the
eld highlighted that ve tors de isional autonomy often produ es \lo ally" good solutions.
In on lusion, our model uses histori al aggregated data for the transportation osts
of one pallet per kilometer. All these data have been obtained obtained a posteriori
by measuring, for ea h type of transportation ow, the average bargained osts and the
average number of pallets traveling per vehi le.

3 Optimization Model
We now des ribe the mathemati al model developed in our study. The problem has been
formulated as a mixed integer program. Plans are made on a monthly base with a time
horizon of one year. We thus onsider 12 time periods t = 1; : : : ; 12 and maintain the four
ommodities i = 1; 2; 3; 4 introdu ed above. Input data are in order.

Model Data

Produ tion data (quantities of produ t supplied) at ea h supply site p and demand data
at ea h SDC j are known and deterministi for all the ommodities i and for ea h period
t. In our experiments, we use produ tion data summarized in Table 1 whi h refer to 1998

produ tion. In Sagit S.p.A., produ tion planning is de ided at a higher hierar hi al level
and thus is independent of distribution poli ies. A tually, as we have already observed,
due to market stability, demand trends may be predi ted with a very good approximation
and produ tion data may be onsidered as xed.
For ea h PDC j , j = 1; 2; 3; 4, the maximum sto k apa ity Qj , the handling ost Hj ,
and sto king ost Sj are given. Note that these data do not vary from period to period.

8
 As already mentioned, we aggregated the 200 se ondary distribution enters into 90
SDC's. Aggregated demand data for all the 90 SDC's are given for ea h time period. In
parti ular, for ea h SDC h, h = 1; : : : ; 90, monthly demand for the i-th ommodity Diht
is given, for all i = 1; 2; 3; 4, and t = 1; : : : ; 12.
Unit transportation osts are indi ated by Tuv 1
, Tuv
2
, and Tuv
3
, where the pair (u; v )
represents the origin-destination pair sour ing point-PDC, PDC-SDC, and PDC-PDC,
respe tively.

Variables

We use the following de ision variables:

 xjh is a binary variable indi ating whether SDC j is assigned to PDC h or not. We

get 360 su h variables whi h are denoted as Primary Flow variables. Note that these
variables ompletely model the primary distribution ow sin e ea h SDC demand
is entirely satised by a single PDC.
 i
zjt is a nonnegative real variable measuring the quantity (in terms of number of
pallets) of the i-th ommodity stored at the j -th PDC during month t. These are
denoted as Sto k variables. We have 192 su h variables.
 i
wpjt is a nonnegative real variable indi ating the quantity of the i-th ommodity sent
from sour ing point p to the j -th PDC during month t. There are 2496 variables
i
wpjt (denoted as Supply Flow variables).

 i
yjktis a nonnegative real variable indi ating the quantity of the i-th ommodity sent
from the j -th PDC to the k-th PDC during month t. There are 768 variables yjkt i
(Inter-Pole Flow variables).
In on lusion we have 3816 variables, about 10% of whi h are integer variables.

Constraints

Constraints on ern the following items. There are 192 Sto k Continuity onstraints (one
for ea h sto k variable) whi h relate ea h sto k variable with demands from SDC's and
supplies from other PDC's and supply sites:

i
X
13
X90
X 4
X4

zjt = zjti 1 +
i
wpjt
i
Dht xjh
i
yjkt + i
ykjt ;

p=1 h=1 k=1 k=1

k6=j k6=j

for all j = 1; : : : ; 4, t = 1; : : : ; 12, i = 1; : : : ; 4.

Moreover, we have 48 Sto k Capa ity onstraints at PDC's:
X4
i
zjt  Qj for all j = 1; : : : ; 4; t = 1; : : : ; 12:
i=1

Then, there are 624 Supply Flow onstraints whi h impose that goods \produ ed" at
supply sites must be immediately shipped to the PDC's:
X i
wpjt = Ppti for all j = 1; : : : ; 4; t = 1; : : : ; 12; p = 1; : : : 13:

9
There are 90 Assignment onstraints whi h indi ate that ea h SDC is supplied with every
ommodity from a single PDC:
X4

xjh =1 for all h = 1; 2; : : : 90:

j =1

Obje tive Fun tion

Our obje tive is to minimize the total management ost of the logisti s hain. This ost
is omposed by:
1. sto king osts whi h will be expressed as
XXX
4 4 12
i
Sj zjt ;
i=1 j =1 t=1

2. handling osts, whi h an be expressed as

!
1X 4
XXX
4
X
13 12 90
i +
(wpjt i ;
2 j =1 j
H Dht xjh

i=1 p=1 t=1 h=1

3. and transportation osts for the three origin-destination pairs, whi h an be ex-
pressed as:
0 1
XXXB
4
B X4 12 13
X 90
X 4
1 1
C
k C
i i

