Network Design

Network design and optimization

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

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Network design overview

Enterprise facility network

Warehouse requirements

Systems concept and analysis

Total cost integration

Formulating logistical strategy

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Strategic Planning Overview

The handbook of Logistics & Distribution Management 4th Edition

External Environment

EconomicRegulatory

TechnologicalCompetitive

Corporate Objectives &

Strategy

Internal FactorsStrengths

WeaknessesOpportunities

Threats

Competitive Strategy

production

marketing

logisticsfinance

Functional strategic plans

SWOTPEST

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PEST Analysis

Political / Legal Monopolies legislation Environmental protection laws Taxation policies Foreign trade regulations Employment law Government stability

Economic Business cycles Interest rates Money supply, inflation Unemployment Disposable income Energy availability costs

Socio-cultural Population demographics Income distribution Social mobility Lifestyle changes Attitude to work & leisure Consumerism Education levels

Technological Government spending on research Government & industry focus on technological effort New discoveries / developments Speed of technology transfer Rates of obsolescence

13-5The handbook of Logistics & Distribution Management 4th Edition

Corporate Objectives & Strategy

Competitive Strategy

Logistics process design

Competitive Strategy

Logistics network design

Logistics information system design

Logistics organizati

onal structure

Logistics Network Design: Includes aspects related to the physical

flow of the product through a company’s operation, the inventory that should be held, the number and location of warehouses, the use of stockless warehouses, and final product delivery. One key to the determination of an appropriate physical design is the use of trade-offs between logistics competencies and between the different company functions.

Logistics Network Design

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Logistics Network Design

The handbook of Logistics & Distribution Management 4th Edition

Corporate Objectives & Strategy

Competitive Strategy

Logistics process design

Competitive Strategy

Logistics network design

Logistics information system design

Logistics organizati

onal structure

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Enterprise facility network Availability of economical

transportation provides opportunity for facility networks

Design requirements are from integrated procurement, manufacturing and customer accommodation strategies

Logistics requirements are satisfied by achieving total cost and service trade-offs

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Spectrum of location decisions

Transportation services link locations into an integrated logistical system

Selection of individual locations represents competitive and cost-related logistical decisions Manufacturing plant

locations may require several years to fully deploy

Warehouses can be arranged to use only during specified times

Retail locations are influenced by marketing and competitive conditions

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Local presence: an obsolete paradigm

Local presence paradigm

Transportation services started out erratic with few choices

Customers felt that inventory within the local market area was needed to provide consistent delivery

Contemporary view Transportation services

have expanded Shipment arrival times

are dependable and consistent

Information technology Provides faster access to

customer requirements Enables tracking of

transport vehicles

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Warehouse requirements

Warehouses exist to lower total cost or improve customer service

Warehouses specialize in supply or demand facing services Facilities used for inbound materials are supply facing

warehouses Facilities used for customer accommodation are demand

facing warehouses Functionality and justification are different based

on facilities support role Procurement Manufacturing Customer accommodation

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Procurement: lowest total inbound cost

Limited number of deeper relationships with suppliers

Life cycle considerations E.g. material purchase, reclamation, and disposal of

unused materials Debundling of value-added services leading to

new structural relationships with suppliers Seasonality of selected supplies Opportunities to purchase at reduced prices Rapid accommodation of manufacturing spikes Facilities placing more emphasis on sorting and

sequencing materials

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Manufacturing drivers: consolidation

Provide customers full-line product assortment on a single invoice at truckload transportation rates

Choice of manufacturing strategy is primary driver Make to plan (MTP)

Requires substantial demand facing warehousing

Make to order (MTO) Requires supply facing support, but

little demand warehousing Assemble to order (ATO)

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Customer accommodation: inventory

Maximize consolidation and length of haul from plants

Rapid replenishment from wholesalers E.g. food and mass merchandise industries

Market-based ATO situations using decentralized warehouses

Size of market served by warehouse based on Number of suppliers Desired service speed Size of average order Cost per unit of local delivery

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Warehouse justification

Must achieve freight consolidation with warehouse positioning Inventory storage to

support customized orders

Mixing facilities to support flow-through and cross-dock sorting

Based on providing service or cost advantage

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Key design questions to ask How many and what

kinds of warehouses should a firm establish?

