Distribution Network

Design

1
Distribution Network Design:
Objective

 Distribution Network
consist of a complex
network of:
 Plants
 Distribution Centres
 Customers
(this become even more
complex in International
distribution)

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Distribution Network Design:
Objective
Objective of Distribution Network Design is to determine:
 The no. of facilities (e.g. DCs) by locations
 Types of Transportation modes deployed
 Required facilities & transportation capacities

That will:
 Minimise Annual Distribution Costs
 Satisfy Customer Demand at desired customer service levels

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 What are the OBTC?
What are the IBTC?
DC 1 Ctr 1
Plant 1

DC 2 Ctr 2

Plant 2

DC 3
Ctr 3
What are the Facility
Fixed Costs, What is the level & location
Capacities & Locations of Customer Demand
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Distribution Network Design:
Considerations
1. Shipment Characteristics
2. Customer Demand by Products & Location
3. Distribution System (Facilities & Transportation)
Capacity
4. DC Centralisation (OR No. of DCs used)
5. Expected Customer Delivery Lead Times
6. Transportation Mode Analysis
7. Logistics Outsourcing
8. DC Location
9. Total Distribution Cost Analysis
10. Network Modelling Approaches 5
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 DND Consideration 1:
Shipment Characteristics
1. Product Dimension & Packaging
 Volume (Length X Breadth X Height) (cbm)
 Weight (kg, tons)
 Required Packaging (e.g. Shipment
with pallets will reduce effective
storage capacity of a TEU)

2. Order Shipment Size

 Full Container Load (FCL), Less Than Container Load (LCL),
Parcels, Packages
 Related to Order frequency

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Exercise 1
 20 large packs of Cornflakes fit into a cardboard box
of 0.75 m X 0.62 m X 0.26 m
 A 20 foot Equivalent Unit (TEU) Container has an
internal dimension of 5.9 m X 2.35 m X 2.39 m
 Questions:
1. How many boxes (& packs) of cornflakes can we ship in a
TEU?
2. Calculate the utilisation rate of the TEU
 Utilisation Rate = Actual Volume used/ TEU Volume
 (Is this method of calculation always correct?)

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DND Consideration 1:
Shipment Characteristics
3. Handling Requirements
 Special Handling Procedures?
 Examples:
 Dangerous Goods (DG) – safety handling
procedures
 Pharmaceutical Products – Temperature
Controlled Environment
 Food Products – Temperature Controlled
Environment
 Semiconductor Products – Electrostatic
Discharge Packaging
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Shipment Characteristics
Example: Wine
 Product Dimensions & Packaging
 75 cl/ bottle
 12 bottles per case
 48 cases per Pallet
 960 cases per 20 Foot Container (TEU)
 Storage & Handling Requirements
 Refrigerated Storage & Shipping Required
 Room Temperature: 1 Yr Life Span
 16oC: many years
 Sharp Temperature Fluctuations will
spoil wine 9
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 DND Consideration 2:
Customer Demand
1. Analyse Customer Demand by:
 Locations
 By cities (e.g. Shanghai, Penang)
 By Postal Codes (e.g. 139651) – data can be
obtained using Geographic Information Systems
(GIS)
 Products
2. Begin by aggregating (grouping) Customer Demand by
location & product to reduce analysis complexity
3. Forecast expected demand (by No. of product units,
weight or volume) that will flow through the Distribution
Network 10
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 DND Consideration 2:
Customer Demand
 Aggregate Customer Demand by Product:
 Why?
 Costly & complicated to obtain & process
individual data
 Customer aggregation improves the Demand
Forecast accuracy
 How?
 Combine (Aggregate) Individual Ctrs into
Geographic Zones (Centroids)
 150 – 200 Zones
 E.g. Chicago, Clementi, K.L, Beijing
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 Customer Demand Aggregation:
How

 Customer Demand Aggregation:

Cell representing
individual
customer

Centroid

Customer Zone.

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 Customer Demand Aggregation:
How
 Customer Demand Aggregation:
1 DC serves 3 cities
DC

Chicago

Memphis Michigan
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DND Consideration 2:
Customer Demand
 Analyse Customers by Products:
 Why? Different Products have:
 Different types of customers, Shipment
& Order patterns
 How? Divide Products by:
 Product Groups
 Use Pareto Analysis

Customer G

Customer H
Customer C

Customer D
Customer A

Customer B

Customer E

Customer J
Customer F

Customer J
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DND Consideration 3:
System Capacity

 Distribution System Capacity has 2

components:
1. Required Warehouse Capacity

2. Required Transportation Capacity

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DND Consideration 3:
System Capacity

