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Network

Network Planning

Planning

Why Network Planning?

  • Find the right balance between inventory, transportation and manufacturing costs

Why Network Planning?  Find the right balance between inventory, transportation and manufacturing costs  Match
  • Match supply and demand under uncertainty by positioning and managing inventory effectively

  • Utilize resources effectively by sourcing products from the most appropriate manufacturing facility

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.

Three Hierarchical Steps  Network design  Number, locations and size of manufacturing plants and warehouses
  • 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 and 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?

  • Network Design

    • Physical configuration and infrastructure of the supply chain.

    Network Design  Physical configuration and infrastructure of the supply chain.  A strategic decision with
    • A strategic decision with long-lasting effects on

    the firm.

    • Decisions relating to plant and warehouse location as well as distribution and sourcing

    Reevaluation of Infrastructure

    • Changes in:

      • demand patterns

      • product mix

      • production processes

      • sourcing strategies

      • cost of running facilities.

  • Mergers and acquisitions may mandate the integration of different logistics networks

  • Reevaluation of Infrastructure  Changes in:  demand patterns  product mix  production processes 

    Key Strategic Decisions

    • Determining the appropriate number of facilities

    such as plants and warehouses.

    Key Strategic Decisions  Determining the appropriate number of facilities 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

    Objective and Trade-Offs

    • Objective: Design or reconfigure the logistics network in order to minimize annual system-wide cost subject to a variety of service level requirements

    Objective and Trade-Offs  Objective: Design or reconfigure the logistics network in order to minimize annual
    • Increasing the number of warehouses typically yields:

      • An improvement in service level due to the reduction in average travel time to the customers

      • An increase in inventory costs due to increased safety stocks required to protect each warehouse against uncertainties in customer demands.

      • An increase in overhead and setup costs

      • A reduction in outbound transportation costs: transportation costs from the warehouses to the customers

      • An increase in inbound transportation costs: transportation costs from the suppliers and/or manufacturers to the warehouses.

    Data Collection

    • Locations of customers, retailers, existing warehouses and distribution centers, manufacturing facilities, and suppliers.

    Data Collection  Locations of customers, retailers, existing warehouses and distribution centers, manufacturing facilities, and suppliers.
    • All products, including volumes, and special transport modes (e.g., refrigerated).

    • Annual demand for each product by customer location.

    • Transportation rates by mode.

    • Warehousing costs, including labor, inventory carrying charges, and fixed operating costs.

    • Shipment sizes and frequencies for customer delivery.

    • Order processing costs.

    • Customer service requirements and goals.

    • Production and sourcing costs and capacities

    Data Aggregation

    • Customer Zone

      • Aggregate using a grid network or other clustering technique

    for those in close proximity.

    Data Aggregation  Customer Zone  Aggregate using a grid network or other clustering technique for
    • Replace all customers within a single cluster by a single customer located at the center of the cluster

    • Five-digit or three-digit zip code based clustering.

    • Product Groups

      • Distribution pattern

        • Products picked up at the same source and destined to the same customers

        • Logistics characteristics like weight and volume.

    • Product type

      • product models or style differing only in the type of packaging.

    Replacing Original Detailed Data with

    Aggregated Data

    • Even if technology exists to solve the logistics network design problem with the original data,

    Replacing Original Detailed Data with Aggregated Data  Even if technology exists to solve the logistics
    • Data aggregation still useful because forecast demand is significantly more accurate at the aggregated level.

    • Aggregating customers into about 150-200 zones usually results in no more than a 1 percent

    error in the estimation of total transportation

    costs

    Transportation Rates

    • Rates are almost linear with distance but not with volume

    Transportation Rates  Rates are almost linear with distance but not with volume  Differences between
    • Differences between internal rate and external rate

    Internal Transportation Rate

    • For company-owned trucks

    • Data Required:

      • Annual costs per truck

      • Annual mileage per truck

      • Annual amount delivered

      • Truck’s effective capacity

  • Calculate cost per mile per SKU.

  • Internal Transportation Rate  For company-owned trucks  Data Required:  Annual costs per truck 

    External Transportation Rate

    Two modes of Truck Transportation

    External Transportation Rate Two modes of Truck Transportation  Truckload, TL  Less-Than-Truckload, LTL
    • Truckload, TL

    • Less-Than-Truckload, LTL

    Circuity Factor, ρ

    • Equations underestimate the actual road distance.

