Lecture Notes in Economicsand Mathematical Systems

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M. BeckmannH. P. Kiinzi

Managing Editors:

Prof. Dr. G. FandelFach berei ch Wirtschafts wissenschaftenFernuniversitat HagenFeithstr. 140/AVZ II, 58084 Hagen, Germany

Prof. Dr. W. Trockelln stitut fur Mathematische Wirtschaftsforschung (IMW)Universitat BielefeldUniversitatsstr, 25,33615 Bielefeld, Germany

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C. D. Aliprantis

519

Editorial Board:

A. Basile, A. Drexl , G. Feichtinger, W. Giith , K. Inderfurth, P. Korhonen,W. Ktlrsten, U. Schittko, P. Schonfeld, R. Selten, R. Steuer, F. Vega-Redondo

Springer-Verlag Berlin Heidelberg GmbH

Andreas KloseM. Gracia SperanzaLuk N. Van Wassenhove(Eds .)

Quantitative Approachesto Distribution Logisticsand Supply ChainManagement

Springer

Editors

Priv.-Doz. Dr. Andreas Klose University of St. Gallen Bodanstr.6

Prof. Dr. Luk N. Van Wassenhove INSEAD 77305 Fontainebleau Cedex, France

9000 St. Gallen, Switzerland

Prof. Dr. M. Gracia Speranza University of Brescia Department of Quantitative Methods C. da S. Chiara, 48B 25122 Brescia, Italy

Library of Congress Cataloging-in-Publieation Data

KJose, Andreas, 1963-Quantitative approaehes to distribution logisties and supply ehain management /

Andreas KJose, Grazia Speranze, Luk N. Van Wassenhove. p.em.

Inc1udes bibliographical referenees. ISBN 978-3-540-43690-4 ISBN 978-3-642-56183-2 (eBook) DOI 10.1007/978-3-642-56183-2 1. Business logisties. 2. Materials management. 1. Speranza, M. Grazia, 1957- II.

Wassenhove, L. N. van (Luk N.) III. Title.

HD38.5 .K586 2002 658.7--de21

ISSN 0075-8450 ISBN 978-3-540-43690-4

2002070481

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Editorial

Logistics management is concerned with the design and control of efficientand cost-effective flows of material and information through complex net­works from point of origin to point of consumption. Increased internationalcompetition and an increased need of quickly confirming to customer require­ments despite longer distances for distribution and a growing product varietystresses the importance of distribution logistics, that part of logistics man­agement responsible for delivering products to customers at the right placeat the right time in the right condition for the right cost. Physical distri­bution is just a part of the supply chain. Effective distribution managementis, however , impossible without taking the strong links to procurement andproduction as well as the interrelations between other logistic processes andparties involved in the supply chain into account. Therefore, there is no clear­cut dividing line between logistics in general, distribution logistics and supplychain management .

Interest in logistics and supply chain management, both in industry and inacademia, has grown rapidly over the past years . On the one hand, this trendis due to the enormous potentials in improving logistics efficiency exploitableby means of intelligent planning techniques and improved coordination of lo­gistic processes. On the other hand, this trend is caused by the developmentof information and communication systems that are able to provide accessto comprehensive data from all components of the supply chain. Vendors ofsupply chain management software are going to add "business intelligence"components to their systems, which not only allow to access, share and trans­fer data in the supply chain but also to utilize this information in order toimprove decision making with the help of decision-support systems. Suchsystems heavily rely on quantitative models and techniques developed in thefield of Operations Research in the last decades. Today, there is no doubtof the importance of quantitative techniques in our modern business envi­ronment . Fortunately, advances in quantitative models and methods and intheir applicability to practical logistic problems are still achieved. Trends likee-cornmerce, the globalization of markets and the need of integrating reverseflows in the supply chain add to the growing complexity of logistic networksand require even more effective models and algorithmic tools. The paperscollected in this book contribute to some of these new developments in quan­titative approaches to distribution logistics and supply chain management.

VI

The main orientation of the book is not towards the theory underlying theemployed methods but towards practical problem solving.

The volume in hand continues a series of books, which are the outcomeof the work of a group of researchers who have met at a number of "Interna­tional Workshops on Distribution Logistics (IWDL)" since 1994. This bookincludes reviewed papers that were presented and discussed during IWDL 5,at Fontainebleau (France) in October 1999, and during IWDL 6 at St. Gallen(Switzerland) in February 2001.