1. Required Warehouse Capacity

i. Product Inventory Turnover
ii. Preferred Storage Method (Racks? Open
Stack?)
 Using (i) - (ii) & product dimensions,
we can estimate the warehousing
space required to handle the products

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DND Consideration 3:
System Capacity
1. Required Warehouse Capacity Example:
 Alpha’s Sales: 2 million units
 Inventory Turnover: 10 Xs/ year
 Adjusted Average Inventory?
= 200,000 units
 If Product Volume is 0.002 cbm/ unit, at any 1
time, we will need how much space?
= 0.002 X 200,000 = 400 cbm
 Assume that the receiving area, shipping area,
aisles, packaging area & so on takes up 40% of
warehouse
 Total warehouse space needed will be:
= 400/ 0.6 = 667 cbm
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DND Consideration 3:
System Capacity
2. Required Transportation Capacity
i. Inbound Transportation Capacity
 From Supplier to DC
 Order Size: No. of TEUs?, Tons? (Air
freight)
ii. Outbound Transportation Capacity
 From DC to Customer
 Shipment Size: No. of Delivery Vans?,
TEUs?, Tons?
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DND Consideration 3:
System Capacity
2. Required Transportation Capacity Example
 Alpha imports 200,000 tonnes of products by TEUs
per year.
 If 1 TEU contains 20 tonnes, 10,000 TEUs are required
 Alpha’s customer orders average at 1 cbm per
order. Average daily orders is 15 / day.
Deliveries are made 5 days/ week. A van is able to
handle 5.6 cbm.
 No of van trips per day
= 15/5.6 = 2.6 = 3
 Expected deliveries per week
= 3 X 5 = 15 vans/ week
 Expected transportation capacity
= 780 van trips/ yr 21
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DND Consideration 3:
System Capacity

3) Seasonality Factors
 Festive Seasons (e.g. Chinese New Year or
Christmas)
 Drastically increases transportation
capacity requirements for a specific
time period
 Christmas: Oct – Dec

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DND Consideration 4:
DC Centralisation
 A typical Logistics Network consists of
multiple DCs

 Such logistics networks are developed

organically or by acquisition

 As Supply Chain Requirements change, the

relevance of each DC changes:
 More DCs required? - Decentralization
 Redundant DCs?- Centralization
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DND Consideration 4:
DC Centralisation
 Why Centralise DCs?
 Advantages:

 Lower Fixed Costs (Economies of Scale)

 Lower Inbound Transportation Costs (IBTC)
 Reduced Safety Stock => lower Inventory Holding Costs

 Disadvantages:
 Higher Outbound Transportation Costs (OBTC)
 Affect Service Levels (Delivery Lead Time) for some Customers

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DND Consideration 4:
DC Centralisation
 Why Decentralize (Increase) DCs?

 Advantages:
 Outbound Transportation Costs
 Customer Service Levels, proximity to Customers

 Disadvantages:
 Higher Inventory Holding Costs
 Higher Facility Fixed Costs (More DCs to maintain)
 Higher Inbound Transportation Costs More DCs to deliver to.
 Smaller shipments means less transportation Economies of Scale

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DND Consideration 5:
Delivery Lead Times
1. Customer Service Levels:
 Short? Long?
 Determines DC proximity to customers

2. Distance between Customer locations & potential DC

locations
 By hours or days travelled
 Influenced by transportation mode used
 China by Air: 6 - 8 hrs; By Sea: 10 days!

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DND Consideration 6:
Transportation Mode Analysis

1. Different Transportation Modes:

 Affects Lead Time (China by air or sea example)
 Affects Lead Time Uncertainty (& Reliability)
 Air – more accurate arrivals than sea

 Determines Transportation Cost

 Air – more expensive than sea

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DND Consideration 6:
Transportation Mode Analysis

2. Each transportation mode also has

different service levels
 Example: Air Express Companies
 DHL Worldwide Express:
 Time Definite Deliveries:
 StartDay Express vs MidDay Express
 Asia Overnight:
 Next Business Day Delivery in Asia

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DND Consideration 7:
Logistics Outsourcing
 Do we Outsource or self-manage logistics?
 Outsource:
 Which carrier to use? (Airlines, Shipping Lines,
Trucking Companies)
 3PL Selection Criteria
 Self-Manage:
 Amount of assets (Prime movers, trailers, TEUs) &
manpower required?
 IT systems (e.g. truck tracking)

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DND Consideration 8:
DC Location
DC Location Selection Criteria
1. Logistics Infrastructure- Road Network, Seaport, Airport, Rail

