TIME AND COST OPTIMISATION MODEL IN SALES AND SUPPLIES

Decision Sciences Project Report

GROUP 2

MEMBERS:
ANIMISH SUKHWAL 34BM07
ANKIT JAISWAL 34BM08
ANUJ DATTA 34BM09
ASIF RAZA KHAN 34BM10
ASHISH SRIVASTAVA 34BM11
BINOD KUMAR RAI 34BM12

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Table of contents:

Sl No Topic Page number

01 Abstract 3
02 Introduction 3
03 Literature review 5
04 Problem Statement 5
05 Mathematical Theory 7
06 Model of project 8
07 Model Objectives 10
058 Model Constraints 11
09 Variables in model 13
10 Parameters of model 13
11 Description of the Model Developed in Excel. 15
12 References 19

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Abstract
In the evolving market to fulfil the promise of the large sale and better access to the customers,
the consumer goods supplying companies(CGSC)” are looking to remove the intermediaries
like the retailers and reaching directly to their customers with the new policy of “Direct to
Customer (DTC).with the invent of the DTC trend the supply and distribution chain has been
impacted by significant opportunities for CGSCs and wholesale brands to better control their
supply chain network by circumventing the middlemen or retailers. In order to implement the
model of DTC the CGSC need to develop the “Omni-Channel strategy and strengthen the
various aspect of supply chin such as fulfilment, inventory flow and goods distributions by
revisiting and changing the supply chain network at all the operational, strategic and tactical
levels.
With the trending pattern of DTC supply chain policy in this project we have discussed the
model building for optimisation of the cost and the time in the supply chain in different
scenarios of the FMCG.
In the project the model to minimise the cost of supply chain and lead time has been developed
based on Linear programme and the objective function solved by Simplex method to arrive at
the objective function fulfilling the various contains of the supply chain network. The model
the various nodes are considered as the manufacturing unit (Mfg.), the primary distribution
centres (PDP), the regional distribution centres and the customers at the different zones which
may be supplied by different combinations of routes and channels and different modes of
transport.

1. Introduction
The huge competition in the productivity, quality and time for the response, involvement of the
products with shorter life cycles, and the huge customers’ expectations are the main concerns
of today’s global markets. These expectations have pushed the firms to aggressively seek the
better ways to establish a closer interaction and collaboration among the different activities of
the supply chain. D. Peidro, J. Mula, R. Poler, and F.-C. Lario (2009). decisions regarding
the handling decisions of different functions of the supply chain namely the production
planning and distribution planning are of prime importance for firms to obtain an optimal
strategy that improves their efficiency and enhances their global performance M. Fisher and
A. Raman (1996). Due to the complexities and dynamic nature of the relationships amongst
the different actors and the hidden customer preference, firms have experienced the threats of
many sources of uncertainties for example as customer demand, prices, and resource capacities

With the advent of higher completion in the market the nowadays, the competition has also
increased among the multinational companies and companies need to be both flexible and
competitive. In order to succeed it is not only required to have the best product portfolio but a
company needs to develop an efficient logistics system through the whole supply chain.
Rushton et al. (2010) define logistics as “The efficient transfer of goods from source of supply
through the place of manufacture to the point of consumption in a cost-effective way while
providing an acceptable service to the customer”. Hence, the main goal within logistics is to
find the perfect balance between cost and customer service. There are a lot of different methods
to improve a supply chain to a more cost-effective one; for example, Lean management and
just-in-time (Rushton et al., 2010). This might increase the lead time, which puts a lot of
pressure on the distribution of the items, though it has to be efficient and reliable.

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 Supply Chain
strategy

Logistics Supply chain planning

Product Life Cycle Supply chain enterprise

management application

Procurement Asset
management

Fig 1. Supply Chain Management

The aim of the Supply Chain Management is to build links among the processes, entities in the
pipeline; suppliers, customers and within organisation etc. The effective Coordinating among
these parts in the supply chain in a well-functioning way that could achieve synergies (Fig 1).
A key to succeed is to focus on the supply chain as a whole and build up relationships, both
upstream and downstream, with suppliers. This could result in delivering good customer values
at a low cost (Chistopher, 2011, 2-3).

This project report will focus on the distribution chain, which is the part of the supply chain
that stands for the activities needed to distribute the products from Manufacturing Site (denoted
by Mfg.) to customers. Distribution is about making the finished goods available to the end
consumers in the most cost-efficient way at the required customer service level (Fig2)
(Oskarsson et al., 2013, 67). Panicker et al. (2012) states that the distribution plays a key
role, within a supply chain, in order to make it work in a successful way.

