NETWORK MODELING PRIMER

Determine why a network model is necessary.

Certain events serve as catalysts to management to cause them to re-evaluate the companies
distribution network.
 Acquisitions/Mergers/Alliances—A company’s distribution network can be
drastically altered through the addition of a new business, product line or brand.
 Company downsizing—Changes to a company’s resources will often impact the
functionality and design of a network model.
 New company policies—A change in company pricing practices or ordering policy
can change customers’ ordering quantities, which will ultimately affect inventory
levels and transportation flows. Likewise, a study of customer or product
profitability will often change the market and product offerings for a company.
 Changes in company competitive strategy—Decreasing product lead times, offering
additional products/services, introducing new reverse logistics requirements or
targeting a new geographic market or industry will impact a company’s existing
distribution network.
 Change in the location of key supply or demand points—A relocation of raw material
sources or large customer distribution centers, or “ship-to” locations will impact a
company’s distribution network.
 Increasing logistics costs—An improvement in a company’s network design can
result in substantial cost savings in the following areas:
 Reduced transportation costs
 Improved customer service
 Reduced inventory
 Reduced warehouse costs
 New manufacturing processes and/or warehousing technology —A change in either
manufacturing processes or technology can impact a network in terms of
inventory levels, demand planning, throughput, and capacity, among others.
It is important to realize that modeling cannot optimize everything, and that trade-offs
between certain variables exist. The network model allows management to study the
projected bottom line impact of these different options and provides a mechanism to
evaluate real world scenarios in a simulated environment.

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Identify the questions that upper management wants the network model to answer.
Bear in mind that a network model is a tool that provides information to help management
make educated business decisions. It is not an oracle or a silver bullet. Nor is it the only tool
that should be used by management (TMS, route optimizer, demand scheduler, WMS, ABC).
Some questions that a typical network model can answer are:
 How many warehouses should there be in a distribution network?
 Where should these warehouses be?
 What should be their throughput and storage capacities?
 Which warehouses will have capacity constraints or will have excess capacity?
 Which warehouses should be consolidated or closed?
 What types of service lead times will the proposed distribution network afford?
 How should customers be allocated/assigned to the distribution centers?
 Which products should be assigned to which warehouses?
 How will changes or trends in the industry impact the distribution network?
 Which products should be manufactured in each plant?
 What are the optimal production levels at each plant?
 From where should the company source raw materials?

Determine the prime objective for modeling the network.

The network modeling team needs to be provided with a series of overarching questions and
objectives that will guide the development and direction of the model. Some typical network
modeling objectives include:
 Is the company looking to increase customer service?
 Is it looking to minimize transportation or inventory costs?
 Is it attempting to reduce the number of facilities, or “nodes” in its network?
 Are there specific facilities in question?
 Does management have any other product, inventory or customer-specific issues
that can be resolved using a network modeling tool?
 On which part of the company’s supply chain will the analysis focus?
 What is the time horizon for the network model?

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The distribution network modeling team needs to work with the company’s management to
answer these questions. Following that, the team needs to determine success criteria that
will be used to evaluate the project at its completion. These criteria need to be clearly
defined and periodically evaluated during the course of a project. Last, the team needs to
work with management to determine the model’s expected role in the future. Will it be used
to make ongoing decisions or will it be used to facilitate a one-time decision?

Create a team to construct the network model.

The success of the network modeling project is largely dependant on the individuals who
will collect/validate the data and design/construct the model. Given that, there are a
number of factors that need to be taken into consideration when identifying individuals to be
a part of the modeling team.
Cross functional representation—Ensure that the team is comprised of individuals from
a number of functional areas within the company. This is essential when modeling the
network of a traditional “silo” company. While the actual areas from which individuals are
pulled will vary from project to project, most modeling teams will include representation
from the following:
 Information Systems  Purchasing
 Distribution  Customer Service
 Marketing  Sales
 Finance/Accounting  Traffic
 Operations/Manufacturing
The project team members should be selected based on the identified objectives and goals of
the network model.
Project champion—The company needs to charge an individual with responsibility for
completing the project. While this individual may not be involved in the day-to-day
happenings of the network modeling process, he or she needs to have the authority to
resolve issues and concerns, as well as the political savvy necessary to stir up excitement and
energy around the project. The majority of the project champion’s involvement with the
network model will be spent at beginning and end of the project, as he or she communicates
management objectives and crafts the model’s scope. Likewise, at the end of the project, the
champion will be responsible for communicating the team’s findings and setting direction
for the company.