2. Proximity to Customers

3. Geographical Conditions – prone to natural disaster?

4. Proximity to Suppliers & Supporting Industries

5. Government Regulations & Tax Regime

6. Manpower Supply & Capabilities –Education/Skill levels

7. Public Utility Support –Electricity, Water sources reliable?

8. Political stability, Socio-Cultural Factor–Work ethic, attitude

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DND Consideration 9:
Total Distribution Costs
3 Distribution Network Cost Components

Distribution Centre Transportation Costs Inventory Costs

Costs

Facility (Building,Land) Inbound Transportation Inventory Holding Cost

Material Handling Outbound Transportation Product obsolescence
Equipment & Storage (write off)
Packaging Material Pricing. Tiered Pricing e.g. Insurance cost
(Pallets, cartons, etc) 1– 250km: $0.3/km/kg
251–500km:$0.25/km/kg
Manpower Salaries Manpower salaries Shrinkage (theft)
Utilities (electricity, etc) Petrol -
Order Management Vehicle Maintenance -
Others (e.g. office Vehicle Depreciation -
supplies, travel, etc)
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Recap
 Identify two common types of distribution channels
 State & briefly explain a typical Sales & Distribution
Process
 Briefly explain the different International transportation
modes
 Explain the 3 types of Distribution Strategies
 Briefly explain the advantages & disadvantages of the 3
Distribution Strategies
 plain the concept of Risk Pooling & its benefits to the DC
strategy
 Identify & discuss the challenges of International
Distribution
 Briefly discuss the considerations of a Distribution Network
Design

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2-39
Answer to Exercise 1
 Based on theoretical calculation, number of boxes = vol of TEU/vol of
box = 274
 Utilisation rate = 99.96%

 No. of boxes that can fit in the length of the TEU: 7 boxes
 No. of boxes that can fit in the breadth of the TEU: 3 boxes
 No. of boxes that can fit in the height of the TEU: 9 boxes

 Estimated no of boxes in 1 TEU: 3 X 9 X 7 = 189 boxes (3,780 packs)

 Actual Volume used: 189 X 0.75 X 0.62 X 0.26 = 22.85 cbm

 TEU Volume: 5.9 X 2.35 X 2.39 = 33.14 cbm

 Utilisation Rate = 22.85/ 33.14 cbm = 69%.

 Of course, we can try to squeeze in a few more boxes in the remaining

gap ..
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 Export & Shipping information:
 http://www.export911.com

 Sea Shipping Sailing Schedules:

 http://www.shipmentlink.com/tvs2/jsp/TVS2_LongTermMenu.jsp?ty
pe=L

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Sea Freight Container Dimensions

1 Ft = 0.31 m 42
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 Please note that we
usually cannot fully
stuff a container
 There will be space
empty space wastage
 In addition, we can only
store what the internal
dimensions can
accommodate.

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Sea Freight Container Payload
 Payload is the maximum Permitted Mass (or weight)
handled by a container.
 Include the dunnage & cargo securement arrangements that
are not associated with the container in its normal operating
condition.
 Payload = Rating - Tare Mass.
 Tare Mass (Weight of Empty Container)
 20' Dry Cargo Container = 1,800 - 2,400 kg.
 40’ Container = 3,900 kg – 4,200 kg.

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Sea Freight Container Payload
 Payload Calculation:
 Payload of 20’ Container
= 24,000 kg – 2,400 kg
= 21,600 kg
 Payload of 40’ Container
= 30,480 – 3,900 kg
= 26,580 kg
 Due to other constraints (e.g. Product or local
regulations), it is common to encounter a payload of
17,500 kg or less in the 20' container, and 24,000 kg or
less in the 40' container.
 For details: http://www.export911.com/e911/ship/dimen.htm

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Topic 7:
Transportation
Chapter 11
At the end of the topic, you will be
able to…
 Cite the strategic importance of transportation
 Describe how transportation affects SCM
 Identify the various mode of transportation
 Evaluate the strengths and weaknesses of different modes of
transportation
 Choose appropriate transportation management methods
 Explain the meaning of volumetric weight
 Perform simple calculations related to transportation costs

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 Transportation…(1)
 Movement of product from one location to another

 How it makes its way from the beginning of a SC to the customer

 Important SC driver
 Products are rarely produced and consumed
in the same location

TRANSPORTATION
49
Customers
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Transportation…(2)

Products have little value to the

customer until they are m oved to
the customer’s point of consumption.

Transportation creates the

efficient flow of goods between SC
partners.

