1 Chapter 5 Chapter 5 Network Design Network Design in the Supply Chain in the Supply Chain 2 Outline Outline 1. Decisions in network design 2. A strategic framework for logistics network decisions 3. Factors influencing network design 4. Network design tools – major components 5. Solution techniques for network design 1) Optimizing facility location models 2) Heuristic approaches 3) Simulation technique 3 1. The Decisions in Network Design: 1. The Decisions in Network Design: A Logistics Network consists of: Facilities (- at the nodes) Vendors, Manufacturing Centers, Warehouse/ Distribution Centers, and Customers Flows (- along the arcs) Raw materials, parts and finished products, etc. that flow between the facilities Decisions: Where? Decisions: Where? Who? Who? What? What? Decisions in Network Design: Facility role Number of facilities Location of facilities Product allocation of facilities Capacity allocation of facilities Market and supply allocation … 4 Network Design Network Design – – Key issues Key issues Network setting: Decide the optimal number, location, and size of warehouses and/or plants Network operation: Determine optimal sourcing strategy Which plant/vendor should produce which product Determine best distribution channels Which warehouses should service which customers… Supply Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks Production/ purchase costs Inventory & warehousing costs Transportation costs Inventory & warehousing costs Transportation costs The objective The objective : – to balance service level against total cost (production, purchasing, inventory, facilities, transportation, handling and processing, etc.) - to find a minimal-cost configuration of the distribution network that satisfies product demands at specific customer service levels
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Chapter 5Chapter 5
Network Design Network Design in the Supply Chainin the Supply Chain
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OutlineOutline
1. Decisions in network design2. A strategic framework for logistics network decisions3. Factors influencing network design4. Network design tools – major components5. Solution techniques for network design
Strategic Planning -- Decisions that typically involve major capital investments and have a long term effect1. Determination of the number, location and size of new plants, distribution centers and warehouses2. Acquisition of new production equipment and the design of working centers within each plant3. Design of transportation facilities, communications equipment, data processing means, etc.Tactical Planning -- Effective allocation of manufacturing and distribution resourcesover a period of several months1. Work-force size2. Inventory policies3. Definition of the distribution channels4. Selection of transportation and trans-shipment alternatives…Operational Control -- Includes day-to-day operational decisions1. The assignment of customer orders to individual machines2. Dispatching, expediting and processing orders3. Vehicle scheduling…
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Complexity of Network Design ProblemsComplexity of Network Design Problems
Location problems are, in general, very difficult problems (-- NP hard!!!)
The complexity increases with
the number and type of customers, the number and type of products, the number of potential locations for warehouses, and the number of warehouses located….
MappingMapping allows you to visualize your supply chain and solutionsMapping the solutions allows you to better understand different scenariosColor coding, sizing, and utilization indicators allow for further analysis
Data analysisData specifies the costs of your supply chainThe baseline cost data should match your accounting dataThe output data allows you to quantify changes to the supply chainAggregation is essential
EngineSolution Techniques
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Mapping Allows You to Mapping Allows You to Visualize Your Supply ChainVisualize Your Supply Chain
Displaying the Solutions Allows you To Compare Scenarios
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Data for Network DesignData for Network Design
1. A listing of all products2. Location of customers, stocking points and sources3. Demand for each product by customer location4. Transportation rates5. Warehousing costs6. Shipment sizes by product7. Order patterns by frequency, size, season, content8. Order processing costs9. Customer service goals ..
Customers and Geocoding -- Too Much Information !!!!!!Sales data is typically collected on a by-customer basisNetwork planning is facilitated if sales data is in a geographic database rather than accounting database1. Distances2. Transportation costsNew technology exists for Geocoding the data based on Geographic Information System (GIS)
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Aggregating CustomersAggregating Customers
Customers located in close proximity are aggregated using a grid network or clustering techniques. All customers within a single cell or a single cluster are replaced by a single customer located at the centroid of the cell or cluster.We refer to a cell or a cluster as a customer zone.
Impact of Aggregation CustomersThe customer zone balances1. Loss of accuracy due to over aggregation2. Needless complexityWhat effects the efficiency of the aggregation? 1. The number of aggregated points, that is the number of different zones2. The distribution of customers in each zone.
Why Aggregation:The cost of obtaining and processing dataThe form in which data is availableThe size of the resulting location modelThe accuracy of forecast demand
Companies may have hundreds to thousands of individual items in their production line1. Variations in product models and style2. Same products are packaged in many sizesCollecting all data and analyzing it is impractical for so many product groups
Strategies for product aggregation:Place all SKU’s into a source-group
A source group is a group of SKU’s all sourced from the same place(s)
Within each of the source-groups, aggregate the SKU’s by similar logistics characteristics
Model (e) Model (e) -- Gravity Methods for LocationGravity Methods for Location
Mile-Center Solutionx,y: Warehouse Coordinatesxn, yn : Coordinates of delivery location ndn : Distance to delivery location n
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Focus on distance!!
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Gravity Location ModelGravity Location Model
Ton-Center Solutionx,y: Warehouse Coordinatesxn, yn : Coordinates of delivery location nDn : Annual tonnage to delivery location n
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-- Focus on tonnage!!