We have organized the 22 papers in seven Chapters. The first three chaptersaddress general issues in supply chain management , in the relatively new fieldof reverse logistics as well as new challenges to distribution logistics causedby the evolution of e-commerce. The other four chapters deal with main func­tions of distribution logistics: strategic and tactical planning of distributionnetworks; operational, tactical as well as strategic problems related to vehi­cle routing and transportation; tactical and operational issues internal to theproduction center or the warehouse; and finally inventory problems .

Chapter 1 is concerned with various important topics in the field of sup­ply chain management. The paper by Vis and Roodbergen first introducesbasic supply chain concepts and afterwards analyses the impact of varioustrends on supply chain performance. The importance of cycle time reduc­tions , the influence of reverse logistics, e-cornmerce, third party logistics andglobal logistics and the resulting threats and opportunities are analysed bymeans of a number of case studies. In his contribution, Blackburn outlinesa methodology for valuing response time in supply chains. Using results ofinventory theory, he establishes important properties of the marginal valueof time, which are at first sight astonishing: Firstly, the marginal value oftim e increases with decreasing response time. Secondly, for equal responsetimes, the marginal value of time is greater at non-optimal inventory levelsthan at the optimum. The paper of Fjell and Jernsten concludes Chapter 1.They study the important question, how coordination between supply chainpartners can be achieved by means of pricing mechanisms, which result ina locally rational behaviour that is also efficient from a global perspective.They propose a novel negotiated two-part tariff scheme and argue that thispricing mechanism is a good means to achieve channel coordination.

Chapter 2 exclusively addresses managerial problems and solution meth­ods in the field of reverse logistics. Over the past years, environmental prob­lems have reinforced public interest in reuse and recycling. Take-back andrecovery of used products leads to additional goods flows from the user backto the producer. Reverse logistics is concerned with the management of theseopposite flows. Since product recovery affects product design , procurement,production and forward distribution, the challenge is to integrate forward andreturn flows and to obtain integral closed-loop supply chains. Guide and VanWassenhove give an overview of the field of closed-loop supply chains . Theysummarize various cases of reused products, elaborate the differences between

VII

branches and elicit main man ager ial problems and success factors. Furth er­more, im por tan t research issues in remanufacturing are poin ted out. Thepaper by Krikke, Pappis, Tsoulfas and Bloemhof-R uwaard gives an overviewof des ign principles of reve rse logistics, which extend the scope and applica­bility of design rul es for for ward supply chains to reverse supp ly chains. Thepresented pr inciples are applied in a case study and may provide a checklistfor improving closed-loop logistic systems . Mazzarino , Pesen ti and Ukovichconsider logistic system optimization for a reverse logisti c case. In cont rast tot ra dit ional approaches, they propose, however , a mul ti -agent approach, whichtakes actors ' behaviour and mul tiple decision makers into account. The pa­per by Gotzel and Ind erfurth examines an extended MRP approach, materi alrequirem ents and recovery plan ning (MRRP ), for production cont rol in a sys­te m with exte rn al stochast ic return flows and stoc hastic demand. They showthat the applicat ion of MRRP lead s to near-optimal resul t s. Bloemhof, vanNunen, Vroom, van der Linden and Kraal describe a practi cal reverse lo­gist ic problem th at eme rged at a dairy producer in th e The Neth erl ands. Acost evaluation too l based on scenario analysis for select ing betw een differ entpackaging sys te ms is developed . In addit ion to t radit iona l costs , environmen­tal costs and aspects are also taken int o accoun t.

Chapter 3 addresses the influence of e-commerce on distri bu tion logisti cs.The papers in this chapter descri be threads , opportunit ies and new problemsthat have to be solved in order to cope wit h the challenges resul tin g from theevolut ion of e-comrnerce. T he paper by de K oster is concerne d wit h the ques­tio n of how to organize logistic fulfilment processes in a Bt C e-comrnerce envi­ronment . Differen t alternatives for designin g effective dist ribu t ion structuresare pointed out and a mod el relating a company's objectives to characterist icsand choices in distribution is presen ted . The need of quickly res ponding todiverse customer needs in BtC e-commerce raises the com plexity of deliver yprocesses and timely delivery gets more difficul t. Daduna discusses this pr ob­lem and proposes a heu rist ic meth od for solving rout ing probl ems wit h t ightt ime windows that arise in elect ronic retail t rade. T he spread of the Inter­net has also significant ly increased t he use of In tern et auctions for exchanginggoo ds among and between individuals and companies. Bj¢rndal and Jernstenconsider combinato rial auctions where bidders bid on bundles of it ems andwhere the value of an objec t to a participant depends on what other objectsthe participant acquires. Bjerndal and J ornsten employ sensit ivity analysisand linear pr ogramming du ality in order to solve the pri cing problem and toderive a feedback mechani sm providing information to bidders that may givethe bidder s incenti ve to change their bids.