    Circuity Factor, ρ  Equations underestimate the actual road distance.  Multiply D by ρ. 
    • Multiply D ab by ρ.

    • Typical values:

      • ρ = 1.3 in intra-city areas

      • ρ = 1.14 for inter-city areas

    Warehouse Costs

    • Handling costs

      • Labor and utility costs

      • Proportional to annual flow through the warehouse.

    Warehouse Costs  Handling costs  Labor and utility costs  Proportional to annual flow through
    • Fixed costs

      • All cost components not proportional to the amount of flow

      • Typically proportional to warehouse size (capacity) but in a nonlinear way.

  • Storage costs

    • Inventory holding costs

    • Proportional to average positive inventory levels.

  • Determining Fixed Costs

    Determining Fixed Costs Warehouse fixed costs as a function of the warehouse capacity

    Warehouse fixed costs as a function of the warehouse capacity

    Determining Storage Costs

    • Multiply inventory turnover by holding cost

    • Inventory Turnover =

    Determining Storage Costs  Multiply inventory turnover by holding cost  Inventory Turnover = Annual Sales

    Annual Sales / Average Inventory Level

    Warehouse Capacity

    • Estimation of actual space required

     Average inventory level = Annual flow through warehouse/Inventory turnover ratio  Space requirement for item
    Average inventory level =
    Annual flow through warehouse/Inventory turnover ratio
    Space requirement for item = 2*Average Inventory Level
    Multiply by factor to account for
    access and handling
    aisles,
    picking, sorting and processing facilities
    AGVs
    Typical factor value = 3

    Warehouse Capacity Example

    • Annual flow = 1,000 units

    Warehouse Capacity Example  Annual flow = 1,000 units  Inventory turnover ratio = 10.0 
    • 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

    Potential Locations

    • Geographical and infrastructure conditions.

    Potential Locations  Geographical and infrastructure conditions.  Natural resources and labor availability.  Local industry
    • Natural resources and labor availability.

    • Local industry and tax regulations.

    • Public interest.

    • Not many will qualify based on all the above conditions

    Service Level Requirements

    • Specify a maximum distance between each customer and the warehouse serving it

    Service Level Requirements  Specify a maximum distance between each customer and the warehouse serving it
    • Proportion of customers whose distance to their assigned warehouse is no more than a given distance

      • 95% of customers be situated within 200 miles of the

    warehouses serving them

    • Appropriate for rural or isolated areas

    Future Demand

    • Strategic decisions have to be valid for 3-5 years

    Future Demand  Strategic decisions have to be valid for 3-5 years  Consider scenario approach
    • Consider scenario approach and net present values to factor in expected future demand over planning horizon

    Number of Warehouses

    Optimal $90 Number $80 of Warehouses $70 $60 Total Cost $50 Transportation Cost Fixed Cost $40
    Optimal
    $90
    Number
    $80
    of Warehouses
    $70
    $60
    Total Cost
    $50
    Transportation Cost
    Fixed Cost
    $40
    Inventory Cost
    $30
    $20
    $10
    $-
    0
    2
    4
    6
    8
    10
    Cost (millions $)

    Number of Warehouses

    Industry Benchmarks:

    Number of Distribution Centers

    Pharmaceuticals Food Companies Chemicals Avg. # of 3 14 25 WH - High margin product -
    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

    Model Validation

    • Reconstruct the existing network configuration using the model and collected data

    • Compare the output of the model to existing data

    • Compare to the company’s accounting information

    Model Validation  Reconstruct the existing network configuration using the model and collected data  Compare
    • Often the best way to identify errors in the data, problematic assumptions, modeling flaws.

    • Make local or small changes in the network configuration to see how the system estimates impact on costs and service levels.

      • Positing a variety of what-if questions.

    • Answer the following questions:

      • Does the model make sense?

      • Are the data consistent?

      • Can the model results be fully explained?

      • Did you perform sensitivity analysis?

    Solution Techniques

    • Mathematical optimization techniques:

    Solution Techniques  Mathematical optimization techniques: 1. Exact algorithms: find optimal solutions 2. Heuristics: find “good”

    1. Exact algorithms: find optimal solutions

    2. Heuristics: find “good” solutions, not necessarily

    optimal

    • Simulation models: provide a mechanism to evaluate specified design alternatives created by the designer.