Fig 2. Distribution chain management

With the organisation and its profile, the layout of distribution chains can also vary, and
whether or not the company has their own Mfg. and where the stakeholders are located
(Rushton et al., 2010, 51-52). Hence, the various logistic functions, i.e., distribution,
transportation, and inventory control have to be properly coordinated in an efficient way

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throughout the network (Lee et al., 2008). The performance depends on the balanced allocation
of distribution centres (DCs) and customers. Designing an effective distribution network is
very important for companies who aim to maintain their competitive position and reduce their
costs. (Panicker et al., 2012) DCs can play different roles within a distribution chain. Lee et
al. (2008) defines the Primary Distribution Points (PDP) as the facility keeping inventory,
usually located closer to the Mfg, and the Regional Distribution Points (RDP) as the one which
is located near customers. The RDP implies an additional step in the distribution chain before
the items can be shipped to the end customer. However, if the items are stored at the RDP the
transportation lead time can be kept short. (Oskarsson et al., 2013, 69) Using a DC can
increase customer service, but also incurs risks, especially when dealing with a global
networking company or international logistics networks with a large number of DCs spread all
over the world. Possible risks for a DC could be divided into subgroups such as resources,
management, human, physical environment, security, financial, market, policy, and operational
stages. Another disadvantage with using DCs is the increased amount of touch points which
results in an increased risk of damage. These risks have to be taken serious by companies to
avoid massive losses. There are different ways to handle the risks but one important aspect is
to take the risks into account when planning at the strategically level (Lam et al., 2015).

2. Literature review

The coordinated production and distribution planning problems have drawn more and more
attention for many years. As these problems are mutually related among themselves, it is
critical to optimise these two functions and plan all of them simultaneously in a well-integrated
manner instead of optimising them in a sequential way with little or no integration (Y. B. Park,
2005)., there are a number of research papers regarding the supply chain management tackling
this issue (Z.-L. Chen, 2010). Traditionally in the field of supply chain, design has focused
mainly on mono-objective optimisation quantifying economic objectives, such as cost
minimisation and the profit maximisation. But actually, the real-world problems often require
the consideration of multiple conflicting criteria to measure the customer service level and
supply chain responsiveness., the multi objective optimisation mainly includes goals related to
maximising products’ quality level, minimising the average tardiness, and minimizing
delivery. Owing to difficulties faced in collecting data and knowledge of production and
distribution planning problems, some works examined real-life case studies for example as
automotive manufacturing apparel industry pharmaceutical industry and plastic industry. Lots
of researches suppose that the availability of deterministic data when developing a production-
distribution planning model. However, the real-world planning problems inherently have some
level of uncertain and incomplete data in one or more of the input parameters., the literature
reveals that optimisation problems with uncertainty have been widely tackled and developed.
Many articles on these models have appeared in there are different factors that generate the
uncertainties in the supply chains, the most commonly and extensively stated sources of
uncertainty are connected to the customers’ demand, the process, and the supply that have huge
effects on the decision-making process of supply chain operations. To incorporate uncertainty
in an 0ptimisation model, several approaches can be addressed such as stochastic programming
methods fuzzy programming and robust optimisation techniques.

3. Problem Statement
The coordinated production and distribution planning problems have drawn more and more
attention for many years. Because the mentioned problems are mutually related to each other,

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it is critical to optimise these two functions and planning them simultaneously in a more
integrated manner instead of optimising in a sequential way with little or no integration (3).

Supply chain models tend to use a single objective function and optimize one criterion, i.e
cost. Previous researchers argue that it is important to have a multicriteria approach when
optimizing a supply chain. There are a lot of works done within the area of distribution network
design with various domains. Some studies evaluate the number of DCs needed in the network
as well as their locations. Other works base their study on the level needed at production and
inventory in the supply chain network, while some others investigate route optimization.

This project will consider the optimal distribution configuration in order to supply the demand
of the customers. Among the works which are looking at the number of DCs needed in a supply
chain network one can find several works. Rabbani et al. (2008) determined the best
distribution strategy through the distribution chain, from plant to warehouse to customer. This
was made by locating DCs, including production plants, in a multi- product supply chain. In
order to minimize the logistic cost in a supply chain, Lee et al. (2008) made a distribution
planning model, including warehouses and the DCs, to supply the end customers.