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Transportation – Impact on SCM
(1)

 Transportation is responsible for creating

 Time Utility
 Place Utility

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Transportation – Impact on
SCM (2)

 Mistakes in delivery will mean

 Higher safety stocks
 Deteriorating Customer Service

Higher Safety Stocks  Higher

Costs

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Time Utility
 Customers get products delivered at
precisely the right time, not earlier, not
later

 Transportation determine
 How fast products are delivered and
 How long they are held in storage prior to
delivery

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Place Utility
 Customers get products delivered at the
desired location

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Major International Transportation
Modes

 Air
 Water
Most International
 Truck
Transportation uses a
 Rail combination of 2 or
 Pipeline more transportation
modes – Intermodal
Transportation

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 Air
Advantages Disadvantages
 Fastest  Most Expensive

 Most accurate  Cannot carry extremely heavy or bulky

departure/arrival times or Dangerous Goods (DG) cargo
 Not all areas have airports, especially
for small cities and towns

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Air freight Containers –
Unit Load Device (ULD) 1

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Air freight Containers –
Unit Load Device (ULD) 2

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Water – Sea or River
Advantages Disadvantages
 Less Expensive  Slow
 Larger Volume and/or  Inflexible
Weight

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Container Ships

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Types of Containers
Reefer

Open Top Isotaine 62

Container r 2-62
Std Container for Ocean Freight

• 20 ft (6.1m)
• TEU (20-foot equivalent unit)

• 40 ft (12.2m)
• FEU (40-foot equivalent unit)

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Size of Container Ships

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Bulk Carriers

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Barges

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Truck
Advantages Disadvantages
 Moderate Speed  Limited Volume and/or
Weight
 Essential link to all
 Moderate Cost
 Easily Available

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Rail
Advantages Disadvantages
 Large Volume and/or Weight  Relatively slow
 Low Cost  Relatively inflexible
 Infrastructure Restriction
(need to run on railway)

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Pipeline
Advantages
 Large Volume and/or Weight
 Does not require labour during
transportation

Disadvantages
 Slow
 Inflexible
 High fixed cost

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22

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 A Comparison – What do you
think?
Element Air Water Truck Rail Pipeline
Cost $
(per unit)
Speed
Flexibility
Load

Now, rank from “1” – Most Favourable to “5” – Least

Favourable for each transportation mode
23`

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A Comparison (Compare your
answers)
Air Water Truck Rail Pipeline
Cost (per 5 1 4 3 1
unit)
Speed 1 3 2 3 5
Flexibility 2 4 1 3 5
Load 4 1 4 3 1

24

“1” – Most Favourable and “5” – Least

Favourable
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Common Ways of Managing
Transportation (1)

Recap on Chapter 4 - LSP

1. Managed by in-house department (competitive
advantage)
OR
2. Outsource transportation
• Better service
• Decrease costs
• Improve internal processes
• Apply resources to core functions
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Common Ways of Managing
Transportation (2)
 Transportation supply base reduction
 Use fewer providers & pick best-performing ones
 Lower rates by shipping bigger volume
 Promotes strong relationships & gets priority access

 Mode & Carrier Selection (use decision model)

 Carrier’s capability, capacity, reliability, equip avail
 Geographical coverage
 Freight rates

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Common Ways of Managing
Transportation (3)
 Transportation performance measurement
 Identify problems. Make changes for
improvement
 Performance criteria
 On-time delivery
 Loss and damage rates
 Billing accuracy
 Ability to track and trace the goods
 Transportation Audits
 Study of constraints for improvement

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Simple Transportation Rates Calculat
 Transportation rates are usually calculated based on either
weight or volume, whichever is higher.

Volumetric Weight = Volume (in cm3)

5000

If volume is given in m3, then the divisor should be

0.005

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 An Example (Question)

ABC Company in Singapore is sending a parcel to DEF Company in

Hong Kong. ABC usually engages DeliverIT to take care of all its
transport needs. DeliverIT charges $10.70 for the first 500g, and
subsequent 500g or part thereof will be charged @$8.

The following information is obtained for this shipment:

Weight: 8kg
Dimension of box: 50cm by 50cm by 50cm

Calculate the transportation charges applicable to ABC for this

shipment to Hong Kong.

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Solution:
Dead weight = 8kg (given)
Volumetric weight = (50 X 50 X 50)/5000 = 25kg
Since volumetric weight > dead weight, the transportation
charges applicable will be based on 25kg

First 500g = $10.70, then,

subsequent weight (25 – 0.5kg) = 24.5kg  24.5 ÷ 0.5 X 8
= $392 (Note: 24.5 ÷ 0.5 to calculate how many 500g there
is in 24.5kg)

Transportation charge = 10.70 + 392 = $402.70

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 Trucking Rates - Concepts

• Full Truck Load (FTL) or Full Container Load

(FCL)
• Lower rates

• Less-than-Truck Load (LTL) or Less than

Container Load (LCL)
• Higher rates

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Lecture completed!
Thank you!

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