    Example

    • Single product

    Example  Single product  Two plants p1 and p2  Plant p2 has an annual
    • Two plants p1 and p2

      • Plant p2 has an annual capacity of 60,000 units.

    • The two plants have the same production costs.

    • There are two warehouses w1 and w2 with identical warehouse handling costs.

    • There are three market areas c1,c2 and c3 with demands of 50,000, 100,000 and 50,000, respectively.

    Unit Distribution Costs

    Facility p1 p2 c1 c2 c3 warehouse w1 0 4 3 4 5 w2 5 2
    Facility
    p1
    p2
    c1
    c2
    c3
    warehouse
    w1
    0
    4
    3
    4
    5
    w2
    5
    2
    2
    1
    2

    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
    D = 50,000
    $2 x 50,000
    D
    = 100,000
    $1 x 100,000
    D
    = 50,000
    $2 x 50,000
    Heuristic #1: Choose the Cheapest Warehouse to Source Demand Cap = 60,000 D = 50,000 $2
    Heuristic #1: Choose the Cheapest Warehouse to Source Demand Cap = 60,000 D = 50,000 $2

    $2 x 60,000

    Heuristic #1: Choose the Cheapest Warehouse to Source Demand Cap = 60,000 D = 50,000 $2

    $5 x 140,000

    Heuristic #1: Choose the Cheapest Warehouse to Source Demand Cap = 60,000 D = 50,000 $2

    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
    $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
    $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

    Heuristic #2: Choose the warehouse where the total delivery costs to and from the warehouse are
    Heuristic #2: Choose the warehouse where the total delivery costs to and from the warehouse are

    $2 x 60,000

    Heuristic #2: Choose the warehouse where the total delivery costs to and from the warehouse are

    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

    The Optimization Model The problem described earlier can be framed as the following linear programming problem.

    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)

    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.

    Optimal Solution Facility p1 p2 c1 c2 c3 warehouse w1 140,000 0 50,000 40,000 50,000 w2
    Optimal Solution
    Facility
    p1
    p2
    c1
    c2
    c3
    warehouse
    w1
    140,000
    0
    50,000
    40,000
    50,000
    w2
    0 60,000
    0 60,000
    0
    Total cost for the optimal strategy is $740,000

    Simulation Models

    • Useful for a given design and a micro-level analysis. Examine:

      • Individual ordering pattern.

      • Specific inventory policies.

      • Inventory movements inside the warehouse.

    Simulation Models  Useful for a given design and a micro-level analysis. Examine:  Individual ordering
    • Not an optimization model

    • Can only consider very few alternate models

    Which One to Use?

    • Use mathematical optimization for static analysis

    • Use a 2-step approach when dynamics in system has to be analyzed:

    Which One to Use?  Use mathematical optimization for static analysis  Use a 2-step approach
    • Use an optimization model to generate a number of least-cost solutions at the macro level, taking into account the most important cost components.

    • Use a simulation model to evaluate the solutions generated in the first phase.

    Key Features for Network Design

    • Flexibility to incorporate a large set of preexisting network characteristics, like

    Key Features for Network Design  Flexibility to incorporate a large set of preexisting network characteristics,
    • Customer-specific service level requirements.

    • Existing warehouses kept open

    • Expansion of existing warehouses

    • Specific flow patterns maintained

    • Warehouse-to-warehouse flow possible

    • Production and Bill of materials details may be important

    • Robustness

      • Relative quality of the solution independent of specific environment, data variability or specific settings

    Inventory Positioning and Logistics

    Coordination

    • Multi-facility supply chain that belongs to a single firm

    • Manage inventory so as to reduce system wide cost

    Inventory Positioning and Logistics Coordination  Multi-facility supply chain that belongs to a single firm 
    • Consider the interaction of the various facilities and the impact of this interaction on the inventory policy of each facility

    • Ways to manage:

      • Wait for specific orders to arrive before starting to manufacture them [make-to-order facility]

      • Otherwise, decide on where to keep safety stock?

      • Which facilities should produce to stock and which should produce to order?

