THE PUZZLES OF LOGISTICS

MODELING
Optimization vs. Heuristics

Q: What does "optimal" mean in a logistics decision support model?

A: There are two very different concepts:

General Business Optimal - The best decisions that we can make given:
ü Fuzzy problem specification
ü Imperfect data
ü Errors in forecasts
ü Limits on computing capability
ü Limited decision timeframe

Scientific - The best decisions that can be made assuming:

ü Exact problem specification
ü Perfect data
ü Perfect knowledge about the future
ü Unlimited computing capability
ü Unlimited decision timeframe

Q: What is meant by the term "heuristics"?

A: There are two very different definitions:

General Business - Solutions based on:

ü Simple rules
ü Common sense
ü Business insight

Mathematical - Solutions based on:

ü Intellect
ü Optimization seeking strategy employing mathematics
ü Systematic method
ü Expert or knowledge-based systems and rules
ü Scientific techniques
Q: Why are heuristics needed?

A: There are several reasons.

ü The number of problems that can be optimized in a reasonable amount of time is few, so
additional models are needed.
ü Models are needed to handle non-quantitative issues, imperfect data, rules, etc.
ü Heuristics are valuable when good, but not-optimal solutions are needed within cost and
time constraints.

Q: Do CAPS products use heuristics? Are they based on mathematical or general business
principles?

A: CAPS products include a number of heuristic tools based both on mathematical and general
business principles.

Q: Which of these concepts of "optimal" should we use?

A: Both are important. We cannot optimize a complex set of business decisions under the
scientific definition since we never have perfect data, perfect knowledge of the future, etc.
However, decision models that optimize under the scientific definition are fundamental tools
used by the CAPS Logistics product line. It is tremendously useful to utilize tools that are
based on optimization concepts, because computational or time restrictions are still considered
heuristic and may not guarantee optimal solutions under the scientific definition. It is also
important to remember that these tools, whether optimum or heuristic, are only part of the
solution to optimizing the business system.

Linear Programming and Mixed Integer

Programming

LINEAR PROGRAMMING

Q: What is a linear programming (LP) model?

A: A linear programming model is a mathematical optimization model where all costs

are linear, all constraints are linear, and all decision variables are "continuous" (e.g. fractions
are okay). This is perhaps the most powerful type of mathematical optimization model
because it can be used to optimize many different types of complex logistics problems.
Q: What are examples of logistics applications that can be optimized using linear programming
technology?

A: The following logistics issues can be optimized using linear programming:

ü Multicommodity flow problems

ü Resource blending or product mix problems
ü Additional side constraints

Q: Do CAPS products use linear programming technology?

A: Yes. For example, Supply Chain Designer™ and Supply Chain Coordinator™ contain a tool
to find the optimal set of flows to minimize the sum of these flows times their linear costs,
while obeying linear supply and demand constraints. In addition, the applications utilize
CPLEX™ to solve general linear programming models.

MIXED-INTEGER PROGRAMMING

Q: What is a mixed-integer programming (MIP) model?

A: The "mixed" in mixed-integer programming refers to linear programming, specifically

continuous linear variables.

The "integer" part means some of the variables are restricted to integer values. The most
common integer is an open/close or on/off variable called a 0/1 or binary variable.

Q: Does MIP find the optimal solution?

A: All popular MIP approaches are based on "smart" enumeration of alternatives. The number of
alternatives can be enormous (exponential), so the only way a MIP approach can find the
optimal answer is by rapidly eliminating large sets of possible alternatives. This is called
"pruning".

Sometimes, a MIP model can prune so many alternatives that the optimal solution is indeed
found in a reasonable amount of time. The key is that you cannot and will not know this in
advance. It is always possible a particular MIP will not be solvable.
Q: Suppose the MIP solver cannot find an optimal solution in a reasonable amount of time. Will
it at least find a good or near-optimal solution?

A: There are no guarantees. An optimal or a near-optimal solution may be found very quickly, or
it is very possible that only poor solutions (or no solutions) will be found in a reasonable
amount of time. This is why one cannot depend exclusively on MIP technology.

Q: Will smaller MIP models run faster than larger MIP models?

A: Once again, there are no guarantees. A logistics network involving 50 warehouse decisions
might be solvable in a few minutes, but one involving 30 warehouses may not solve for a few
weeks. It all depends on the particular problem.

Q: Is it possible to do what-if analysis with a MIP model?

A: It is very difficult and frustrating because even a slight change in a solvable MIP model may
make it insolvable.

Q: It seems that there are many troubles with MIP technology, what is the value?

A: In general, MIP technology is not very robust or consistent - you just do not know if you will
get a good or optimal solution. There is value in this technology though: a MIP model may
indeed find a good or optimal solution in a reasonable amount of time, thus it is technology
worth having.

Q: Do CAPS products utilize MIP technology?

