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Newgistics Case Study
04/19/2006
Lei Deng, Timothy Gumm, Jacqueline Jones, Adam Levin,
Leihong Li, Yang Song
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Agenda
Problem Overview Current vs. Proposed Situation Pre-Modeling Issues The Model Results Analysis
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Problem Statement and Goal
Problem Statement: The postal network accumulates and consolidates the return volumes at Return Delivery Units (RDU) and Return Bulk Mail Centers (RBMC). At some point, it becomes faster and less expensive to pull the consolidated volumes out of the postal stream and ship it directly to Newgistics’ returns centers.
Goal: Develop a model that Newgistics can use under changing conditions to understand where to best extract the returns from the postal network 10, 20, and 30 million volume cases
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Post Office
RBMC (j)
RDU (i)
Return Centers (k)
Pull from BMC: Current State
Cost: by postal zone
Cost: FTL cost
Constraints:
• maximum density
• minimum pick-up frequency
10, 20, or 30 Million Packages
Legendi = 1 to 6115j = 1 to 22k = ATL, CHI, LAX, DFW, PHY
±70%
±30%
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Post Office
RBMC (j)
RDU (i)
Return Centers (k)
Pull from RDU or BMC: Possible Future State
±70%
±30%
Cost: $2/parcel + DDU cost
Constraints:
• Pick up at least 3 times/week
• # items/bag
25%
75%
Cost: by postal zone
Cost: by FTL cost
Constraints:
• truck capacity
• minimum pick-up frequency
10, 20, or 30 Million Packages
Legendi = 1 to 6115j = 1 to 22k = ATL, CHI, LAX, DFW, PHY
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Issues Before Modeling….
SUM(RDU dist) = 70% < 100%, where does the other 30% go? The 30% go directly to BMC from postal office – outside of
our control So the uncontrollable volume at a single BMC is:
30%*annual volume*BMC dist? Any problems? 30% fixed volume does not apply to an individual BMC! The right answer is:
(BMCi dist - Sum(RDUs in BMCi dist))*annual volume
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Issues Before Modeling….
Truckload cost What if < 3 TL/week, do we still pay for 3 FTL cost?
Package and bag weight distribution One bag can contain 1,2,3,4,or 5 packages We are given weight distribution for packages < 10 lbs,
but no distribution for packages >10 lbs What distribution to assume? Exponential or Uniform?
What is the bag weight distribution? Simulation needed!
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DDU Bag Weight Simulation
0 5 10 15 20 25 30 350
0.1
0.2
0.3
0.4
0.5
weight (lbs)
wei
ght
dist
ribtu
ion
the distribtuion of bag weight: 5 packages per bag
0 20 40 60 80 100 120 1400
2000
4000
6000
8000
10000
weight (lbs)
No.
cas
e
simulation of bag weight: 5 packages per bag
0 5 10 15 20 25 30 350
0.2
0.4
weight (lbs)
wei
ght d
istri
btui
on
the distribtuion of bag weight: 5 packages per bag
0 5 10 15 20 25 30 35 40 45 500
5000
10000
weight (lbs)
No.
cas
e
simulation of bag weight: 5 packages per bag
Not realistic! Exponential is better estimate.