    Single Product, Single Facility Periodic

    Review Inventory Model

    • Assume -

    Single Product, Single Facility Periodic Review Inventory Model  Assume - zh SI  T 
    Single Product, Single Facility Periodic Review Inventory Model  Assume - zh SI  T 

    zh SI T S

    Single Product, Single Facility Periodic Review Inventory Model  Assume - zh SI  T 
    • 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

    • Net Lead Time = SI + T - S

    • Safety stock at the facility:

    2-Stage System

    2-Stage System  Reducing committed service time from facility 2 to facility 1 impacts required inventory
    2-Stage System  Reducing committed service time from facility 2 to facility 1 impacts required inventory
    • Reducing committed service time from facility 2 to facility 1 impacts required inventory at both facilities

      • Inventory at facility 1 is reduced

      • Inventory at facility 2 is increased

  • Overall objective is to choose:

    • the committed service time at each facility

    • the location and amount of inventory

    • minimize total or system wide safety stock cost.

  • Key Points

    • Identifying the Push-Pull boundary

    • Taking advantage of the risk pooling concept

    Key Points  Identifying the Push-Pull boundary  Taking advantage of the risk pooling concept 
    • Demand for components used by a number of finished products has smaller variability and uncertainty than that of the finished goods.

    • Replacing traditional supply chain strategies that are typically referred to as sequential, or local, optimization by a globally optimized supply chain strategy.

    Local vs. Global Optimization

    Local vs. Global Optimization Trade-off between quoted lead time and safety stock

    Trade-off between quoted lead time and safety stock

    Global Optimization

    • For the same lead time, cost is reduced significantly

    Global Optimization  For the same lead time, cost is reduced significantly  For the same
    • For the same cost, lead time is reduced significantly

    • Trade-off curve has jumps in various places

      • Represents situations in which the location of the Push-Pull boundary changes

      • Significant cost savings are achieved.

    Problems with Local Optimization

    • Prevalent strategy for many companies:

    Problems with Local Optimization  Prevalent strategy for many companies:  try to keep as much
    • try to keep as much inventory close to the customers

    • hold some inventory at every location

    • hold as much raw material as possible.

    • This typically yields leads to:

      • Low inventory turns

      • Inconsistent service levels across locations and products, and

      • The need to expedite shipments, with resulting increased transportation costs

    Integrating Inventory Positioning and Network Design

    • Consider a two-tier supply chain

      • Items shipped from manufacturing facilities to primary

    Integrating Inventory Positioning and Network Design  Consider a two-tier supply chain  Items shipped from

    warehouses

    • From there, they are shipped to secondary warehouses and finally to retail outlets

    • How to optimally position inventory in the supply chain?

      • Should every SKU be positioned both at the primary and secondary warehouses?, OR

      • Some SKU be positioned only at the primary while others only at the secondary?

    Integrating Inventory Positioning and

    Network Design

    Integrating Inventory Positioning and Network Design Sample plot of each SKU by volume and demand

    Sample plot of each SKU by volume and demand

    Three Different Product Categories

    • High variability - low volume products

    Three Different Product Categories  High variability - low volume products  Low variability - high
    • Low variability - high volume products, and

    • Low variability - low volume products.

    Supply Chain Strategy Different for the

    Different Categories

    • High variability low volume products

    Supply Chain Strategy Different for the Different Categories  High variability low volume products  Inventory
    • Inventory risk the main challenge for

    • 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 tracks 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.

  • Resource Allocation

    • Supply chain master planning

    Resource Allocation  Supply chain master planning The process of coordinating and allocating production, and distribution

    The process of coordinating and allocating production, and distribution strategies and resources to maximize profit or minimize system-wide cost

    • Process takes into account:

      • interaction between the various levels of the supply chain

      • identifies a strategy that maximizes supply chain performance

    Global Optimization and DSS

    FACTORS TO CONSIDER

    • Facility locations: plants, distribution centers and demand points

    • Transportation resources including internal fleet and common

    Global Optimization and DSS FACTORS TO CONSIDER  Facility locations: plants, distribution centers and demand points

    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.

    Focus of the Output

    • Sourcing Strategies:

      • where should each product be produced during the planning horizon, OR

    Focus of the Output  Sourcing Strategies:  where should each product be produced during the
    • Supply Chain Master Plan:

      • production quantities, shipment size and storage requirements by product, location and time period.