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PART I – OPTIMIZING LOGISTICS

NETWORK WITH EXCEL
March 12, 2016BudhiExcel, Facility Location, Logistics, Network Analysis, Optimization, P-Median, Spreadsheet, supply
chain, Tutorial
 
 
 
 
 
 
4 Votes

This is the first part in Logistics Planning series. In this series, we are going to maximize the
power of Excel and Solver to optimize logistics network problems. Simple cases will be
provided as DIY project for you to try.
Logistics network planning consist of a set of activities from determining number, location, and
capacity of facilities, allocating resources, to determining operational routes to maximize service
value while minimizing the cost to perform such a service. We can divide logistics network
planing into 3 decision levels:
1. Strategic decision; typically includes long-lasting impact (usually years) and costly
decision, such as determining facility location.
2. Tactical decision; involves decision on medium term basis (monthly or weekly), such as
resource and inventory allocation.
3. Operational decision; deals with day to day problem such as vehicle routing and parcel
delivery.
Since most of those decision are typically complex and NP-hard problem, it often takes
specialized software to perform this kind of planning and optimization in business.
In this series, we are going to maximize the power of Excel and Solver to solve logistics network
problem on strategic, tactical, and operational decision. Simple cases will be presented along the
explanation as DIY project. Excel is a very popular spreadsheet application. Many companies
still rely on Excel to perform planning process. With such familiar application, many people can
have access to learn solving logistics network problem without a need for heavy programming
background. Of course, this Excel exercise is not meant to compete with those
sophisticated software. The main idea is to build a tool which able to solve relatively
compact problem and can be understood for larger audience.
So let us start with our first case to solve facility location problem in logistics network.
Fatima is a distribution manager in Region ABC. She manages goods delivery from a depot to  a
set of customer locations. Currently she works with 11 customer locations which mostly located
in the north of region. She noticed that over last year there is a strong demand growing in the
south of the region. She was thinking if it will be  a good idea to open a new depot in the south.
Opening a new depot of course requires some cost which is not cheap. But on the other hand, it
also can save some transportation cost and potentially open up some new market opportunity.
Motivated by the idea, she opened her map and plotted the customer locations. She also
make projection on shipment  frequency based on expected demand for each location. The table
and figure are shown below.  Red dots represent the current customer locations, and the yellow
dots  represent the new ones. The blue shadows indicates the market size based on delivery
frequency. X and Y column denotes the coordinate of the customer location in cartesian
diagram.
Fatima asked her analyst to help her with the analysis. She want to know if opening a new
location will be a good decision. If yes, she also want to know in which location she need to
open the new depot. Fatima estimates that it will take around USD 120,000 per year to rent a
new depot in the south region. So if the new location  can save transportation cost about that
value, she is positive that it will be a good business case.
By assuming  euclidean  distance with road factor of 1.5 and the average fuel cost per km of 0.8
USD, can you help Fatima making the decision in within 1 hour?  
So let us help Fatima soling her problem by using Excel. Since 2010, Excel has equipped its
Solver with evolutionary algorithm which can speed up its optimization process especially for
non-linear problem. Here, we are going to utilize that feature to help us solving this
problem. The idea is to create a smart “trial-and-error” model by randomly selecting
solution candidates through solver and evaluates its solution quality. For those who are not
familiar with Solver modeling process, I recommend you to visit this official page from
Microsoft. Note that the free Solver edition can only handle up to 200 variables. So before
modeling the problem in Excel, please make sure that you only have less than 200 locations to
select. Otherwise you need to upgrade your Solver into the premium version to be able to solve
the problem.
The first thing we need to do is to setup an Excel model which enable us to evaluate the total cost
whenever we select a set of location as depot candidate in the network. It also need to be able to
show which customers linked to which depot. The objective of the model is to minimize the
total weighted distances in the network. The distance is weighted in such a way so that depot
location will be placed nearer customers who have higher demand, or in this case higher delivery
frequency. I formulate the weighted distance as the distance between location and its dedicated
depot multiplied by its yearly delivery frequency. By multiplying it with road factor and fuel
cost, we can get the total transportation cost per year.
Below is the snapshot of excel setup that I created. Note that the decision variable is in cell N7
and N8 and the objective function is in cell N3 . The idea is when the user change the location in
the decision variable, the model should be able to automatically calculate the total cost. The
challenge is how to find a set of locations which will give minimum cost. Of course, it will take
ages to check every location combinations one by one. So, this is the part where Solver coming
in to solve the problem for us.

 Formula: 
After setting up the model in the Excel, the second step is to transfer the model to Solver. Firstly,
you need to make sure that you have Solver installed in your excel. If you cannot find it most
likely it has not been installed yet. Follow this instruction to load Solver in your Excel.
The next step is to set the objective cell, variables, and constraints based on the model above.
Thick the Unconstrained Variable Non-Negative to make the decision variables always in
positive number. Then, select the solver method to Evolutionary.  Finally click the Solve button
and, voila, within seconds you get the result! Please note that the constraint in cell N12 is
important to make sure that Solver will only select two unique locations as solution.
The beauty of this model setup is that you can expand it in Excel up to 200 locations. Of course,
the more locations and variables you input, the slower for Excel to get you the solution. Not to
mention that the solution quality will also get worse and getting farther from optimal. The bright
side is that you will have much much better solution and more efficient process than picking a
random guess.

Now, let us go back to our case and help Fatima to make the decision.

Fatima has received the analysis from her analyst. She is satisfied with the result. It says that by
keeping the old depot in Location 2 and opening a new depot in location 13, she can save
transportation cost by about USD 136,000. The yearly saving is more than enough to rent a new
location and seize the potential growth in south region.
She praises the analyst and thanks him for the work. However even though the saving is
prominent, Fatima does not want to jump right away to the conclusion. She realized that the
result is very close to the threshold which is only about 10% difference. If herassumption  in
demand was wrong, then the solution will lead to a wrong direction. She also assumed in that
the major cost drivers were only fuel cost and depot rental cost. It can be that there are still
other major cost that she need to consider.  Therefore, she will discuss it first with marketing and
operations team to get more information before making the decision.
As you can see, with a right model setup, we can maximize the power of Excel and Solver to
optimize a difficult network problem such as facility location. I hope you enjoy the post and the
DIY case project. If you have remark or any input, do not hesitate to contact me. Thanks for
reading.

Next Post: Solving Vehicle Routing with Excel!

Stay tune.

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Part I – Optimizing Logistics Network with Excel

POST NAVIGATION
← All Models Are Wrong (2)
Part II – Solving Vehicle Routing Problem with Excel →
ONE THOUGHT ON “PART I – OPTIMIZING
LOGISTICS NETWORK WITH EXCEL”
1. DOULFIKAR SHORAHBIL SAYS:
 

Thank you for sharing however, it is helping me finalize my end studies little project
I wounder if you could also share the spreadsheet cause i’m not getting same results, looks like i’m missing
some important details
specially the second part II
Appreciate if you can help, your support is valuable to me ,
Thanks and Salam

September 25, 2016 at 03:32 Reply

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