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 Steering committee—A group of empowered cross-functional individuals, which
serves as both a sounding board and a quality assurance check, must be created and
involved with the project. These people will initially be responsible for identifying
management’s issues which instigated the network modeling project, as well as setting the
objectives for the team. The steering committee needs to be convened to resolve major
issues, review the assumptions and constraints of the team, and provide an official “seal of
approval” at periodic, pre-determined stages of the model.

Determine the data necessary to create the network model.

The key to creating an effective, efficient and manageable model is distinguishing which data
to include in the model and which to exclude from the model. Oversimplification of the data
can result in a model that does not accurately depict the business issues or does not generate
information that will enable management to answer the questions and attain the objectives
set forth in the planning stages of the project. Conversely, modeling at a level that is too
detailed can result in a tool that requires collection of superfluous data, a model that is
difficult to create and validate, and a mechanism that is neither timely nor robust. It is the
modeling team’s charge to navigate this narrow strait, selecting everything necessary for the
model AND only what is necessary for the model.

In addition, the network modeling team needs to be familiar with the business issues that
drive the manner in which the company does business. Some potential issues to consider
are:
 Are company policies rigid, or is flexibility the norm in an effort to ensure
customer satisfaction?
 Are the products subject to seasonal or fluctuating demand?
 What types of competition exist in the industry? How do these competitors go to
market? What do their distribution networks look like?
 Does the company plan to use the distribution network as a competitive
advantage? If so, how?
 Is the industry or company heavily regulated?
 Are customers segmented by service standards?
 Do distribution centers rely on direct shipments from vendors?
Given the business issues, the team must determine a period of analysis that would provide
data that illustrates these and any other situations that should be included in the model.

Create a plan of attack for gathering the data, then gather and validate it.

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 Plan of Attack—On a typical modeling project, the data gathering step accounts for the
greatest expenditure of resources. Consequently, it is critical to create a sound plan to
complete this segment of the workplan. Some items to consider when formulating this plan
are:
 From which period will the data be captured?
 Precisely which data is necessary for the model? Which data is extraneous to the
model?
 Who will be responsible for capturing what data?
 In what format must the data appear?
 From which source(s) will the data be gathered?
 Who is responsible for documenting the queries used to obtain the data?
 Which data will be used to cross-validate other data?
 What synergies can be enjoyed during the data collection process?
 What analyses are necessary to facilitate validation?
 Who will be responsible for validating the data?
Gather Data—The data necessary for a valid network model will vary by industry,
company and management objectives. There are, however, some standard elements of data
that are common to many distribution network models.

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SUPPLIER DATA
Location—Company name, city, state and five digit Zip Code (5ZIP), or foreign
equivalent, for each of the suppliers to be included in the model
Capacity and Throughput—Square footage, manufacturing capacity and distribution
capacity. Include throughput numbers for manufacturing and distribution, as
well as hours of operation
Material Supplied—Type of raw material, component or product supplied
Lead Times—Standard lead times for each element supplied by the supplier

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 Unit Costs—Unit prices for each of the elements supplied by the supplier
Minimum Purchase Quantities—Identified by supplier by raw material
INBOUND TRANSPORTATION DATA
Transportation Lanes—Create links for each mode employed between suppliers and
their respective ship-to manufacturing/distribution locations.
Transportation Costs by Material—Costs (per mile, per pound, per unit, per CWT,
etc. as applicable) for each of the elements supplied by the supplier. If these
differ by transportation lane, indicate the costs for each lane.
Transportation volumes by material (weight/volume and unit)—Total amount of
raw materials/components that were shipped to each manufacturing or
distribution location. Ensure that the transportation lanes that were
employed are clearly defined
Transportation modes by material—Method used to ship the product to the
manufacturing/distribution site (TL, LTL, air, rail, intermodal, container,
barge, pipeline, etc.)
MANUFACTURING DATA
Location—Facility name, city, state and five digit Zip Code (5ZIP), or foreign
equivalent, for each of the manufacturing sites to be included in the model
Capacity and Throughput by Product AND/OR Process—Total square footage,
capacity and throughput at the facility. Indicate capacity and throughput for
each product produced for both manufacturing and for distribution at the
facility. To determine unused capacities, list utilization rates for each process.
Also include hours of operation for each location
Lead Times—Standard lead times for each product produced at the facility
Bills of Material for Each Product—Determine the components and/or raw
materials that comprise each product in the model. (i.e. The products’
“recipes.”)
Fixed and Variable Costs—Breakout the fixed costs of production (rent, depreciation,
taxes, insurance, salaried employment, etc.) from the variable costs (raw
materials, direct labour, material handling, etc.).
Products Produced—Products that are sourced from this facility
Routings—At the level at which the model is to be created and for each product
modeled, identify the typical sequential processes for each, as well as any
constraints that may exist.
INTERFACILITY TRANSPORTATION DATA
Interfacility Transportation Lanes—Create links for each mode employed between
manufacturing/distribution locations and the other
manufacturing/distribution locations as they occur in the distribution
network.
Transportation Costs by Product—Costs (per mile, per pound, per unit, per CWT,
etc. as applicable) for each of the products produced at the manufacturing
facility. If these differ by transportation lane, indicate the costs for each lane.
If applicable, calculate the discount per freight class for each product.
Indicate if this discount is lane, carrier or region specific.
Transportation Volumes by Material (weight/volume and unit)—Total amount of
product/components that were shipped to each manufacturing or
distribution location. Ensure that the transportation lanes that were
employed are clearly defined
Transportation modes by material—Method used to ship the product to the
manufacturing/distribution site (TL, LTL, air, rail, intermodal, container,
barge, pipeline, etc.)

