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- To find the right balance between inventory, transportation and manufacturing

- Match supply and demand under uncertainty by positioning and managing inventory
- Utilize resources effectively by sourcing products from the most appropriate
manufacturing facility.

Divide the Network planning process into 3 steps

1) Network design this includes decisions on the number, locations, and size of
manufacturing plants and warehouses, the assignment of retail outlets to
warehouses and so forth. Major sourcing decisions also are made at this point and
the typical planning horizon is a few years

2) Inventory positioning includes identifying stocking points as well as selecting

facilities that will produce to stock and thus keep inventory, and facilities that will
produce to order and hence keep no inventory

3) Resource allocation given the structure of the logistics network and the location of
stocking points, the objective in this steps is to determine whether production and
packaging of different products is done at the right facility.

Determines the physical configuration and infrastructure of the supply chain. Network
design is a strategic decision that has a long lasting effect on the firm. It involves decisions
relating to plant and warehouse location as well as distribution and sourcing.

Supply chain infrastructure typically needs to be revaluated due to changes in demand

patterns, product mix, production process, sourcing strategies, or the cost of running
1) Determining appropriate number of facilities (e.g. plant, warehouse)
2) Determining location of each facility
3) Determining size of each facility
4) Allocating space for products in each facility
5) Determining sourcing requirements
6) Determining distribution Strategies (allocation of customer from warehouse)


Objective: Design or reconfigure the network in order to minimize system-wide cost
subject to the 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
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.

a typical network configuration problem involves large amounts of data, including
information on.
1 Locations of customers, retailers, existing warehouses and distribution centres,
manufacturing facilities, and suppliers
2 All products, including volumes, and special transport modes
3 Annual demand for each product by customer location
4 Transportation rates by mode
5 Warehousing costs, including labor, inventory carrying charges and fixed operating
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.

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
Aggregate by post code(s)

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

- Aggregate demand points into at least 200 zones. If customers are classified into
classes according to their service levels or frequency of delivery, each class will have
at least 200 aggregated points.
- Make sure each zone has approximately an equal amount of total demand. This
implies that the zones may be of different geographic sizes.
- Place the aggregated point at the center of the zone.
- Aggregate the products into 20 to 50 product groups.

Constructing an effecting distribution network design model is to estimate transportation
costs. An important characteristics for most transportation rates, including truck, rail and
others is that the rates are almost linear with distance but not with volume.
For company-owned trucks
Data Required:
Annual costs per truck
Annual mileage per truck
Annual amount delivered
Trucks effective capacity
Calculate cost per mile per SKU.

External Transportation Rate Two modes (Truckload or less than truckload)

Truckload, TL
Country sub-divided into zones. One zone/state except for: big states (might have two
Zone-to-zone costs provides cost per mile per truckload between any two zones.

TL cost from WA to NSW = cost per mile X WA-NSW distance

TL cost structure is not symmetric

Less-Than-Truckload, LTL - uses three basic types of freight rates

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 products specific class include:
product density, ease or difficulty of handling and transporting, and liability for damage.
After establishing rating, identify rate basis number.
Based on approximate distance between the loads origin and destination.
With the two, determine the specific rate per hundred pounds from a carrier tariff table
(i.e., a freight rate table).
Exception rates provides less expensive rates
Commodity rates are specialized commodity-specific rates

Mileage estimation
Estimate lona and lata, (the longitude and latitude) of point a and similarly for point b
Then determine the distance between a (e.g.Perth) and b (e.g. Albany)

Three main components
Handling costs
Labor and utility costs
Proportional to annual flow through the warehouse.
Fixed costs
Typically proportional to warehouse size (capacity).
Storage costs
Inventory holding costs
Proportional to average positive inventory levels.

Important input to the distribution network design model is the actual warehouse capacity.
Not immediately obvious, however, how to estimate the actual space required, given the
specific annual flow of material through the warehouse.
Capacity/Space requirement for item =
2 * Average Inventory Level* Storage space factor
Storage factor account for
access and handling
picking, sorting and processing facilities
Typical factor value = 3

Annual flow through warehouse

Average inventory level = Inventory turnover ratio

Annual flow = 1,000 units
Inventory turnover ratio = 10.0
Average inventory level = 100 units
Assume each unit takes 10 sqft. of space
Required space for products = ?
Total space required = ?


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


Specify a maximum distance between each customer and the warehouse serving it to
serve the customer within a reasonable time.
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

Strategic decisions (number, location, size of warehouse) are taken for at least 3-5 years
Need to consider changes in customer demand during the decision.
Scenario based approach can be used in determining the strategies.


Identify stocking points

Select facilities that will produce to stock (inventory)

Facilities that will produce to order (no inventory)


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?


High variability low volume products
Inventory risk
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.


Step 3: Allocate Resources

Allocate which facilities used for production and packaging

Determine each plants sourcing strategies

Work out the capacity required for each plant (and match it to regional seasonal demands)

Need Supply chain master planning

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