A: Yes. Supply Chain Designer, Supply Chain Coordinator, and TransPro™ use MIP for the
following purposes.

ü Proprietary MIP tools are used to optimize single commodity network flow models with
open/close decisions.
ü CPLEX is used for models that are more complex than single commodity network flows.
ü MIP technology is combined with an interactive map based user interface, a macro
language, configurable objectives, and flexible platforms.
 Simulation and Expert Systems
Q: What is meant by "simulation"?

A: This term has many different meanings.

In the broadest sense, a simulation is simply a model of a real or proposed process. The idea is
to make a model with alternatives that are easier to analyze and test as compared to making
actual changes to the real world system. CAPS products provide for this functionality.

A narrower definition of simulation relates to "probabilistic" models. Here, the simulation

model is used to play out a scenario to study how the system will behave. Traffic simulation in
a city is a good example, where areas of interest are issues like how many cars back up at a
traffic light. While our macro language can and has been used to play out events, like stepping
through a vehicle route, our focus is not typically on probability types of models.

Another narrow definition of simulation relates to animation. Again, our macro language can
be used to animate a logistics process, such as vehicle routes moving through space and time,
but this type of simulation is not our focus.

Q: What is meant by "expert system"?

A: This term has a couple of different meanings.

In the broadest sense, an expert system means human judgment is part of the solution process.
This judgment could be applied by rules, guidance of optimization models, heuristics, or
interactive control of a model. Our macro language and interactive modeling approach is
based on this modeling philosophy.

A narrower definition of expert system is related to artificial intelligence. Here, a "knowledge

base" is present which is a formal database of rules or other information. An "inference
engine" is then used to analyze the knowledge base, representing strategies that make
decisions or conclusions based on the information in the database. CAPS products do not
include this type of formal expert systems methodology, although it is possible to specify and
use unique knowledge or rules through the macro language.
 Inventory

Q: What is inventory?

A: Inventory is the amount of a commodity beyond what is currently needed. Inventory can occur
in various places in the supply chain.

Q: What are the defining factors of inventory?

A: There are several factors that define inventory for a company:

ü A company's current inventory costs.

ü The cost of having inventory on a vehicle versus other locations
ü When, where, and how much of a commodity a company should produce and store as
inventory to cover for drastic demand peaks.
ü The frequency shipments should be sent from plant(s) to distribution center(s) and the
inventory cost trade-offs.
ü The safety stock cost relative to offering different service rates.

Q: What types of inventory exist in a logistics supply chain?

A: There are four major types of inventory in a logistics supply chain:

Inventory Type Cause Description

In-Transit Transit time In-transit inventories always exist in the
transportation pipeline as a result of the elapsed
time required to move goods from one location to
another.
Order-Quantity Scale economies Order-quantity inventories occur as a result of
purchasing, producing or shipping product in
batches or lots. These inventories arise from
purchasing, production or transportation
economies-of-scale.
Safety Stock Uncertainty Safety stock is inventory intentionally
accumulated to cover variability of future supply
and future demand. Safety stock ensures
commodities are available when needed by
customers or manufacturing processes.
Seasonal Limited supply The demand for product may exceed available
production capacity during certain time periods,
so seasonal inventories must be accumulated in
advance of heavy demand periods.
Q: What is inventory rationalization?

A: Inventory rationalization is the process of determining when, where, and how much inventory
to accumulate. Historically, inventory was generally considered an acceptable by-product of
the scale economies of long production runs, large purchase lots, and large shipment sizes.
Inventory is also necessary to ensure products are available when needed. However, a key
contemporary logistics strategy is minimizing inventories throughout the logistics supply
chain, reducing costly inventories, and increasing the flexibility and efficiency of a supply
chain.

Q: Can CAPS products address inventory modeling?

A: Yes. Supply Chain Designer contains an aggregate inventory model which uses the
Ron Ballou formula to calculate inventory costs. We can also calculate safety stock costs and
determine In-Transit inventory costs.

Q: How is inventory modeled in Supply Chain Designer?

A: Inventory costs may be included during the optimization or as a post-processing step. In

order to include inventory costs in the optimization, the cost must be expressed as a variable
cost. For example, the inventory cost could be modeled as a percentage of sales for the
product flowing through the supply chain. In this case, the model would analyze the tradeoffs
between faster, more expensive modes of transportation and slower, cheaper modes of
transportation.

As a post-processing step, inventory costs may be added to a solution to evaluate a what-if

scenario.

CONCLUSION
Because of the limited existence of solvable optimization models, CAPS Logistics products
incorporate several approaches to modeling logistics problems. Our product line is built on top of
CAPS Logistics Toolkit® technology and is based on a macro modeling language designed
specifically for logistics. Our tools blend mathematical optimization models, powerful heuristic
models, a set of logistics data objects, a highly interactive map-based user interface, a toolbox of
optimization routines, and configurable platform libraries for rapid application of models.