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DDU Bag Weight Optimization
Understand optimal bag configuration to determine the financial value in understanding cubic dimensions of packages
Developed optimization model Results indicate that significant savings exist if bag
configurations are optimized Suggestion: Work with vendor to improve pricing
contract for DDU Pickup Cost based on Bag Opt. Conclusions
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The Model
Uses Excel and GAMS (General Algebraic Modeling System)
Computed costs in Excel Formulated problem as an Integer Program in
GAMS
GAMS Model
Transfer solution to
Transfer costs to
Excel Model
Excel Model
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For 75% captured packages: DDU cost for each RDU
Expected DDU cost/bag with i packages (i=1,2,3,4,5)
Cost(i) = sum (cost per pound * weight * P(weight))
Total cost for each RDU = M*cost(5)+cost(N) + 2(5M+N),
M = # full bags
[rounddown( # packages at RDU /5)]
N = # packages in last bag
[# packages at RDU – 5*M]
BagWeight Cost per lbs 1 32 1.53 14 0.755 0.656 0.557 0.58 0.459 0.4
10 0.3811 0.3512 0.3413 0.32
Costs of Pulling from RDU
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Costs of Pulling from RDU
25% Non-captured Packages: Expected postal cost for each RDU
= Expected postal cost by zone * # non-captured pkgs. at each RDU
Expected postal cost for each zone= sum over all weights (weight distribution * the postal cost for each weight)
# Non-captured pkgs. at each RDU = ROUND (RDU distribution * total
annual volume * 0.25 / 52 / 3)
Weight Distribution1 50%2 20%3 10%4 5%5 4%6 3%7 2%8 1%9 1%10 1%
>10 3%
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Expected postal cost for each RDU = Expected postal cost by zone * # pkgs. at
each RDU
Truckload cost Includes pkgs. that go from post office BMC
and those that go from RDU BMC = Max (3, total weekly volume at BMC / max
density of truck) * FTL cost * 52
Costs of Pulling from BMC
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Model Formulation
binaryx
FTLeqnumtFTLCosttruckload
numsenteqnumt
numtruckeqnumtMaxDensity
totPackBMC
totalBMCeqtotPackBMCPxPxP
toSubject
truckloadCxCxCxCostTotalWeeklyMin
i
n
iBRi
n
iBNRiBMC
n
iRCRi
n
iBNRi
n
iBRi
ii
iii
"".
"".3
"".
"".1
:
1
12
122
12
12
12
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Results
Total RDUs pulled: 10 million: 5276, or 86.3% 20 million: 5574, or 91.2% 30 million: 5625, or 92%
Savings from proposed solution: 10 million: $8,294,499 20 million: $17,800,244 30 million: $29,618,935
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DDU Cost Sensitivity Analysis: Detroit and Springfield
Scenario RDUs Pulled Fraction of Total RDUs Pulled Fraction of Total
1 * Cost 206 93.63% 319 82.64%1.2 * Cost 206 93.63% 319 82.64%1.5 * Cost 206 93.63% 270 69.95%2 * Cost 187 85.00% 245 63.47%
1 * Cost 216 98.18% 326 84.46%1.2 * Cost 216 98.18% 326 84.46%1.5 * Cost 216 98.18% 326 84.46%2 * Cost 198 90.00% 277 71.76%
1 * Cost 216 98.18% 331 85.75%1.2 * Cost 216 98.18% 331 85.75%1.5 * Cost 216 98.18% 331 85.75%2 * Cost 200 90.91% 303 78.50%
30 million
DETROIT SPRINGFIELD
10 million
20 million
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Postal Cost Sensitivity Analysis: Detroit
Scenario RDUs Pulled Fraction of Total
1 * Cost 206 93.64%0.9 * Cost 206 93.64%0.8 * Cost 206 93.64%0.7 * Cost 183 83.18%0.6 * Cost 36 16.36%
1 * Cost 216 98.18%0.9 * Cost 216 98.18%0.8 * Cost 216 98.18%0.7 * Cost 189 85.91%0.6 * Cost 39 17.73%
1 * Cost 216 98.18%0.9 * Cost 216 98.18%0.8 * Cost 216 98.18%0.7 * Cost 190 86.36%0.6 * Cost 73 33.18%
30 million
10 million
20 million
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Overall Results
Pull from RDU except when volumes are very low Very low volumes increase DDU cost cheaper to go
through BMC
As annual volume increases, pull from more RDUs Solution is not very sensitive to small changes in
DDU cost Solution can change when postal costs decrease by
at least 20%
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Recommendations
Start pulling packages from specified RDUs Understand better cubic dimensions of
packages reduce DDU cost Explore possibility of paying LTL instead of
FTL: may change optimal solution
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Questions?