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 DISTRIBUTION CENTER DATA
Location—Facility name, city, state and five digit Zip Code (5ZIP), or foreign
equivalent, for each of the distribution centers to be included in the model
Capacity and Throughput By Product—Total square footage, capacity and
throughput at the facility. Indicate capacity and throughput for each product
distributed from the facility. Also include hours of operation for each
location
Lead Times—Standard lead times and time fences for each product shipped from
each facility. For each time fence, breakout the portion that is related to the
order processing cycle and the transit lead times.
Fixed and Variable Costs—Breakout the fixed costs of distribution (rent,
depreciation, taxes, insurance, salaried employment, etc.) from the variable
costs (direct labour, material handling, etc.).
Products Stored—Products that are stored at and shipped from this facility
Inventory Carrying Costs by Product—Inventory costs as a percentage of standard
product cost
Turnover by Product—Number of inventory turns by product in units, not in dollars
OUTBOUND TRANSPORTATION DATA
Outbound Transportation Lanes—Create links for each mode employed between
distribution locations and the identified customer demand points.
Transportation Costs by Product—Costs (per mile, per pound, per unit, per CWT,
etc. as applicable) for each of the products demanded by customers. If these
differ by transportation lane, indicate the costs for each lane.
Transportation Volumes by Material (weight/volume and unit)—Total amount of
product/components that were shipped to each customer demand point.
Ensure that the transportation lanes that were employed are clearly defined
Transportation Modes by Material—Method used to ship the product to the
customer demand point (TL, LTL, air, rail, intermodal, container, barge,
pipeline, etc.)
DEMAND DATA
Location—The objectives of the model, coupled with the arrangement of the
companies supply chain, should determine the demand points for the model
(i.e. Distributor, final consumer, retailer, etc.) In the same manner,
management’s objectives will also drive the model’s level of aggregation,
which is often evident in the manner in which customer demand points are
grouped. In some models, each customer location is a separate demand
point. In others, customer demand points are aggregated at the city, three
digit Zip Code (3ZIP), or state level.
Quantity Demanded by Product by Location by Ship-From—For each customer
demand point, identify the number of (amount of) each product demanded.
Include the ship-from location and the mode used to transport the finished
product. In some models, it is necessary to include the number of returns by
type of product by demand point.
Service Levels Demanded—Relates to the fill rates and customer determined lead
times for each product. This is especially relevant in cases where
sales/marketing has promised delivery within a stated time, where a
customer has implemented a JIT inventory system, or where a product has
certain issues with perishability or obsolescence. Indicate if these service
levels differ by geographic location.
Shipment Class by Product by Demand Region/Location—Identify shipping
differences that exist between product and area to which the product is
shipped.

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 Unit Revenue by Product—Used to optimize a distribution network based on
maximum profit, as opposed to one optimized based on minimum cost.
FORECASTED DATA
Anticipated Geographic Penetration—Shows geographic areas where sales levels by
product are expected to change.
Anticipated Growth by Product—Shows projected growth for each product in the
model.
Anticipated Product/Customer Changes—Indicate new products and customers that
are expected to be added to the distribution network within the modeling
time horizon. Conversely, account for any products or customers that will be
pruned from the company.
Future Trends in Business—Identify any foreseen changes to the business or
industry that will impact the distribution network. (i.e. “Green” regulations,
reverse logistics requirements, reduced lead times, changes to export/import
requirements or regulations, etc.)
GENERAL COMPANY DATA
Period of Analysis and Modeling Horizon—Formalize the time frame from which
the data to create the model will be gathered. In addition, determine the time
horizon for which the model needs to provide data.
Unit Value by Product—Provide product value [what the product is worth the
owner], product price [market price for the product], and product cost [cost of
manufacturing the product] for each type produced at the facility
Weight, Cube and Pallet Quantity by Product—Determine weight, cube and pallet
quantities for each product, weighted by sales.
Target Fill-Rate and Allowable Stock-Out Percentage by Product—Determine fill
rates and allowable stock-outs for each SKU and aggregate them to the
product level, weighted by sales.
Company Mandated Lead Times by Product—Overall company lead time goals for
each product
Calculated Costs of Capital—Use company-defined cost of capital for the project.
This should be approximately equal to the company’s hurdle-rate.
Coverage of a Distribution Center—Maximum distance product can travel within a
stated lead time from a distribution center, given the time it takes to process,
assemble and ship an order, as well as the distance covered by each mode.