There are lots of different improvement methods which companies use in a broad range when
doing their supply chain more efficient. Among them Six Sigma, Lean, and Agile are the most
common ones.

Six Sigma Six Sigma is often used when doing improvements within the production. In Six
Sigma, one usually talks about the DMAIC- model, which is a model used in project. DMAIC
stands for Define, Measure, Analyse, Improve, and Control and these are the different steps a
project should follow in order to succeed. (Sorqvist and Hoglund, 2014, 9,27-30,57-66, 73)

Lean is a method used to increase the efficiency in the supply chain. It is based on the Toyota
Production System (TPS) which in turn is based on two concepts: (i) the full utilization of the
capacities and (ii) the reduction of cost by the elimination of waste. (Reichhart and Holweg
(2007)) There are eight identifies wastes, these are, (i) waiting, (ii) transport, (iii) inventory,
(iv) motion, (v) overproduction, (vi) over processing, (vii) defects, and (viii) unused
competence. (Petersson et al., 2009, 89) The overall goal with Lean production is to eliminate
the wastes from the system. This will increase operation efficiency which in turns will increase
the value- added in the supply chain. Reichhart and Holweg (2007) In order to implement
Lean, there are numbers of principles. Just in time (JIT) is the main principle and its purpose
is to achieve short and predictable lead times.

Agile During the last years a new method has been in focus, Agile. Agile promotes flexibility
within planning, developing processes and motivates organization to early delivery and
continuous improvement (Towill and Christopher, 2002). With this approach companies will
secure rapid responses to changes, which has become a key factor to succeed in the market
nowadays.

Key Performance Indicators

The organizations and business have a variation of targets and they put different levels of
emphasis on the different KPIs in order to succeed. The four KPIs which are used to measure

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the efficiency in distribution chains. The KPIs are: (i) cost, (ii) lead time, (iii) delivery
reliability, and (iv) inventory.

4. Mathematical Theory

The most common cases of optimization problem are built on maximizing or minimizing an
objective function. This is done by systematically going through the input values and
choosing the inputs which are within the allowed set. Then the value of the objective function
is calculated. An optimization problem can be formulated as:
min f(x) for different values of x

Where f(x) is the objective function which depends on the variables x = (x1, ...,xn)T. The
feasible solution to the problem are defined by the set X. Usually, one express X with
constraints. Hence, an alternative formulation of the problem (P) is:

Where g1(x), ..., gm(x) are constraint functions that depends on x, and bis are given constants
(Lundgrenet al., 2011, 12).

Minimum Cost Network Flow Problem

Fig 3. A Directed Network

The general formulation of a minimum cost flow problem can be stated as follows:

Consider a directed network G = (N,A), consisting a set N of n nodes and a set A of m directed
arcs (Fig3).

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Each of the arcs (i,j) ɛ A has an associated cost ci,j that denotes the cost per unit flow on that
specific arc.

The assumption that the cost varies linearly with the amount of flow is made. Each of the arc
(i, j) ɛ A has a capacity U i,j that is the maximum amount of flow and li,j denotes the minimum
amount of flow on the arc.

Each node i ɛ N are associated with an integer number b(i). If b(i) > 0, node i is the demand
node with the demand of –b(i). If b(i) = 0 the node i is a transhipment node.

The decision variable in the min cost flow problem is xi,j and the flow on arc (i, j) belong to
A.

Three of the most common problems to solve in the field of network flow is

• Shortest path: What is the best way to traverse a network, getting from one node to
another at the cheapest cost?
• Maximum flow problem: In a network with limited capacity on its arc, how should
the flow be sent between two points in order to honouring the capacity?
• Minimum cost flow problem: If there exists a cost per unit flow in a network with
limited capacities. How should the goods be distributed in the network at a minimal
cost? (Ahuja et al., 1993, 1-2)

Among those problems, minimum cost flow is used in different contexts and applications. It is
common in logistics network, where the main challenges are to move people and materials to
numbers of points around the world, and it could be successfully used in supply chain,
communication systems and distribution problems etc. Minimal cost flow network problems
are linear and can be solved in several ways, one of the most common solving methods is by
using simplex algorithm (Bazaraa et al., 2010, 453).

The models in this paper, consider two criteria, costs and lead time, when finding the optimal
solution, i.e., the single objective & multicriteria model. The two criteria, cost and lead time,
are evaluated with the same grade of importance. The equal weight policy on the two criteria
aligned with the company’s guidelines.

