Académique Documents
Professionnel Documents
Culture Documents
Network Planning
Dr A. Agarwal
The Bis Corporation is a company that produces and distribute paints. Currently, eight manufacturing plants located in cities such as Atlanta and Denver serve about 2000 retails stores including home Depot, Walmart as well Bis owned stores.
Distribution System
The current distribution system is a singletier network where all products are shipped from the plants to 17 warehouses, located all over the United States, and from there to retail accounts.
Company History
The company was established in 1964 as a family venture and grew in the 1970s and 1980s at a fairly steady rate. Bis is now owned by 12 shareholders and run by newly appointed CEO.
Todays session
How a company can develop a model representing its logistics network. How a company can validate this model. How aggregating customers and products affects the accuracy of the model. How a company decides on where to position inventory. How a company knows whether, when, and where to expand its production capacity.
Why Supply Chain and Logistics Management One of the most important challenge in organized retail in India is faced by ? Poor supply chain and logistics management.
Supply
Work Center
Inventory & warehousing costs Transportation costs Inventory & warehousing costs
Packaging
Finished Goods
Transportation costs
Shipping
Shipping Dock
Outgoing Vehicles
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
determines physical configuration and infrastructure of the supply chain. is a strategic decision with long-lasting effects on the firm. involves 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
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. Allotting space for products in each facility. Determining sourcing requirements. Determining distribution strategies, that is, the allocation of customers to each warehouse.
Data collection for Network Design 1. Locations of customers, retailers, existing warehouses and distribution centres, manufacturing facilities, and suppliers. 2. All products including volumes, and special transport modes (e.g. refrigerated). 3. Annual demand for each product by customer location.
Data Collection
5. Warehousing costs including labour, inventory carrying charges, and fixed operating costs 6. Shipment sizes and frequencies for customer delivery 7. Order processing costs 8. Customer service requirements and goals 9. Production and sourcing costs and capacities.
Data Aggregation
Amount of data involved in any optimization model is overhelming. A typical soft drink distribution system has between 10,000 and 120,000 accounts (customers). In a retail logistics network, such as Wal-Mart or JC Penney, the number of items that flow through the network is in the thousands or even hundreds of thousands.
Items
Distribution pattern Product type
Aggregating 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.
Why Aggregate?
The cost of obtaining and processing data The form in which data is available The size of the resulting location model The accuracy of forecast demand
Historical Data for the two customers Year 2004 Avg. STD.D Coeff. Annual ev. of Var. Dema nd 22.346 28.549 19.567 25.457 24.237 4.658 0.192 17.835 21.765 19.875 24.346 20.905 3.427 40.181 50.314 39.442 49.803 45.142 6.757 0.173 0.150 2005 2006 2007
Recommended Approach
Use at least 300 aggregated points Make sure each zone has an equal amount of total demand Place the aggregated point at the center of the zone In this case, the error is typically no more than 1%
The variability faced by the aggregated customer, measured using either the standard deviation or the coefficient of variation, is smaller than the combined variabilities faced by the two existing customers
Comparing Output
Total Cost:$5,796,000 Total Customers: 18,000 Total Cost:$5,793,000 Total Customers: 800
Product Grouping
Companies may have hundreds to thousands of individual items in their production line
Variations in product models and style Same products are packaged in many sizes
Aggregating Items/Products
Items are aggregated into a reasonable number of products groups based on
Distribution Pattern: All products picked up at the same source and destined to the same customers are aggregated together. Product Type: In many cases, products might simply be variations in product models or style or might differ only in the type of packaging.
Collecting all data and analyzing it is impractical for so many product groups
Within each of the source-groups, aggregate the SKUs by similar logistics characteristics
Weight Volume Holding Cost
Transportation Rates
The next step in constructing an effective distribution network design model is to estimate transportation cost. An important characteristics of most transportation rates, including truck, rail, and others, is that the rates are almost linear with distance but not with volume.