Where should they be located?

What services should they provide?

What inventories should they stock?

Which customers should they service?

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The “Systems” Concept

Systems concept is an analytical framework that seeks total integration of components essential to achieving stated objectives

Components of logistical system are its functions Order processing Inventory Transportation Warehousing Materials handling and packaging Facility network design

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Systems analysis

Focus on process perspective balancing performance between functional areas both within the enterprise and across its supply chain

Components linked together in a balanced system will produce greater end results than possible through individual performance

seeks to quantify trade-offs between logistics functions

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A systems concept example

Customer service is an integral part of total system performance

However, Customer service must also be balanced against

other components Accommodating the customer to the extent that you

put yourself out of business is not serving the customer!

There must be a balance between cost and customer service

Building relationships with customers is key to this balance i.e. customers become a component of the supply chain

system

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Total cost integration

Initial network of facilities are driven by economic factors Transportation economics Inventory economics

Cost trade-offs of these individual functions are identified, but A system analysis approach (i.e. total cost

integration) is used to identify the least-total-cost for the combined facility network

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Transportation economics

Two basic principles for economical transportation Quantity principle is that individual shipments

should be as large as the carrier can legally transport in vehicle

Tapering principle is that large shipments should be transported distances as long as possible

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cost-based warehouse justification using transportation consolidation

Assumptions Average shipment =

500 lbs Freight rate to

customer = $7.28 per cwt

Volume transport rate = $2.40 per cwt For shipments 20,000+

lbs Local delivery within

market = $1.35 per cwt

Options Direct ship to

customer = $36.40 per average shipment

Ship to market at volume rate and distribute locally Total rate = $3.75 per

cwt $18.75 per average

shipment

Can you justify the use of a warehouse in this situation?

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Network transportation cost minimization

Figure 13.2 Transportation Cost as a Function of the Number of Warehouse Locations

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Inventory economics is driven by service response time

Performance cycle is key driver

Forward deployment of inventory potentially improves service response time, but Increases overall

system inventory

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Service-based warehouse justification

Inventory consists of Base stock Safety stock In-transit stock

What is the impact of adding warehouses to each of these inventories? Base stock is independent of number of market

facing warehouses What about in-transit stock?

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Additional warehouses typically reduce total in-transit inventory

Figure 13.3 Logistical Network: Two Markets, One Warehouse

Figure 13.4 Logistical Network: Two Markets, Two Warehouses

Table 13.1 Transit Inventory under Different Logistical Networks Results

6 day

s

10 day

s

6 day

s4

days

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Inventory summary

Base stock determination is independent of number of market facing warehouses

In-transit stock will typically decrease with the addition of warehouses to the network

Safety stock increases with number of warehouses added to the network New performance cycle requires additional safety

stock

Network Modeling Steps

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Strategic importance of network design

Critical variables in network design: Changing Customer Service Requirements Shifting Locations of Customer and/or Supply

Markets Change in Corporate Ownership Cost Pressures Competitive Capabilities Corporate Organizational Change

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High-level Modeling Steps

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Network design process

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Analysis (example)

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Recommendations and Implement

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Chapter 14Management of Business Logistics, 7th Ed.33

Network Design: Step 1

Step 1: Define Network Strategy & Requirements

Form a design team Includes the overall system including business

strategy requirements and relevant constraints, such as planning and environmental issues.

Also includes approaches described in business and supply chain strategy literature, such as on competitive advantage and consumer value and the use of scenario planning

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Chapter 14Management of Business Logistics, 7th Ed.34

Network Design: Step 2 & 3

Step 2: Perform a Logistics Audit & Collect Data Forces a comprehensive perspective Develops essential information These include product details, order profiles,

shipping patterns, cost data and site information

Step 3: Examine the Logistics Network Alternatives Use modeling to provide additional insights Develop preliminary designs Test model for sensitivity to key variables

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Logistics Audit

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Network Design: Steps 4 & 5

Step 4: Conduct a Facility Location Analysis Analyze attributes of candidate sites Apply screening to reduce alternative sites

Step 5: Make Decisions regarding Network and Facility Location Evaluate sites for consistency with design criteria. Confirm types of change needed

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Logistics Network Design

Step 6: Develop an Implementation Plan Plan serves as a road map in moving from current

system to the desired logistics network. Firm must commit funds to implement the

changes recommended by the re-engineering process.