5. Model of project

The model takes advantage of the topology of network which results in a MILP problem. In
the model, four options are considered, and it minimize the two criteria, cost and lead time.
The four options consist of several sub-options, which are different combinations of the
available trip modes on each link.

Model description:

Model 1 is based on four different options. These options stand for the four possible routes
from Mfg. to the end customer. The options are listed below and visualized in Fig4.
• Option 1: Mfg – PDP – RDP – Customer
• Option 2: Mfg – Customer
• Option 3: Mfg – RDP – Customer

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• Option 4: Mfg – PDP – Customer

Fig 4. four options of model

Descriptions of various situations of the model:

Each option consists of several sub-options, which are the possible trip modes on the links.
All links has the possibility of transporting goods with standard (STD) or deferred air (DEF)
freight. The link between the Mfg and the PDP has an additional transportation method, sea
freight (SLOW).

Let K={{TM1),{TM2),{TM3),{TM4)) indexed by k in the model, be the set of trip modes

options,

Let J={{CN),{JP),{AS)) be the set of customers indexed by j in the model, where CN,JP,
and AS are the different regions.

Let R={r1,r2,r3) be the set of RDPs, indexed by r in the model.

Let T = {1, 2, 3, ..., 12) be the set of periods, indexed by t in the model.

Customer j which is located in region CN, JP, or AS can be supplied by either Mfg,
PDP, or RDP.

On each link the goods can be transported by different transportation modes, and for each
option all possible combinations of transportation mode are combined as trip modes k. For each
customer only one trip mode k, can be selected. Each option has a specific lead time, which
includes both shipping lead time and the time for inbound and outbound at the DCs. The cost
of the options can be divided into distribution cost and 3PL cost for the DCs. Hence, the cost
in this model is logistics cost. There are some other cost aspects which are excluded in this
model, since accurate data is missing i.e. administration costs and service cost. Passing across
the Distribution Centres (DCs) implies increases some hidden costs and the risk of damage, so
the weights are created, one for RDP and one for each PDP. These weights which are assumed
are based on the number of lines of the order that each DC should receive if all flow is forced
through that DC. The two criteria, cost and lead time, are minimized with respect to each other
with the same importance in the single objective function. The model consists of 24 constraints.

The constraints ensure that only one option is chosen, and also that only one of Mfg, PDP or
RDP can supply the customer. When it comes to the RDPs, the model constraints ensure that
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the right RDP supplies the market which it is responsible for. Further, the constraints limit
option 2 and option 3 with minimum demand from Mfg. So, in order to have the direct
shipment, customer demand has to be greater than a certain number of kilos.

This is since it is not economical viable to direct ship for every single order regardless of the
size of the order. Using minimum order quantity results in the consolidation of products. This
also increases the credibility of the results. Fig5: Visualizes the three different scenarios The
model is run considering three different inventory scenarios, see Fig5;

Fig 5: Depiction of three scenarios

• Scenario 1:
Inventory is available Mfg, i.e the lead time will be from Mfg to end customer.

• Scenario 2:
Inventory is available at Mfg and PDP, i.e the same conditions is kept from scenario 1 if the
goods is shipped from Mfg, but if it is shipped from PDP the considering lead time will starts
from PDP out to end customer.

• Scenario 3:
Inventory is kept on every Mfg, PDP, and RDP, which implies that the considering lead time
can be either from, Mfg, PDP or RDP.

6. Model Objectives

Minimize Cost

This part of the objective function is set up to minimize the cost, which consists of:
transportation cost for the different options, and the 3 PL cost at PDP & RDPs. The 3PL cost
is multiplied by the number of order lines, since the costs for the PDP and RDP is calculated
per order line. The transportation cost is multiplied by the demand (kg) to get the total cost.

Minimize Lead time

This part of the objective function minimizes the total lead time from the day the order is
placed to the day the customer receives the order.

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Minimising cost model objective function:

7. Model Constraints

Constraints 1-3, Only one option can be selected

For each customer, j, located in one of the three regions, these constraints make sure that only
one option is selected, xt,k,r,j , yt,k,j , zt,k,r,j or mt,k,j . The purpose is to make sure that the
model
select one of the main options and one of the sub-options in time period t.

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Constraints 4-9, Customer may be supplied from only one of Mfg, PDP, or RDP

For each customer, option 1 and 3 may not be selected if option 2, or 4, is selected. A binary
variable, λ t,j, is introduced. λ t,j has value 1 if customer j receives goods from Mfg or PDP in
period t, and 0 if customer is supplied by RDP.