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Gravity Location ModelGravity Location Model
Ton Mile-Center Solutionx,y: Warehouse Coordinatesxn, yn : Coordinates of
delivery location ndn : Distance to delivery
location nDn : Annual tonnage to
delivery location nFn : Cost of shipping one unit to
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-- Look at both distance and tonnage!!
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55--2) Heuristics Methods2) Heuristics Methods
Example:Single productTwo plants p1 and p2Plant 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.
Table 1 Distribution costs per unit
Facility Warehouse
P1
P2
C1
C2
C3
W1
W2
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5 2
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The IP model: 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:
T he to ta l co st fo r th e o p tim a l stra te gy is 7 4 0 ,0 0 0 .
The Optimal StrategyThe Optimal Strategy
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Heuristic 1: For each market we choose the cheapest warehouse to source demand. Thus, c1, c2 and c3 would be supplied by w2.Now for every warehouse choose the cheapest plant, i.e., get 60,000 units from p2 and the remaining 140,000 from p1. The total cost is:
Heuristic 2:For each market area, choose the warehouse such that the total costs to get delivery from the warehouse is the cheapest, that is, consider the source and the distribution.Thus, for market area c1, consider the paths p1→w1→c1, p1→w2→c1, p2→ w1→c1, p2→w2→c1. Of these the cheapest is p1→w1→c1 and so choose w1 for c1.Similarly, choose w2 for c2 and w2 for c3.
Production costs are the same, warehousing costs are the same
$0
Example:
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Traditional Approach #1:Traditional Approach #1:Assign each market to closet WH. Then assign each plant based oAssign each market to closet WH. Then assign each plant based on cost.n cost.
D = 50,000
D = 100,000
D = 50,000Cap = 60,000
Cap = 200,000
$5 x 140,000
$2 x 60,000
$2 x 50,000
$1 x 100,000
$2 x 50,000
Total Costs = $1,120,000
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Traditional Approach #2:Traditional Approach #2:Assign each market based on total landed costAssign each market based on total landed cost
D = 50,000
D = 100,000
D = 50,000Cap = 60,000
Cap = 200,000
$4
$5
$2
$3
$4
$5
$2
$1
$2
$0
P1 to WH1 $3P1 to WH2 $7P2 to WH1 $7P2 to WH 2 $4
P1 to WH1 $4P1 to WH2 $6P2 to WH1 $8P2 to WH 2 $3
P1 to WH1 $5P1 to WH2 $7P2 to WH1 $9P2 to WH 2 $4
Market #1 is served by WH1, Markets 2 and 3are served by WH2
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Traditional Approach #2:Traditional Approach #2:Assign each market based on total landed costAssign each market based on total landed cost
D = 50,000
D = 100,000
D = 50,000Cap = 60,000
Cap = 200,000
$5 x 90,000
$2 x 60,000
$3 x 50,000
$1 x 100,000
$2 x 50,000
$0 x 50,000
P1 to WH1 $3P1 to WH2 $7P2 to WH1 $7P2 to WH 2 $4
P1 to WH1 $4P1 to WH2 $6P2 to WH1 $8P2 to WH 2 $3
P1 to WH1 $5P1 to WH2 $7P2 to WH1 $9P2 to WH 2 $4
Total Cost = $920,000
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55--3) Simulation Models3) Simulation Models
Optimization techniques deal with static models:
1. Deal with averages.
2. Does not take into account changes over time
Simulation takes into account the dynamics of the system
Simulation models allow for a micro-level analysis:1. Individual ordering pattern analysis
2. Transportation rates structure
3. Specific inventory policies
4. Inter-warehouse movement of inventory
5. Unlimited number of products, plants, warehouses and customers
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Optimization Techniques vs. SimulationOptimization Techniques vs. Simulation
The main disadvantage of a simulation model is that it fails to support warehouse location decisions; only a limited number of alternatives are considered
The nature of location decisions is that they are taken when only limited information is available on customers, demands, inventory policies, etc, thus preventing the use of micro level analysis.
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Recommended approachRecommended approach
Use an optimization model first to solve the problem at the macro level, taking into account the most important cost components
1. Aggregate customers located in close proximity2. Estimate total distance traveled by radial distance to the
market area3. Estimate inventory costs using the EOQ model
Use a simulation model to evaluate optimal solutions generated in the first phase.
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Case 2: Case 2: Evaluating Facility InvestmentsEvaluating Facility Investments under Uncertainty under Uncertainty ---- AM TiresAM Tires
BuyPC.comBuyPC.com Case Study:Case Study:Cost TradeCost Trade--OffOff
Cost Trade-Off for BuyPC.com
$0$2$4$6$8
$10$12$14$16$18$20
0 5 10 15
Number of DC's
Cos
t ($
mill
ion)
Total CostInventoryTransportationFixed Cost
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Inventory Reduction and WarehousesInventory Reduction and Warehouses
BuyPC.com faced heavy variability in consumer demandEach DC had to carry sufficient safety stockWarehouse to warehouse transfers were discouraged because of the extra liability in shipping computers
Studies within BuyPC.com indicated that reducing the warehouses would reduce the inventory
The Risk Pooling Effect
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BuyPC.comBuyPC.com Case Study:Case Study:Optimal NetworkOptimal Network
BuyPC.comBuyPC.com Case StudyCase StudyNetwork Design Conclusion and Next StepsNetwork Design Conclusion and Next Steps
By reducing the number of warehouses, BuyPC.com could reduce their overall logistics network costs
The reduction in inventory costs more than outweighed the increase in next-day air shipments
But, the strategic network did not consider the impact of seasonality
Would they have enough space?When would they have to start building inventory to meet demand?Where would the product be stored?Would the territories change during peak season?
