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Phil Simchi-Levi
David Kaminsky
kaminsky@ieor.berkeley.edu
Philip Kaminsky
Edith Simchi-Levi
Outline
What is it?
Methodology
– Modeling
– Data Aggregation
– Validation
Solution Techniques
Case Study: BuyPC.com
Facilities:
Vendors, Manufacturing Centers, Warehouse/ Distribution
Centers, and Customers
Supply
Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
Decision Classifications
Customer data
– Original Data had 18,000 5-digit zip code ship-
to locations
– Aggregated Data had 800 3-digit ship-to
locations
– Total demand was the same in both cases
60.0
50.0
Weight (lbs per case)
40.0
30.0
Rectangles illustrate how
20.0 to cluster SKU’s.
10.0
0.0
0.000 0.010 0.020 0.030 0.040 0.050 0.060 0.070 0.080 0.090 0.100
Volume (pallets per case)
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.
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
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points
Supply
Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
Minimize the cost of your logistics
network without compromising
service levels
$90 Optimal
$80
Number
of Warehouses
$70
Cost (millions $)
$60
Total Cost
$50 Transportation Cost
$40 Fixed Cost
Inventory Cost
$30
$20
$10
$-
0 2 4 6 8 10
Number of Warehouses
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
The Impact of Increasing
the Number of Warehouses
Avg.
# of
WH 3 14 25
- High margin product - Low margin product
- Service not important (or - Service very important
easy to ship express) - Outbound transportation
- Inventory expensive expensive relative to inbound
relative to transportation
Sources: CLM 1999, Herbert W. Davis & Co; LogicTools
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
A Typical Network Design
Model
Several products are produced at several plants.
Each plant has a known production capacity.
There is a known demand for each product at
each customer zone.
The demand is satisfied by shipping the products
via regional distribution centers.
There may be an upper bound on total throughput
at each distribution center.
Single product
Two plants p1 and p2
– Plant P1 has an annual capacity of 200,000 units.
– 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.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
Heuristics and
the Need for Exact Algorithms
Table 1
Distribution costs per unit
Facility P1 P2 C1 C2 C3
Warehouse
W1 0 4 3 4 5
W2 5 2 2 1 2
$0
$3 D = 50,000
Cap = 200,000
$4
$5
$5 D = 100,000
$4 $2
$2 $1
Cap = 60,000
$2
D = 50,000
Production costs are the same, warehousing costs are the same
D = 50,000
Cap = 200,000
$5 x 140,000 D = 100,000
$2 x 50,000
$2 x 60,000 $1 x 100,000
Cap = 60,000
$2 x 50,000
D = 50,000
$0
$3 D = 50,000
Cap = 200,000 P1 to WH1
P1 to WH2
$3
$7
$4 P2 to WH1 $7
P2 to WH 2 $4
$5
$5 D = 100,000
$2 P1 to WH1 $4
$4 P1 to WH2 $6
$1 P2 to WH1 $8
$2 P2 to WH 2 $3
Cap = 60,000
$2
D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4
$0
$3 D = 50,000
Cap = 200,000 P1 to WH1
P1 to WH2
$3
$7
$4 P2 to WH1 $7
P2 to WH 2 $4
$5
$5 D = 100,000
$2 P1 to WH1 $4
$4 P1 to WH2 $6
$1 P2 to WH1 $8
$2 P2 to WH 2 $3
Cap = 60,000
$2
D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4
$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
Let :
x pw
ij the flow from plant i to warehouse j
min : 0 x1pw
,1 5 x pw
1, 2 4 x pw
2 ,1 2 x pw
2, 2 3 x wm
1,1 4 x wm
1, 2
5 x1wm
, 3 2 x2 ,1 2 x2 , 3
wm wm
s.t.
x2pw
,1 x 2 , 2 60,000
pw
x1pw
,2 x pw
2, 2 x wm
2 ,1 x wm
2, 2 x wm
2,3
x1wm
,1 x 2 ,1 50,000
wm
, 2 x2 , 2 100,000
x1wm wm
, 3 x2 , 2 50,000
x1wm wm
Table 2
Distribution strategy
Facility P1 P2 C1 C2 C3
Warehouse
W1 140000 0 50000 40000 50000
W2 0 60000 0 60000 0
1- Day Milwaukee
Chicago (Use UPS Ground Service)
WH 2-Days
Atlanta
(Use UPS Next Day Air Service)
BuyPC.com Case Study:
Current Network
Inbound: $ 851,000
Outbound: $ 2,930,000
Inv Cost: $13,291,000
WH Fixed: $ 1,875,000
Total: $18,947,000
BuyPC.com Case Study:
Cost Trade-Off
Cost Trade-Off for BuyPC.com
$20
$18
$16
Cost ($ million)
Inbound: $ 783,000
Outbound: $ 5,900,000
Inv Cost: $ 7,679,000
WH Fixed: $ 625,000
Total: $14,987,000
$4 Million Savings
Solution Results
40000 Demand
30000 Production Capacity
20000
10000
0
Jun
Nov
Jul
Jan
Aug
Feb
Sep
Dec
May
Apr
Mar
Oct
Month