For Example
To calculate TL cost from one city A of one zone Z1 to another city B of second zone Z2, one needs to get the cost per mile for this pair and multiply it by the distance between the two cities (A and B). TL cost structure is not symmetric. Cost is more for moving A to B than from B to A.
Other Issues
Mileage Estimation
Street Network Straight line distances
This is of course an underestimate of the road distance. To estimate the road distance we multiply the straight line distance by a scale factor, . Typically =1.3.
Mileage Estimation
Straight line distances
Example: Suppose we want to estimate the distance between two points a and b where Lona and Lata are the longitude and latitude of the point a and similarly for b. Then
Mileage Estimation
Straight line distances: The previous equation is accurate only for short distances; otherwise we use
lat - lat b lon - lonb Dab = 2(69) sin1 sin a + cos(lata ) cos(latb ) sin a 2 2
2 2
This is of course an underestimate of the road distance. To estimate the road distance we multiply Dab by a scale factor, . Typically = 1.3 or 1.14.
Warehousing
Warehousing is the management of materials while they are in storage. Warehousing activities include: Storing Dispersing Ordering Accounting
Warehousing
Record keeping within warehousing requires a stock record for each item that is carried in inventories. The individual item is called a stockkeeping unit (SKU). Stock records are running accounts that show: On-hand balance Receipts and expected receipts Disbursements, promises, and allocations
Warehouse Costs
Warehouse Costs
Facility costs 1. Fixed costs; not proportional to the amount of material the flows through the warehouse 2. Handling costs; labor costs, utility costs 3. Storage costs; proportional to the inventory level Facilities capacities
In our case it is the ratio of the total flow through the warehouse to the average inventory level. If the ratio is then the average inventory level is total flow divided by . Multiplying the average inventory level by the inventory holding cost gives the annual storage costs.
Warehouse Costs
Fixed costs is a function of warehouse capacity
Other Issues
Future demand Facility costs
Fixed costs; not proportional to the amount of material the flows through the warehouse Handling costs; labor costs, utility costs Storage costs; proportional to the inventory level
Facilities capacities
10
Warehouse Capacities
Required storage space is about twice the average inventory level.
Warehouse Capacities
A multiple factor of 3 to product space to account for access and handling space Example
Annual flow is 1,000 units; inventory turnover rate is 10.0. Then, the average inventory level is about 100 units. If each unit takes 10 ft2, the required space for the product is 2,000 ft2. The total space required for the warehouse is about 6,000 ft2.
Warehouse Locations
When locating new facilities such as warehouses, a number of requirements have to be satisfied: 1. Geographical and infrastructure conditions 2. Natural resources and labor availability
Avg. # of WH
3
- High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation
14
25
- Low margin product - Service very important - Outbound transportation expensive relative to inbound
3. Local industry and tax regulations 4. Public interest As a result, there is only a limited number of locations that would meet all the requirements. These are the potential location sites for the new facilities.
Future Demands
Decision regarding the number, location, and size of warehouse have an impact on the firm for at least the next three to five years.
11
Minimize the cost of your logistics network without compromising service levels
$90 $80 $70
Cost (millions $)
$60 $50 $40 $30 $20 $10 $Total Cost Transportation Cost Fixed Cost Inventory Cost
Increase overhead and set-up costs Reduce transportation costs in a certain range Reduce outbound transportation costs Increase inbound transportation costs
10
Number of Warehouses
Components of Customer Service which are influenced by the structure of the distribution network
Response Time Product Variety Product Availability Customer Experience Order Visibility Returnability
12
Solution Techniques
Mathematical optimization techniques:
Exact algorithms: find optimal solutions Heuristics: find good solutions, not necessarily optimal
Simulation models: provide a mechanism to evaluate specified design alternatives created by the designer.
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.