Constraints 10-15, RDP may be supplied either from Mfg or PDP

The following constraints ensure that either Mfg or PDP, but not both, may supply RDP in
period t. Thus, only one of option 1 and 3 may be selected per RDP. In these constraints αt,r
is introduced, so that αt,r is equal to 1 when RDP, is supplied directly from Mfg, and 0 if it is
supplied from PDP.

Constraints 16-18, Only one of the RDPs can be selected

The constraints ensures that only one of the three different RDPs can be selected to a
customer, if
option 1 or 3 is used. This is to make sure that each RDP is responsible of a specific region.
Hence,
two different RDPs are not allowed to send goods to the same customer. In these constraints,
ϒ t,r,j
is introduced. When ϒ t,r,j is equal to 1, the customer j is supplied by RDP r, and 0
otherwise.

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Constraints 19-24, Demand requirement for direct shipment

In order to be able to receive goods directly from Mfg, the customers and the RDPs must
have a demand equal or greater than MD. If option 2 is used, yt,k,j is equal to 1, and if option
3 is used, zt,k,r1,j will be equal to one. In these constraints αt,r,j is introduced. αt,r,j is equal
to 1 if RDP will be supplied direct from Mfg, and 0 if it is supplied from PDP.

8. Variables in model

x (t,k,r,j) : 1 if option 1 is selected for customer j when receiving from RDP r via trip mode k
in period t, 0 otherwise.
y (t,k,j) : 1 if option 2 is selected for customer j when receiving from Mfg via trip mode k in
period t, 0 otherwise.
z (t,k,r,j) : 1 if option 3 is selected for customer j when receiving from RDP r via trip mode k
in period t, 0 otherwise
m (t,k,j) : 1 if option 4 is selected for customer j when receiving from PDP via trip mode k in
period t, 0 otherwise
λ,j : 1 if customer j receives from Mfg or PDP in period t, 0 if it receives it from a RDP.
λ,r: 1 if RDP r is supplied directly from Mfg in period t, 0 if it is supplied from PDP.
ϒ (t,r,j ): 1 if RDP r supplies customer j in period t, 0 otherwise

9. Parameters of model

dt,j : Demand of customer j / kg in period t

dt,r : Demand of RDP, r /kg in period t
LTMPk,r,j : Lead time(in days) of option 1 with trip mode k , include transportation lead
time and lead time of inbound and outbound at PDP and RDP
LTMk,j : Lead time(in days) of option 2 with trip mode k , includes transportation lead
time
LTMk,r,j : Lead time of option 3 with trip mode k (in days), include transportation lead
time and lead time of inbound and outbound at RDP
LTMPk,j : Lead time of option 4 with trip mode k (in days), include transportation lead
time and lead time of inbound and outbound at PDP
CMPk,r,j : Transportation cost/Kg of option 1 with trip mode k
CMk,j : Transportation cost/Kg of option 2 with trip mode k
CMk,r,j : Transportation cost/Kg of option 3 with trip mode k
CMPk,j : Transportation cost/Kg of option 4 with trip mode k

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HC : A fixed 3PL cost/order line at each RDP and PDP in period t, includes
handling cost
OLt,j : Number of order lines from customer j
Wt,r : The weight for RDP r
Wpt : The weight for PDP t
V : A very large number
MD : Minimum order quantity shipped from Mfg to Customer
MDRDP : Minimum order quantity shipped from Mfg to RDP

Minimising lead time model objective function:

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 10. Description of the Model Developed in Excel.

Objective of model in excel:

1) OBJ COST FUNCTION FOR COST MINIMISATION(RS)

This objective requires the minimisation of the cost incurred to fulfil the demand of the customer at different regions during the transportation
by virtue of the cost of transportation on different routes, cost of handling the material at different PDPs and RDPs, cost of inventorying at the
PDPs and RDPs for different combinations of routes of supply chains and combinations of PDPs and RDPs.

2) OBJ TIME FUNCTION FOR TIME MINIMISATION(HRS)

This objective’s function is to minimise the lead time by optimising the time which consists of the different times spans required for the
transportation across different arcs and the handling and inventorying time during the supply chain process

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3) VARIABLES USED IN THE MODEL:

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4) CONTRAINS USED IN THE MODEL:

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5) INPUTS USED IN THE MODEL (ANY DESIRED VALUE OF THESE MAY BE INSERTED IN THE MODEL TO DERIVE A
SOLUTION FOR A SITUATION)

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