Chapter 4 treats st rategic planning of distribu tion networks as well as al­locat ion problems arising in tactica l network planning. The paper by B auerdiscusses practical pr oblems of data gathering, data validation and insuffi­cient data qu ality in distribu tion system design and gives hin ts on possiblesolutions elaborated on two case studies. T he pap er by Rom eijn and Mora lescons iders the problem of ass igning plan ts to wareho uses and customers to

VIII

warehouses in a mult i-level dist ribut ion network with time-varying demands.They present a mixed-integer model for the minimization of transpo rt at ion,production and handling costs , an d derive an effective greedy heuristic forsolving the model. Klo se and Drexl describ e assignment ty pe optimisationproblems aris ing in logistic system analysis and propose a solution methodbased on problem par ti ti oning and column generation.

The to pic of Chapter 5 is t ransportation planning and vehicle routing.The pap er by Angelelli and Mansin i deals with a vehicle routing problemwith time windows and simultaneous pick-up and delivery. A branch-and­pri ce algorithm for computing optimal solutions is proposed . Angelelli andSperanza apply a vehicle routing model to est imate the operational costs ofdifferent wast e collection systems and to support decision making regardingthe ty pe of system to adopt. Although vehicle routing is usually t reated as anoperational or tactical issue, th e det ermination of efficient vehicle routes canbe a strat egic problem if stable routes ar e required. Dillmann summarizest he experiences made when solving a large number of st rategic vehicle rout­ing problems for press wholesalers. He addresses imp ortan t practical prob­lems related to data measurement , data validation and model building in thepresence of soft constraints and mul tiple objectives. For solving lar ge-scalevehicle routing problems a dialog-based procedure is proposed. Furtherm ore,it is shown how the implementation of computed routes in pr actice can besupported.

Cha pter 6 is concerned wit h tactical and operational issues of warehous­ing. The pap er by Chevalier , Pochet and Talbot presents ana lyt ical result sfrom queuing theory for est imating the num ber of vehicles needed in an au­tomated material handling system. The model can provide a meth odologyfor designin g automated guided vehicle systems and is validated by means ofsimulation. De Ko ster and van der Meer compare t he performan ce of on-lineand off-line rules for dispatching vehicles in intern al t ra nsport systems. Th eauthors show that for different layouts of the t ransportation system off-lineopt imisat ion at tain s high perform an ce if t he system is relatively idle; how­ever, in high throughput environments the proposed on-line dispat ching rulesattain high performan ce.

Finally, Chapter 7 addresses to pics in inventory cont rol. Laan and Te­un ter compare average cost models with approaches based on the net presentvalue for single-source, mul ti-source, multi-stage inventory syste ms and for asystem with remanufacturing and disposal. The authors show in particularthat for complex inventory systems there is a considerable performance gapbetween the widely used average cost and the net present value approach.T he pa per by Wagner t rea ts the problem of determining safety stocks incapac itated single-stage mul ti-product production-invent ory systems. Simpleschemes for calculating safety stock levels are proposed and their reliabili tyshown by means of simul ation experiments . The pap er by Smits and de K okconsiders the imp act of freight consolidation policies on the lead time, whichinfluences inventory requ irements. T he aut hors derive approximations for the

IX

lead time behaviour where items are consolidated according to different typesof consolidation policies.

Unfortunately, a tragic event overshadowed the making of this book. InSeptember 2001, one of the authors , Roland Dillmann, died unexpectedlyand far too early in the age of 56 years . Roland Dillmann was professor formathematical methods in Economics at the University of Wuppertal from1975 until his death. He teached Economics, Statistics, Econometrics andOperations Research. Furthermore, he was engaged in the administrationof the faculty and acted successfully for a long time as consultant for presswholesalers in fields like transportation planning and demand forecasting. Wehave not only lost an excellent researcher with an extremely broad knowl­edge but also a very good friend . We are grateful to Simon G6rtz, Universityof Wuppertal, and Thomas Bieding , Dillmann&Co GmbH, for their help inreediting parts of Roland Dillmann's paper that is published in this volume.