$0
Cap = 200,000
$5 $4
$3 $4 $5 $2 $2 $1 $2
D = 50,000
D = 100,000
Cap = 60,000
D = 50,000
Production costs are the same, warehousing costs are the same
Example - Heuristics 1
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: 250000 + 1100000 + 2*50000 + 260000 + 5140000 = 1,120,000.
D = 100,000
Cap = 60,000
$2 x 60,000
D = 50,000
13
$0
Cap = 200,000
$5 $4
$3 $4 $5 $2 $2 $1 $2
D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4
$0
Cap = 200,000
$5
$3 $4 $5 $2 $2 $1 $2
D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4
D = 100,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3
D = 100,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3
$4
Cap = 60,000
Cap = 60,000
D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4
D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4
$0 x 50,000
Cap = 200,000
$3 x 50,000
D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4
D = 100,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3
Cap = 60,000
$2 x 60,000
D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4
Let : xijpw = the flow from plant i to warehouse j x wm = the flow from warehouse j to market k jk
s.t.
x 1wm + x 2wm = 50 , 000 ,1 ,1 x 1wm + x 2wm2 = 100 , 000 ,2 , x 1wm + x 2wm2 = 50 , 000 ,3 , All flows non - negative
14
0
140
5 2
60
4
140
C2 4
40
C3 5
50
Supply 140 1. Deal with averages. 60 2. Does not take into account changes over time Simulation takes into account the dynamics of the system
2 50
1
60
2 50
100
Total Cost=120+620=740,000
15
Simulation Models and Optimization Techniques 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.
Recommended 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 proximity 2. Estimate total distance traveled by radial distance to the market area 3. Estimate inventory costs using the EOQ model Use a simulation model to evaluate optimal solutions generated in the first phase.
Potential Improvement
Smaller, more frequent deliveries Delayed differentiation Disintermediation Modular Outsourcing Shorter lead times, better forecasts
Benefits
Reduced holding costs Quick response
Possible Drawbacks
Traffic congestion Increased costs May not be feasible May need absorb functions Less variety Loss of control Less variety
Fewer parts Simpler ordering Reduced cost, higher quality Able to match supply and demand
FACILITIES LOCATION
When does a location decision arise? Steps in the facility location study Qualitative Facility location techniques Quantitative Facility location techniques Case Examples
Facility Location
Location of Facilities is a problem associated with the planning phase of a factory or even a service sector
Facility Location is first planning activity. It is vital decision so that no change is needed for years to come
16
Why it is so difficult
Uncertainty in future Complexity and conflicting factors associated with the site selection Constraints and limitations of resources to produce a site
Example
Two site locations for a new factory Site A is nearer to market but far from the raw material location; site B is otherwise, Site A is in rural location with cheap availability of labor; site B is in urban location with better availability of power Question: Which site should be selected?
Insights
Urban and rural site have their own strengths and weaknesses A compromise could be the sub-urban site which are located near big cities. Examples of sub-urban sites are Faridabad, Gurgaon, Sahibabad, Naini etc.
17
Factors identified for site selection Description Nearness to market Transport facility and logistics support Availability of water Adequacy in labor availability Quality of life Competition in local market Nearness to market Incentive from financial institutions Cost of land
B A3 B
C A1 C2 C
D A3 B1 C2 D
E A3 B3 C2 D3 E
F F2 F3 F2 F3 E2 F
G A2 G1 G2 G2 G2 F1 G
H A2 H2 H1 H2 H3 F3 H2 H
I A3 I1 C2 I2 I2 I1 I1 H3 I Total
Scores Percentage 17 0.218 4 0.051 8 0.103 3 0.038 2 0.026 14 0.179 7 0.090 13 0.167 10 0.128 78 1
B 0.051 75 80 90 100 80
C 0.103 80 80 80 45 80
D 0.038 65 60 70 80 70
E 0.026 25 20 30 100 50
F 0.179 65 90 85 40 30
G 0.090 90 80 60 95 30
H 0.167 90 70 90 50 30
18
Managing Inventory
Make-to-order Make-to-stock
Thank You !
19