1
wpjt Tpj + 2
Dht xjh Tpj + 3
Tjk + Hj + H
A :

i=1 j =1 t=1 p=1 h=1 k=1

2 2
k6=j

4 Computational Results
In this se tion we des ribe our omputational experien es whi h onsisted of two main
experiments: the rst is the optimization of the a tual s enario; the se ond group of
experiments on erned sensitivity analysis useful to point out future dire tions for the
management of the ompany. In parti ular, the following three s enarios have been on-
sidered: (i) in reased volumes of produ tion at supply sites and demand at SDC's (and
varied sto k apa ity at PDC's); (ii) ex lusion of Milan PDC; (iii) de reased transporta-
tion osts. In this sense our model appeared to be an ee tive de ision support system.
Experiments highlighted a good formulation for the problem. In fa t, in the rst
experiments the solution for the linear relaxation provides an integer optimal solution.
For the other experiments, the gap between the linear relaxation and integer program
optimal values is always below 3%.
All the data used in our experiments refer to the monthly 1998 produ tion. We used
Mi rosoft Ex el 7.0 on a Pentium 100, 32 Mb RAM, under Windows NT, as I/O data
interfa e, and Cplex 3.0 on an IBM RISC 6000 under AIX 3.0 o.s., as MIP solver.

10
 Costs Fra tion of Savings (w.r.t.
the total ost partial osts)
Sto king 27% 3.1%
Handling 16% 1%
Transportation 51% 4.9%
Inter-PDC transp. 6% 40%
Total 100% 5.7%
Table 4: Comparison between distribution poli ies.

4.1 Optimization of the a tual s enario

In this experiment we used real data to test the model des ribed in Se tion 3 and ompared
the solution found with the a tual poli ies of the ompany.
Table 4 illustrates osts savings obtained by using our model ompared to the a tual
distribution poli y. The total ost saving is equal to more than 1'500'000 Euro, whi h
orresponds to 5.7% of the total distribution ost. The total ost saving of the system
is omposed by 245'000 Euro for sto king osts ( orresponding to a 3.1% de rease with
respe t to a tual sto king expenses), 49'000 Euro for handling osts (that is a 1% de-
rease with respe t to a tual handling expenses), and 750'000 Euro for transportation
osts (about 4.9% de rease with respe t to a tual transportation expenses). Moreover,
a onsistent de rease in inter-pole transportation osts an be observed (around 40%,
orresponding to 596'500 Euro).

Demand Volumes Number of SDC’s

Percentage of total demand

Percentage of total number

50 50

40 40

30 30

20 20 Actual scenario

10 10
Optimized scenario
0 0
Alanno Naples Milan Latina Alanno Naples Milan Latina

Primary Distribution Centers Primary Distribution Centers

Figure 4: Comparison between the a tual and optimized s enarios: number of SDC's and
demand volumes allo ated at PDC's.
Few omments on the dieren es between a tual s enario and the solution suggested by
our model follow. Figures 4 and 5 illustrate the omparison between the two distribution
poli ies in terms of demand quantities and number of SDC's allo ated.
The allo ation of SDC's to PDC's is very similar in the two ases: the assignment is
the same for 85% of the SDC's. However, not surprisingly, due to its lower handling and
storage osts, our MIP model makes a greater use of Naples PDC, and a smaller use of
Latina PDC. On the other hand, demand volumes allo ated at PDC's dier a lot in the

11
a tual s enario and in the model. For instan e, note how, in the model, the load of Latina
PDC de reases dramati ally.
In Figure 6 the sto k levels at PDC's for ea h month are ompared. In the a tual
s enario the sto k levels follow demand trends in a similar fashion (they all de rease
during summer and in rease during winter). On the other hand, in the optimized s enario,
learly PDC's apa ities are exploited depending on their osts. Therefore, Alanno and
Naples sto k levels are kept at their maximum, while Latina and Milan re e t demand
trends.

4.2 Other experiments

For what on erns the sensitivity analysis experiments, our model has been extensively
used to give suggestions that an help the Company management in ongested demand
s enarios. The experiments are des ribed hereafter.

In rease of produ tion rate

Our model has been tested in the modied s enario in whi h produ tion rate and demand
has been in reased of 20%, keeping the other data xed.
We may observe that:
 total osts in reases by 14.4%: this is mainly due to an in reased rate of transship-
ment between PDC's (59%);
 minor variations in the allo ation SDC-to-PDC (less than 2.2%) whi h shows an
inherent robustness of the solution found by our model.
It is lear how in this ase, it may be protable to in rease sto k apa ity at some PDC.
In order to determine whi h PDC's apa ity is the best to expand, we may pro eed as
follows.
Remove all PDC's apa ity onstraints and solve the resulting MIP model. It is
reasonable that the PDC with higher sto k volumes is the one whose expansion would
mostly benet the system. In our experiments, it turned out that 50% of the demand was
allo ated to Alanno PDC (30% to Naples and less than 20% to Milan and Latina).
On the basis of the pre eding results an additional experiment has been ondu ted.
At Alanno PDC apa ity has been expanded of 15% and handling and sto king osts
in reased by 10%. (The latter data has been provided by the ompany management as a
onsequen e of PDC expanded apa ity). In this ase we obtain a substantial ost saving
(around 6.5%, i.e., 2'137'000 Euro) with respe t to the ase with augmented produ tion-
demand and PDC's apa ities unmodied.

