Reevaluation of Infrastructure
Mergers and acquisitions may mandate the integration of different logistics networks
Key Strategic Decisions
such as plants and warehouses.

Determining the location of each facility.

Determining the size of each facility.

Allocating space for products in each facility.

Determining sourcing requirements.

Determining distribution strategies, i.e., the allocation of customers to warehouse
Data Aggregation
for those in close proximity.

Product Groups

Product type
Replacing Original Detailed Data with
Aggregated Data

Data aggregation still useful because forecast demand is significantly more accurate at the aggregated level.

Aggregating customers into about 150200 zones usually results in no more than a 1 percent
error in the estimation of total transportation
costs
Internal Transportation Rate
Calculate cost per mile per SKU.
External Transportation Rate
Two modes of Truck Transportation
Determining Fixed Costs
Warehouse fixed costs as a function of the warehouse capacity
Determining Storage Costs
Annual Sales / Average Inventory Level
Warehouse Capacity Example

Inventory turnover ratio = 10.0

Average inventory level = 100 units

Assume each unit takes 10 sqft. of space

Required space for products = 2,000 sqft.

Total space required for the warehouse is about
6,000 square feet
Service Level Requirements
warehouses serving them
Industry Benchmarks:
Number of Distribution Centers
Pharmaceuticals
Food Companies
Chemicals
Avg.
# of
3
14
25
WH

High margin product

Low margin product
Service not important (or
easy to ship express)


Service very important

Outbound transportation

Inventory expensive
relative to transportation
expensive relative to inbound
Solution Techniques
1. Exact algorithms: find optimal solutions
2. Heuristics: find “good” solutions, not necessarily
optimal
Heuristic #1:
Choose the Cheapest Warehouse to Source Demand
Cap = 60,000
D = 50,000
$2 x 50,000
D
= 100,000
$1 x 100,000
D
= 50,000
$2 x 50,000
$2 x 60,000
$5 x 140,000
Total Costs = $1,120,000
Heuristic #2:
Choose the warehouse where the total delivery costs to and from the warehouse are the lowest
[Consider inbound and outbound distribution costs]
Cap = 60,000
$0
D = 50,000
$3
P1 to WH1
$3
P1 to
WH2
$7
$7
$4
$2
P2 to WH1
P2 to WH 2
$4
$5
$5
D
= 100,000
P1 to WH1
$4
$4
P1 to
WH2
$6
$1
$2
P2 to WH1
P2 to WH 2
$8
$3
$2
D
= 50,000
P1 to WH1
$5
P1 to
WH2
$7
P2 to WH1
P2 to WH 2
$9
$4
Market #1 is served by WH1, Markets 2 and 3 are served by WH2
Heuristic #2:
Choose the warehouse where the total delivery costs to
and from the warehouse are the lowest [Consider inbound and outbound distribution costs]
Cap = 200,000
Cap = 60,000
$3 x 50,000
D = 50,000
P1 to WH1
$3
P1 to
WH2
$7
P2 to WH1
P2 to WH 2
$7
$4
$5 x 90,000
D
= 100,000
P1 to WH1
$4
P1 to
WH2
$6
$1 x 100,000
P2 to WH1
P2 to WH 2
$8
$3
$2 x 50,000
D
= 50,000
P1 to WH1
$5
P1 to
WH2
$7
P2 to WH1
P2 to WH 2
$9
$4
$0 x 50,000
$2 x 60,000
Total Cost = $920,000
The Optimization Model
The problem described earlier can be framed as the following
linear programming problem.
Let

x(p1,w1), x(p1,w2), x(p2,w1) and x(p2,w2) be the flows from the
plants to the warehouses.

x(w1,c1), x(w1,c2), x(w1,c3) be the flows from the warehouse w1 to customer zones c1, c2 and c3.

x(w2,c1), x(w2,c2), x(w2,c3) be the flows from warehouse w2 to customer zones c1, c2 and c3
The Optimization Model
The problem we want to solve is:
min 0x(p1,w1) + 5x(p1,w2) + 4x(p2,w1)
+ 2x(p2,w2) + 3x(w1,c1) + 4x(w1,c2)
+ 5x(w1,c3) + 2x(w2,c1) + 2x(w2,c3)
subject to the following constraints:
x(p2,w1) + x(p2,w2) 60000 x(p1,w1) + x(p2,w1) = x(w1,c1) + x(w1,c2) + x(w1,c3) x(p1,w2) + x(p2,w2) = x(w2,c1) + x(w2,c2) + x(w2,c3) x(w1,c1) + x(w2,c1) = 50000 x(w1,c2) + x(w2,c2) = 100000 x(w1,c3) + x(w2,c3) = 50000
all flows greater than or equal to zero.
Key Features for Network Design

Customerspecific service level requirements.

Existing warehouses kept open

Expansion of existing warehouses

Specific flow patterns maintained

Warehousetowarehouse flow possible

Production and Bill of materials details may be important
Inventory Positioning and Logistics
Coordination
Single Product, Single Facility Periodic
Review Inventory Model
zh SI T S

SI: amount of time between when an order is placed until the facility receives a shipment (Incoming Service Time)

S: Committed Service Time made by the facility to its own customers.

T: Processing Time at the facility.

SI T S
Local vs. Global Optimization
Tradeoff between quoted lead time and safety stock
Problems with Local Optimization

try to keep as much inventory close to the customers

hold some inventory at every location

hold as much raw material as possible.
Integrating Inventory Positioning and Network Design
warehouses
Integrating Inventory Positioning and
Network Design
Sample plot of each SKU by volume and demand
Three Different Product Categories
Supply Chain Strategy Different for the
Different Categories
Low variability low volume products
Resource Allocation
The process of coordinating and allocating production, and distribution strategies and resources to maximize profit or minimize systemwide cost
Global Optimization and DSS
FACTORS TO CONSIDER

Facility locations: plants, distribution centers and demand points

Transportation resources including internal fleet and common
carriers

Products and product information

Production line information such as min lot size, capacity, costs, etc.

Warehouse capacities and other information such as certain technology (refrigerators) that a specific warehouse has and hence can store certain products

Demand forecast by location, product and time.