Logistics Network

Configuration
 Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points
The picture can't be displayed.

Supply

Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
 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.
 Why Network Planning?

• Find the right balance between inventory, transportation

and manufacturing costs,

• Match supply and demand under uncertainty by

positioning and managing inventory effectively,

• Utilize resources effectively by sourcing products from

the most appropriate manufacturing facility
 Logistics Design Decisions

• Determine the appropriate number of warehouses

• Determine the location of each warehouse

• Determine the size of each warehouse

• Determine optimal sourcing strategy: Which plant/vendor

should produce which product

• Determine best distribution channels: Which warehouses

should service which customers

• Allocate space for products in each warehouse

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.
 Three Hierarchical Steps
• Network design
• Number, locations and size of manufacturing plants and warehouses
• Assignment of retail outlets to warehouses
• Major sourcing decisions
• Typical planning horizon is a few years.

• Inventory positioning:
• Identifying stocking points
• Selecting facilities that will produce to stock and thus keep inventory
• Facilities that will produce to order and hence keep no inventory
• Related to the inventory management strategies

• Resource allocation:
• Determine whether production & packaging of different products is
done at the right facility
• What should be the plants sourcing strategies?
• How much capacity each plant should have to meet seasonal
demand?
 Factors influencing network design
• Strategic factors
• Cost leadership
• Responsiveness/variety

• Technological factors
• Macroeconomic factors
• Tariffs and taxes
• Exchange rate and demand risk

• Political factors
• Infrastructure factors
• Competitive factors
 Factors influencing network design
• Logistics and facility costs
• Inventory costs

• Transportation costs

– Inbound versus outbound

– External versus internal fleet

– Truckload (TL) versus less than truckload (LTL)

• Facility costs

– Setup

– Operating costs
 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.
Increase in number of Warehouse
leads to?????????
• Improvement in service level due to reduction in
travel time.

• Increase in inventory cost

• Increase in overhead and setup cost

• Increase in inbound transportation cost

• Reduction in outbound transportation cost

PROPER BALANCE REQUIRED

 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, sizing, 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
Mapping Allows You to Visualize Your
Supply Chain
Displaying the Solutions Allows you To
Compare Scenarios
 Data for Network Design

1. A listing of all products

2. Location of customers, retailers, existing warehouses and

distribution centers, manufacturing facilities, and suppliers.

3. Demand for each product by customer location

4. Transportation rates by modes

5. Warehousing costs

6. Shipment sizes by product

7. Order patterns by frequency, size, season, content

8. Order processing costs

9. Customer service goals

 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 or
customer zone.

Based on:
• Distribution Pattern - Ex. Same source to same customer’s
• Product type
 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

Avoid over aggregation so as to prevent loss of accuracy

 Recommended Approach

• Make sure each zone has an equal amount of total

demand
• Place the aggregated point at the center of the
zone
 Example: Customer Aggregation

• Considering transportation costs only

• Customer data

• Original Data had 18,000 customers Aggregated

Data had 800 customer zones

• Total demand was the same in both cases

 Comparing Output

Total Cost:$5,796,000 Total Cost:$5,793,000

Total Customers: 18,000 Total Customers: 800

Cost Difference < 0.05%

 Product Grouping

Companies may have hundreds to thousands of

individual items in their production line

– Variations in product models and style

– Same products are packaged in many sizes

Collecting all data and analyzing it is impractical for

so many product groups

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, aggregate the

SKU’s by similar logistics characteristics

– Weight

– Volume

– Holding Cost
 Product Aggregation

Total Cost:$104,564,000 Total Cost:$104,599,000

Total Products: 46 Total Products: 4

Cost Difference: 0.03%

 Three Different Product Categories

• High variability - low volume products

• Low variability - high volume products, and

• Low variability - low volume products.

 Supply Chain Strategy Different for the
Different Categories
• High variability low volume products
• Inventory risk is the main challenge so position them mainly at
the primary warehouses
 demand from many retail outlets can be aggregated reducing inventory costs.

• Low variability high volume products

• Position close to the retail outlets at the secondary warehouses

• Ship fully loaded trucks as close as possible to the customers

reducing transportation costs.

• Low variability low volume products

• Require more analysis since other characteristics are important,
such as profit margins, etc.
Required No. of Facilities Number of facilities

Inventory Costs
Desired Response Time Number of Facilities
Transportation Costs

Facility Costs

Number of Facilities Number of Facilities

Minimize the cost of your logistics network
without compromising service levels

$90 Optimal
$80
Number
of Warehouses
$70
Cost (millions $)

$60
Total Cost
$50 Transportation Cost
$40 Fixed Cost
Inventory Cost
$30

$20

$10

$-

0 2 4 6 8 10
Number of Warehouses
 Number of facilities

Response time

Total Logistics Costs

Number of Facilities
 Industry Benchmarks:
Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg.
No. of
WH 3 14 25
- High margin product - Low margin product
- Service not important (or - Service very important
easy to ship express) - Outbound transportation
- Inventory expensive expensive relative to inbound
relative to transportation
Sources: CLM 1999, Herbert W. Davis & Co; LogicTools
 A Typical Network Design Model

• Several products are produced at several plants.

• 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 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
 Solution Techniques

• Mathematical optimization techniques:

– Heuristics: find “good” solutions, not necessarily optimal

– Exact algorithms: find optimal solutions

• Simulation models: provide a mechanism to evaluate

specified design alternatives created by the designer.
 Modeling Approaches: Simulation Models

• Based on developing a model of a real system and

conducting experiments with this model.

• In location theory, a firm can test the effect of various

locations on costs and profitability.

• Does not guarantee an optimum solution but evaluates

through the iterative process.

 Modeling Approaches: Heuristic Models

• Based upon developing a model that can provide a good

approximation to the least-cost location in a complex

decision problem.

• Can reduce a problem to a manageable size.

• This approach can be as sophisticated as mathematical

optimization approaches.
 OR models for facility decisions

• Facility location model: minimize transportation and facility costs

• Vehicle routing: minimize transportation and vehicle costs

• Location-routing: combination of facility location and vehicle routing

• Location-inventory: minimize transportation, facility and inventory

holding costs

• Inventory-routing: minimize transportation, vehicle and inventory costs

 10-step logistics network design process
(by Frazelle)
1. Assess/evaluate current network.

2. Design and populate network optimization database.

3. Create network design alternatives, such as more or fewer hierarchies, multi-

commodity flows, pooling opportunities, merge-in-transit, direct shipping,

cross docking, and supply-flow optimization concepts.

4. Develop network optimization model.

5. Choose network optimization tool and validate model

6. Implement network model in chosen tool.

7. Evaluate alternative network designs.

8. “Practicalize” recommended network structure.

9. Compute reconfiguration cost.

10. Make go/no-go decision.

 SUMMARY
Network Planning Characteristics

Network Design Inventory Positioning Resource Allocation

and Management

Decision focus Infrastructure Safety stock Production Distribution

Planning Horizon Years Months Months

Aggregation Level Family Item Classes

Frequency Yearly Monthly/Weekly Monthly/Weekly

ROI High Medium Medium

Implementation Very Short Short Short

Users Very Few Few Few

THANK YOU