As issues will arise during the data collection, many of which will impact other data
collection efforts, it is imperative to conduct regular meetings involving all individuals
involved in the process. This ensures consistent handling of the issues throughout the entire
data gathering effort, which is key to the creation of a model which will yield dependable
output. In addition, these meetings facilitate the synergies and cross-validation of the data
gathering effort.
Determine the data to exclude from the model—As stated earlier, one of the keys to
efficient model building is determining what to exclude from the model.
Document queries used to gather the data—Ensure that the individuals who are pulling
the data are properly documenting the procedures used to obtain the data from the system.
This aids in the validation process, as the source from which the data was gathered is readily
available. It also facilitates the collection of similar data in the future.
Organize supporting documentation for aggregated data—To facilitate the validation
process, the team needs to create a series of check sheets against which the collected data will

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be analyzed. This set of supporting documentation should be carefully organized and saved,
as it will also be used to validate the output of the constructed network model.
Validate Data—As data is collected, it is important to have it validated. To ensure an
efficient model building process and to minimize the redundant steps, it is critical to perform
this step before importing the data into the model. Typically, the team will identify an
individual or department within the organization who has knowledge of the data and can
“bless” it. It is at this time that flaws and inconsistencies in the data can be identified and
corrected in a much simpler fashion that they could after being imported into the model.
Validation of the data is crucial, as a model with flawed data generates information
that is insupportable. In addition, building a model with validated data reduces the amount
of time-consuming data “re-entry” that is typically associated with a model constructed with
insupportable data. Because this is such a critical stage, many teams provide a “sign-off”
sheet to the individuals validating the data. This gives the team documentation that the data
is valid and ensures that other individuals are held accountable for providing correct data.

Create an identification scheme for the data.

Use the templates provided with the software to determine the type of and the proper format
for the validated data to be imported into the model. Create a list of the types of data to be
input into the model and the relationships that exist between the data. For each group of
data, determine a unique identification scheme and document the ID’s, as the tables that will
be imported into the model will be imported with relationships intact.

Import data into the model.

Arrange the company data into the software specified format and copy into the templates.
Typically, template construction is performed in a tool that allows for easy data
manipulation and viewing. Field arrangement/layout, data format, and other pertinent
information will be specific to the modeling software used. Consult the tool documentation
for detailed information on data importing.

Create a check sheet with which to validate the model.

Using the validated data that is imported into the model, create a validation sheet that will
be used to ensure that the model has been properly constructed and is representative of the
company’s current distribution network. While certain models may require validation of
specialized individual items, some standard validation checks are:
 Total raw material costs
 Total manufacturing costs by facility by product by process
 Total manufacturing output by facility by product
 Manufacturing utilization rates
 Throughput (or shipments) by facility
 Total variable handling costs by facility
 Total inbound move costs and volumes
 Total interfacility move costs and volumes
 Total outbound move costs and volumes
 Number of demand points
 Fill rates or satisfaction levels for the demand points

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Run the model.
Correct any errors that may arise
Run the validation reports—Network modeling tools have an abundance of validation
reports available. In addition, most software allows users to create and customize their own
reports. To ensure that the model is “wired” correctly and providing reasonable output,
these validation reports must be run and compared with the validation check sheet which
was mentioned in a previous section.
Make any changes necessary.
Run the model for the identified baseline year and validate.

Model the scenarios

Create the scenarios that management wants to have modeled. (i.e. Closing a certain
distribution center, increasing throughput through a “constrained” distribution center, etc.)
Run the model and ensure that the output is valid.

Determine if the results are feasible. Adjust and tweak model as necessary.
Sometimes the model will provide recommendations that are infeasible with the company’s
way of doing business. If this happens, the model needs to be adjusted to ensure that
realistic results are provided.

Present findings to management

Either formally or informally, present the findings to the company’s management team. Be
sure to be ready to re-clarify assumptions, back up the recommendations with hard data, and
respond to individuals’ challenges to the output. Keep in mind that certain members of the
management group will be, at the very least, skeptical about the team’s recommendation.
Stress to them that the output is based on the best information available and does represent a
hard and fast decision. Instead, the output from the model is to be used as a key piece of
information in the decision making process.

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