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Demand and Production Capacity
010000
20000300004000050000
6000070000
Jan
Feb
Mar Apr
May Ju
n
Jul
Aug
Sep Oct
Nov
Dec
Month
Uni
ts DemandProduction Capacity
BuyPC.comBuyPC.com Demand and Demand and Production CapacityProduction Capacity
BuyPC.com needed to start building inventory in advance of the Christmas season
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What is Tactical Planning?What is Tactical Planning?
A tactical plan allows you to develop optimal plan across the supply chainthat minimizes transportation costs, inventory costs, and production costs.
When do we ship air or sea, to minimize in-transit inventory and avoid capacity
problems?
How do I buildfor the seasonal
spike and stillmeet shelf liferestrictions?
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Benefits of Tactical Planning SoftwareBenefits of Tactical Planning Software
Apply forecasts to the supply chainTake your company’s forecast and relate it directly to the supply chain
Create better supply chain plansCreate plans that are optimal across the entire supply chainAnalyze different inventory and production strategies
Avoid supply chain bottlenecksAnticipate problems months in advance and take action now to alleviate the issue
Improved coordination within your supply chainShare the output and collaborate with all your supply chain partners to ensure a successful execution of the plan
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WhatWhat--Ifs with Tactical Planning SoftwareIfs with Tactical Planning Software
When and where will we run out of capacityWhich plant or warehouse? In which month?
What do we do if we run out of capacity?Should we add capacity? Should we re-align territories?
What are the benefits of smoothing out the quarterly demand spikes?How do we meet seasonal demand?
Should we build inventory? When to start and where to store?Should we run overtime during the peak months to meet demand?
BuyPC.com wanted to minimize the amount of floor space to keep overhead low, yet have enough to handle peak demand
BuyPC.com wanted to know if their order fulfillment system would have to allow dynamic changing of territories
The factories in Asia were capacity constrained, so product would have to be brought in early for the peak season
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BuyPC.comBuyPC.com Tactical Results:Tactical Results:Using the size of warehouses calculated by the strategic model, Using the size of warehouses calculated by the strategic model, BuyPCBuyPC can only meet 78% of can only meet 78% of
DecemberDecember’’s demands demand
Warehouse Average Inventory Utilization (Volume)
0
20
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80
100
120
Jan
Feb Mar AprMay Ju
n Jul
Aug Sep OctNov Dec
Time Period
% U
tiliz
atio
n Atlanta, GAChicago, ILDallas, TXHarrisburg, PALos Angeles, CA
In Nov and Dec all warehouses are at capacity and cannot process any more product
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BuyPC.comBuyPC.com Tactical Results:Tactical Results:Determining warehouse sizes needed to meet seasonal demandDetermining warehouse sizes needed to meet seasonal demand
BuyPC.comBuyPC.com Tactical Results:Tactical Results:Warehouse capacity utilization using larger facilitiesWarehouse capacity utilization using larger facilities
Warehouse Average Inventory Utilization (Volume)
0
20
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100
120
Jan
Feb Mar AprMay Ju
n Jul
Aug Sep OctNov Dec
Time Period
% U
tiliz
atio
n Atlanta, GAChicago, ILDallas, TXHarrisburg, PALos Angeles, CA
With more warehouse space, there is less of a constraint on overall capacity, although several facilities are quite close to the limit.
However, space utilization is very poor for the first half of the year.
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BuyPC.comBuyPC.com Tactical Results:Tactical Results:Using temporary leased spaceUsing temporary leased space
Alternatively, BuyPC.com could lease space from Oct - Dec in LA (23,000 additional) and PA (26,000).
During December, LA would have to ship outside its optimal territory. The order fulfillment system would have to dynamically assign orders to DC’s
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BuyPC.comBuyPC.com Tactical Results:Tactical Results:Using temporary leased space and additional capacityUsing temporary leased space and additional capacity
Or, BuyPC.com could lease less space from Oct - Dec in LA (15,000 additional) and PA (20,000) and add an addition 25% of production capacity for Sep to Dec.
This would also result in less of a seasonal inventory build-up.
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BuyPC.comBuyPC.com ConclusionsConclusions
With the average warehouse sizes suggested by the strategic model, BuyPC.com could only meet 78% of December demandTo alleviate this, BuyPC.com had several options
Build larger warehouses at all locationsLease temporary space in LA and PA for the peak seasonLease temporary space in LA and PA and increase production
BuyPC.com determined that the most economical choice was to lease temporary space, but not increase production