Ex lusion of Milan PDC

Another experiment regarded the ex lusion of the primary distribution enter of Milan.
The reason of this analysis is that Milan PDC has the lowest apa ity and the highest
sto king and handling osts. Moreover, it an be observed that during demand peaks,
be ause of its small apa ity, it is for ed to take advantage of Alanno PDC warehouse,
thus augmenting inter-poles ow. In the model, ex luding Milan PDC an be done by
setting all the orresponding variables to 0.

12
 Milan

SDC

PDC

Actual scenario allocation

Alanno

Latina

Napoli

Figure 5: Graphi al omparison between the a tual and optimized s enarios in terms of
SDC-PDC allo ation.

13
 Stock Levels Trend at PDC’s (Actual Scenario) Stock Levels Trend at PDC’s (Optimized Scenario)
50
50

40 40
Alanno
Latina

tHOUSANDS OF PALLETS
30 30
tHOUSANDS OF PAlLETS

Naples
Alanno

20 20
Naples

Latina
10 10

Milan Milan
0 0
INITIAL STOCK JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER
INITIAL STOCK JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER
MONTHS
MONTHS

(a) (b)
Figure 6: Comparison of PDC's sto k levels between the a tual and optimized s enarios.

The experiments highlighted the following system behavior: although sto king osts
on the whole de reased (3.7%), total ost in reased of 5.2% (around 1'495'000 Euro), due
to a dramati in rease of handling osts (17,6%, orresponding to 846'000 Euro) and to a
6% in rease in transportation osts. Figure 7 illustrates the experimental results in terms
of demand quantities and number of allo ated SDC's.

Demand Volumes Number of SDC’s

Percentage of total demand
Percentage of total demand

50 50

40 40

30 30

20 20

10 10

0 0
Alanno Naples Milan Latina Alanno Naples Milan Latina

Primary Distribution Centers Primary Distribution Centers

Figure 7: Allo ation of SDC's and demand volumes to PDC's with the ex lusion of Milan.

Redu tion of transportation ost

As radi al hanges in the italian standards on transportation are foreseen in the next
future, transportation oÆ e at Sagit S.p.A. estimates a redu tion of about 10% in the
transportation osts for the ompany. On this basis, the last set of experiments on erned
the analysis of a modied s enario where the ost for transshipment (for all the types of
origin-destination pair) are redu ed at the same rate.
By running our model, the observed de rease of the obje tive fun tion is around 5.4%
(that is more than 1'540'000 Euro)of the total ost with respe t to the a tual s enario.
As one may expe t, largest savings (16.5%) on ern transportation expenses, thus
redu ing their in iden e on the total ost from 50.6% to 44.6%.

14
 Sto king osts remain almost the same but, together with an in rease of the inter-pole
ow (and of the ost asso iated with it) whi h is around 25%, handling osts rise up to
more 10% than in the a tual s enario. This is not surprising, as it is now more onvenient
to transship goods from one PDC to a less expensive one. Correspondingly, the growth
in handling osts partially ountera t this trend.
The dieren es in terms of demand quantities and number of allo ated SDC's between
the s enario with redu ed transportation osts and the a tual one an be seen in Figure
8.

Demand Volumes Number of SDC’s

40 50
Percentage of total demand

Percentage of total demand

40
30

30
20
20

10
10

0 0
Alanno Naples Milan Latina Alanno Naples Milan Latina

Primary Distribution Centers Primary Distribution Centers

Figure 8: Allo ation of SDC's and demand volumes to PDC's with redu ed transportation
osts.

5 Summary and Con lusions

This paper has presented an approa h, based on mixed integer programming, to the opti-
mization of a distribution system for an Italian ompany operating in the i e ream and
frozen food market. The problem onsisted on allo ating the demand of spe i logis-
ti poles spread all over the Italian territory (denoted as se ondary distribution enters)
to some other (primary) distribution enters whi h are, in turn, supplied by some other
produ tion poles.
Data were provided by the ompany management and refer to the produ tion and
demand detailed per months of one year (1998). A set of experiments has been designed
in order to ompare the performan e of the a tual and the optimized distribution system
but also to obtain signi ant information about possible a tion oping with predi table
hanges in the demand s enario. In this sense our model appeared to be an ee tive
de ision support system as it may provide useful indi ations to the ompany management.
Other investigations into dierent distribution poli ies are underway. Dis ussion with
the ompany indi ated that a de ision support system that allows the produ tion planning
module to intera t with an optimization model for distribution logisti s would in fa t be
extremely useful. Future resear h will therefore on ern the design of algorithms for
produ tion planning using (iteratively) our model as a routine for the demand allo ation.

15
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