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Chapter 3

Network Planning

Fajar Hidayat, ST, MsMM, CPIM

• What is it?
• Methodology
– Modeling
– Data Aggregation
– Validation

• Solution Techniques

The Logistics Network
The Logistics Network consists of:
• Facilities:
Vendors, Manufacturing Centers, Warehouse/ Distributi
on Centers, and Customers
• Raw materials and finished products that flow betw
een the facilities.







Inventory &
Inventory &


data processing means.Decision Classifications • Strategic Planning: Decisions that typically inv olve major capital investments and have a long term effect – Determination of the number. etc. distribution centers and warehouses – Acquisition of new production equipment and the d esign of working centers within each plant – Design of transportation facilities. communications equipment. location and size of n ew plants. .

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

expediting and processing orde rs – Vehicle scheduling .Decision Classifications • Operational Control: Includes day-to-da y operational decisions – The assignment of customer orders to indivi dual machines – Dispatching.

transport ation and manufacturing cost – Match supply and demand under uncertainty by po sitioning and managing inventory effectively – Utilize resources effectively by sourcing products fro m the most appropriate facility .Network Planning • The process by which the firms structures and manages the supply chain in order to: – Find the right balance between inventory.

o utlets etc. locations. size of plants. warehouse. • Resources Allocations: decision on plant s sourcing strategies . • Network Positioning: identifying stockin g points.3 Steps Network Planning • Network Design: decision on the numbe r.

location. and size of warehouses and/or plants • Determine the location of each facility • Determine the size of each facility • Determine best distribution channels – Which warehouses should service which cust omers .Network Design: Key Issues • Pick the optimal number.

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 co nfiguration of the distribution network that satisfies pr oduct demands at specified customer service levels. .

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.Network Design Tools: Major Components • Mapping – Mapping allows you to visualize your supply chain and solutio ns – Mapping the solutions allows you to better understand differe nt scenarios – Color coding.

Mapping Allows You to Visualize Your Supply Chain .

Displaying the Solutions Allows you To Comp are Scenarios .

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

. All customers within a single cell or a single cluster are replaced by a single customer located at the centr oid of the cell or cluster. We refer to a cell or a cluster as a custo mer zone.Aggregating Customers • Customers located in close proximity are aggregated using a grid network or clust ering techniques.

Impact of Aggregating Customers • The customer zone balances – Loss of accuracy due to over aggregation – Needless complexity • What effects the efficiency of the aggreg ation? – The number of aggregated points. . that is th e number of different zones – The distribution of customers in each zone.

Why Aggregate? • • • • The The The The cost of obtaining and processing data form in which data is available size of the resulting location model accuracy of forecast demand .

Recommended Approach • Make sure each zone has an equal amou nt of total demand • Place the aggregated point at the center of the zone • In this case. the error is typically no m ore than 1% .

1 Product • Considering transportation costs only • Customer data – Original Data had 18.000 5-digit zip code sh ip-to locations – Aggregated Data had 800 3-digit ship-to loc ations – Total demand was the same in both cases .Testing Customer Aggregation • 1 Plant.

000 Total Cost:$5.000 Total Customers: 800 Cost Difference < 0.000 Total Customers: 18.793.796.Comparing Output Total Cost:$5.05% .

Product Grouping • Companies may have hundreds to thous ands of individual items in their producti on line – Variations in product models and style – Same products are packaged in many sizes • Collecting all data and analyzing it is imp ractical for so many product groups .

aggregate t he 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.

030 0.0 40.040 0.0 0.0 10.080 0.0 60.0 30.000 0.050 0.060 Volume (pallets per case) 0.Within Each Source Group.010 0.100 .0 0.0 Weight (lbs per case) 50. 20. Aggregate P roducts by Similar Characteristics 70.070 0.090 0.020 0.0 Rectangles illustrate how to cluster SKU’s.

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 .

564.000 Total Products: 4 Cost Difference: 0.599.Sample Aggregation Test: Product Aggregation Total Cost:$104.000 Total Products: 46 Total Cost:$104.03% .

.Transport Rate Estimation • Huge number of rates representing all co mbinations of product flow • An important characteristic of a class of r ates for truck. rail and other trucking co mpanies is that the rates are quite linear with the distance.

labor costs. proportional to the inventory level • Facilities capacities .Other Issues • Future demand • Facility costs – Fixed costs. not proportional to the amount of material the flows through the warehouse – Handling costs. utility costs – Storage costs.

Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers. demand centers sinks Supply Inventory & warehousing costs Production/ purchase costs Transportation costs Inventory & warehousing costs Transportation costs .

Minimize the cost of your logistics network without compromising service levels Optimal Number of Warehouses $90 Cost (millions $) $80 $70 $60 Total Cost Transportation Cost Fixed Cost Inventory Cost $50 $40 $30 $20 $10 $- 0 2 4 6 Number of Warehouses 8 10 .

• Storage Cost: inventory holding cost. proportional to av erage inventory .Warehousing Cost • Handling Cost: proportional to annual flow trough the warehouse • Fixed Cost: proportional to warehouse size.

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 .

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

• There may be an upper bound on total throughput at each distribution center. . • Each plant has a known production capacity. • The demand is satisfied by shipping the products via r egional distribution centers.A Typical Network Design Model • Several products are produced at several plants. • There is a known demand for each product at each cu stomer zone.

A Typical Location Model • There may be an upper bound on the distance between a distribution center and a market are a served by it • A set of potential location sites for the new fac ilities was identified • Costs: – – – – Set-up costs Transportation cost is proportional to the distance Storage and handling costs Production/supply costs .

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

not necessa rily optimal • Simulation models: provide a mechanism to evaluate specified design alternatives created by the designer.Solution Techniques • Mathematical optimization techniques: – Exact algorithms: find optimal solutions – Heuristics: find “good” solutions. .

Inventory Positioning • Answer questions: how much and where to keep the inventory .

• Strategic Safety Stocks: where to keep th e safety stock? . • Objective is to manage inventory and re duce system wide cost.Inventory Positioning and Logitics Coordinations • Firms that operates multiple facility.

.Resources Allocations Answer the Questions: how much capacity each plants have to meet the demand.

Resource Allocations • Supply Chain Master Planning: process of coordinating and allocating productio ns and distibutions strategies and resour ces to maximize profits or minimize cost systems-wide. .

• Thank You .