Acknowledgement

The editors would like to thank the authors of the papers for their contribu­tion . All papers submitted for publication in th is volume have been subjectto a refereeing process and we are grateful to th e referees whose work wasessential to ensure a high quality level of this book .

Last , but not least , the editors are deeply indebted to Prof. Dr. PaulStahly. Paul Stahly was professor for Operations Research at the Universityof St . Gallen from 1973 until his retirement in March 2001. Since the first"International Workshop on Distribution Logistics" in 1994, Paul Stahly wasan active and leading member of our "IWDL group" who invested his energyin strengthening the coopera t ion between th e group members. Furthermore,he was main organizer of the workshop in St . Gallen . Without his support ,this workshop and th ereby this book would not have been possible . Therefore,we would like to dedicate this book to Paul Stahly as a recognition for hismerits for our "IWDL group".

Dr . Andreas Klose, University of St. Gallen, SwitzerlandProf. Dr . M. Grazia Speranza, University of Brescia, ItalyProf. Dr. Luk N. Van Wassenhove, INSEAD , Fontainebleau, France

May 2002

Contents

Chapter 1: Supply Chain Management

Examinin g Supply Chains from Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . 3I. F. A . Vis, K. J. Roodbergen

Valuing Time in Make-to-stock Manufacturing:Calculating the Limits of Time-based Competition . . . . . . . . . . . . . . . . . . 19J. D. Blackburn

Int ernal Pricing in Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37K. Fjell, K. Jernsien

Chapter 2: Reverse Logistics

Closed-loop Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47V. D. R . Guide, Jr ., L . N. Van Wass enhove

Extended Design Principles for Closed Loop Supply Chains:Optimising Economic, Logistic and Environmental Performance. . . . . . . 61H. Krikke, C. P. Pappis , G. T. Tsoulfas , J. M. Bloemhof-Ruwaard

A Behavioral Approach for Logistics System Analy sis and Design:A Reverse Logisti cs Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75M. Mazzarino, R . Pesenti, W. Ukovich

Performance of MRP in Product Recovery Systems with Demand, Re-turn and Leadtime Uncertainties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99C. Gotzel, K. Inderfurth

One and Two Way Packaging in th e Dairy Sector , 115J. M. Bloemhof-Ruwaard, J. A . E. E. van Nunen, J. Vroom,A . van der Linden, A . Kraal

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Chapter 3: Distribution Logistics and E-Commerce

The Logistics Behind the Enter Click , 131R. B. M. de Koster

Distribution Planning with Specific Delivery Time Restrictionsfor the Handling of Electronic Customer Orders in Food/Non-FoodRetail Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149J. R . Daduna

An Analysis of a Combinatorial Auction 163M. Bjerndol, K. Jernsien

Chapter 4: Warehouse Location and Network Planning

The Practice of Distribution Network Planning:Coping with Shortcomings in Important Data Quality " 179A . Bauer

A Greedy Heuristic for a Three-level Multi-periodSingle-sourcing Problem 191H. E. Romeijn, D. Romero Morales

Combinatorial Optimisation Problems of the Assignment Typeand a Partitioning Apprach 215A. Klose , A . Drexl

Chapter 5: Vehicle Routing and Transportation

The Vehicle Routing Problem with Time Windows and SimultaneousPick-up and Delivery 249E. Angelelli, R. Mansini

The Application of a Vehicle Routing Model to a Waste CollectionProblem: Two Case Studies 269E. Angelelli, M. G. Speranza

Strategic Vehicle Routing Problems in Practice -A pure Software Problem or a Problem Requiring Scientific Advice?Routing Problems of Daily Deliveries to the Same Customers 287R . Dillmann

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Chapter 6: Warehousing

Design of a 2-Stations Automated Guided Vehicle System 309P. Chevalier, Y. Pochet, L. Talbot

On-line versus Off-line Control with Multi-load Vehicles 331R. de Koster, J. R. van der Meet:

Chapter 7: Inventory Control

Average Costs versus Net Present Value:A Comparison for Multi-source Inventory Models 359E. van der Laan, R. Teunter

Safety Stocks in Capacity-constrained Production Systems 379M. Wagner

Approximations for the Waiting Time in (8, nQ)-Inventory Modelsfor Different Types of Consolidation Policies. . . . . . . . . . . . . . . . . . . . . . . . 395S. R . Smits, A . G. de Kok

Appendix

List of Contributors 419