MBA 502 SUPPLY CHAIN

MANAGEMENT
LESSON 2
OGANIVE CHINGAKULE
Network Planning INTRODUCTION
Network Planning

 The process by which the firm structures and manages the supply chain in order to:
 Find the right balance between inventory , transportation and manufacturing costs.
 Match supply and demand under uncertainty by positioning and managing inventory effectively
 Utilize resources effectively by souring products from the most appropriate manufacturing
facility
 The 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.
 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 Planning NETWORK DESIGN
Network Design?

 Physical configuration and infrastructure of the supply chain.

 A strategic decision with long-lasting effects on the firm.
 Decisions relating to plant and warehouse location as well as distribution and sourcing
Key Strategic Decisions of Network Design

 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
The 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
 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.
 Production and
Purchasing

Inventory
Transportation
holding

System-Wide Cost

Facility
Facility (Fixed)
(Storage)

Facility
(Handling)
Network Planning DATA COLLECTION
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.
 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.
General Rules for Aggregation

 Aggregate demand points into at least 200 zones

 Holds for cases where customers are classified into classes
according to their service levels or frequency of delivery
 Make sure each zone has approximately an equal amount
of total demand
 Zones may be of different geographic sizes.
 Place aggregated points at the center of the zone
 Aggregate products into 20 to 50 product groups
General Rules for Aggregation

 Aggregate demand points into at least 200 zones

 Holds for cases where customers are classified into classes
according to their service levels or frequency of delivery
 Make sure each zone has approximately an equal amount
of total demand
 Zones may be of different geographic sizes.
 Place aggregated points at the center of the zone
 Aggregate products into 20 to 50 product groups
Network Planning TRANSPORTATION RATES
Transportation Rates

 Rates are almost linear with distance but not

with volume
 Differences between internal rate and external
rate
Internal Transport 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.
External Rate of Transport

 Truckload, TL
 Country sub-divided into zones. One
zone/state/province/district except for really
large areas
 Zone-to-zone costs provides cost per mile per
truckload between any two zones.

 TL cost structure is not symmetric

External Rate of Transport

 Less-Than-Truckload, LTL
 Class rates
 standard rates for almost all products or commodities shipped.
 Classification tariff system that gives each shipment a rating or a class.
 Factors involved in determining a product’s specific class include:
 product density, ease or difficulty of handling and transporting, and liability for damage.
 After establishing rating, identify rate basis number.
 Approximate distance between the load’s origin and destination.
 With the two, determine the specific rate per hundred pounds (hundred weight, or cwt) from
a carrier tariff table (i.e., a freight rate table).
 Exception rates provides less expensive rates
 Commodity rates are specialized commodity-specific rates
Network Planning WAREHOUSING
Warehouse Costs

 Handling costs
 Labor and utility costs
 Proportional to annual flow through the warehouse.
 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.
Warehouse Capacities

 Another important input to the distribution

network design model is the actual warehouse
capacity
 Inventory Ratio Approach most appropriate
 Annual flow through the warehouse divided
by inventory turnover ratio gives us average
inventory level.
 The required storage space is approximately
twice that amount
Potential Locations

 Geographical and infrastructure conditions.

 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
 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
 Consider scenario approach and net present
values to factor in expected future demand
over planning horizon
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
 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:

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.
Heuristics Example

 Single product
 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 markets areas c1,c2 and c3 with demands of 50,000, 100,000 and 50,000,
respectively.
Unit Distribution Costs
 Heuristic #1:

Choose the Cheapest Warehouse to Source Demand

D = 50,000
$2 x 50,000

$5 x 140,000 D = 100,000
$1 x 100,000
$2 x 60,000
Cap = 60,000
$2 x 50,000 D = 50,000

Total Costs = $1,120,000

 Heuristic #2:

$0
$3 D = 50,000
P1 to WH1 $3
P1 to WH2 $7
P2 to WH1 $7
$4 $2 P2 to WH 2 $4
$5
$5 D = 100,000
P1 to WH1 $4
$4 P1 to WH2 $6
$1 P2 to WH1 $8
$2 P2 to WH 2 $3
Cap = 60,000
Choose the warehouse where the total delivery costs to and
$2 D = 50,000
from the warehouse are the lowest P1 to WH1
P1 to WH2
$5
$7
[Consider inbound and outbound distribution costs] 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:

$0 x 50,000
$3 x 50,000 D = 50,000
Cap = 200,000 P1 to WH1
P1 to WH2
$3
$7
P2 to WH1 $7
P2 to WH 2 $4

$5 x 90,000 D = 100,000
P1 to WH1 $4
P1 to WH2 $6
$1 x 100,000 P2 to WH1 $8
$2 x 60,000 P2 to WH 2 $3
Cap = 60,000
$2 x 50,000 D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4

Total Cost = $920,000

Solutions to Past Paper June, 2018

 Question 2 (a)
 Heuristics: find “good” solutions, not necessarily optimal which is more realistic in this day and
age
 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.
Solutions to Past Paper June, 2018

 Question 2 (b)
 P1 to W2 = K44
 W2 to C4 = KO
 Total Unit Distribution cost = K44
 Total customer demand 45,000 units
 44 x 45,000
 Total Cost = K1,980,000
Solutions to Past Paper June, 2018
Question 2 (c)
Warehouse 1
 P1 to w1 = 20 x 62,000 = 1,240,000
 P2 to w1 = 40 x 178,000 = 7,120,000
 w1 to c1 = 43 x 115,000 = 4,945,000
 W1 to c2 = 70 x 50,000 = 3,500,000
 W1 to c3 = 19 x 30,000 = 570,000
 W1 to c4 = 23 x 45,000 = 1,035,000
 Total Cost = K18,410,000
Warehouse 2
 P1 to w2 = 44 x 62,000 = 2,728,000
 P2 to w2 = 15 x 178,000 = 2,670,000
 w2 to c1 = 27 x 115,000 = 3,105,000
 W2 to c2 = 21 x 50,000 = 1,050,000
 W2 to c3 = 18 x 30,000 = 540,000
 W2 to c4 = 0 x 45,000 = 0
 Total Cost = K10,093,000
Solutions to Past Paper June, 2018
Question 2 (d)

c1
 P1 to w1 = 20 + 43 = 63
 P1 to w2 = 44 + 27 = 71
 P2 to w1 = 40 + 43 = 83
 P2 to w2 = 15 + 27 = 42
c2
 P1 to w1 = 20 + 70 = 90
 P1 to w2 = 44 + 21 = 65
 P2 to w1 = 40 + 70 = 110
 P2 to w2 = 15 + 21 = 36
Solutions to Past Paper June, 2018
Question 2 (d)

c3
 P1 to w1 = 20 + 19 = 39
 P1 to w2 = 44 + 18 = 62
 P2 to w1 = 40 + 19 = 59
 P2 to w2 = 15 + 18 = 33
c4
 P1 to w1 = 20 + 23 = 43
 P1 to w2 = 44 + 0 = 44
 P2 to w1 = 40 + 23 = 63
 P2 to w2 = 15 + 0 =15
Simulation Models

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

 Individual ordering pattern.
 Specific inventory policies.
 Inventory movements inside the warehouse.
 Not an optimization model
 Can only consider very few alternate models
Network Planning INVENTORY POSITIONING
Inventory Positioning and Logistics
Coordination

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

 Manage inventory so as to reduce system wide cost
 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?
Network Planning RESOURCE ALLOCATION
Resource Allocation

 The organization needs to decide on a monthly, quarterly and annual basis how to utilize
resources.
 This is done by developing a supply chain master plan
 To answer the questions of;
 Production quantities
 Shipment size
 Storage requirements
Network Planning Exercise

 The BIS Corporation

 In groups discuss the questions at the end of the BIS corporation case study.
 Discussion will be presented back to the whole class.