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Major Locational Determinants

Regional Determinants Site-Specific Determinants

Labor climate Transportation access

Availability of transportation

● Truck

Proximity to markets ● Air

Quality of life ● Rail

Taxes & other incentives ● Water

Supplier networks Inside/outside metro area

Land costs and utilities Availability of workforce

Company preference Utilities

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Major Locational Determinants: Current Trends Governing Site Selection

Strategic positioning of inventories, with faster moving items located at “market-facing” logistics facilities, and slower moving items at national or regional sites.

Direct plant-to-customer shipments which can reduce or eliminate the need for company-owned supply or distribution facilities.

Growing need and use of “cross-docking” facilities.

Use of third party logistics companies which negate the need for the firm to maintain or establish its own distribution facilities.

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Supply Chain Scenario for Network Analysis

Raw Materials Warehouse Manufacture Warehouse

DistributionCenter

Retail

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Modeling Approaches: Optimization Models

Based on precise mathematical procedures guaranteed to find the “best” solution from among a number of feasible solutions.

One approach is Linear Programming (LP). Useful in linking facilities in a network. Defines optimum distribution patterns. Modern computers facilitate LP modeling.

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Modeling Approaches: Simulation Models

Based on developing a model of a real system and conducting experiments with this model.

In location theory, a firm can test the effect of various locations on costs and profitability.

Does not guarantee an optimum solution but evaluates through the iterative process.

Simulations are either static or dynamic depending upon how whether they incorporate data from each run into the next run.

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Modeling Approaches: Heuristic Models

Based upon developing a model that can provide a good approximation to the least-cost location in a complex decision problem.

Can reduce a problem to a manageable size. This approach can be as sophisticated as

mathematical optimization approaches. The “Grid Technique” is an example of a

heuristic approach and will be demonstrated in the next few slides.

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Heuristic Modeling Approach: The Grid Technique

The Grid Technique attempts to locate a fixed facility such that the location represents the least-cost center for moving inbound materials and outbound product within a geographic grid.

It finds the ton-mile center of mass; that is, the geographic point where transportation costs are minimized (as discussed in class)

This simple approach works where all transportation rates are the same.

However, we know that freight rates for raw materials are generally lower than those for finished goods.

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Example of: The Grid Technique

When we use different freight rates, the grid model will tend to pull the location of our fixed facility toward the higher rated areas.

Thus, the location of a production plant will tend to be nearer the market, reducing the overall transportation of the higher rated finished goods in favor of increasing transportation of lower rated raw materials.

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Heuristic Modeling Approach: The Grid Technique

Advantages Simple to use Provides a starting point for further analysis Can accommodate “what if” questions

Limitations Static approach Linear rates No consideration of topography Does not consider direction of movement

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Total cost of the network

Figure 13.6 combines cost curves from Figure 13.2 and 13.5

Lowest cost points on each curve For total transportation cost between 7 and 8

facilities For inventory cost it would be a single warehouse For total cost of network it is 6 locations

Trade-off relationships Minimal total cost point for the system is not at

the point of least cost for either transportation or inventory

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Total cost concept

Figure 13.6 Least-Total-Cost Network

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Limitations to accurate total cost analysis

Many important costs are not specifically measured or reported

Need to consider a wide variety of network design alternatives Alternative shipment

sizes Alternative modes of

shipment Range of available

warehouse locations

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Evaluating alternative customer service levels and

costs General approach to finalizing a logistical

strategy Determine a least-total-cost network

Measure service availability and capability for this network

Conduct sensitivity analysis for incremental service options Use cost and revenue associated with each option

Finalize the plan