Logistics Network

-issues involved in the design and configuration of the logistics network

1. Determining the appropriate number of warehouses. 2. Determining the location of each warehouse. 3. Determining the size of each warehouse. 4. Allocating space for products in each warehouse. 5. Determining which products customers will receive from each warehouse.

Increasing the number of warehouses typically yields: 1. An improvement in service level due to the reduction in average travel time to the customers. 2. An increase in inventory costs due to increased safety stocks required to protect each warehouse against uncertainties in customer demands. 3. An increase in overhead and setup costs. 4. A reduction in outbound transportation costs: transportation costs from the warehouses to the customers.

5. An increase in inbound transportation costs: transportation costs from the suppliers and/or manufacturers to the warehouses. Data Collection - Involves large amounts of data including information on: 1. Location of customers, retailers, existing warehouses and distribution centers, 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 costs. 6. Shipment sizes and frequencies for customer delivery 7. Order processing costs 8. Customer service requirements and goals. Transporting Rates - Next step in constructing an effective distribution network design model is to estimate transportation costs. - Company-owned trucks estimated costs to be used to calculate cost per mile per SKU:

o Annual costs per truck o Annual mileage per truck o Annual amount delivered o Trucks effective capacity Mileage Estimation/Determination - The cost of transporting products from a specific source to a specific destination is a function of the distance between these two points. Warehouse Costs 1. Handling Costs. These include labor and utility costs that are proportional to annual flow through the warehouse. 2. Fixed Costs. These capture all cost components that are not

proportional to the amount of material that flows through the warehouse. The fixed cost is typically proportional to warehouse size (capacity) but in a nonlinear way. This cost is fixed in certain ranges of the warehouse size. 3. Storage Costs. These represent inventory holding costs, which are proportional to average positive inventory levels. Inventory Turnover Ratio = Annual Sales / Average Inventory Level Annual storage costs = ?

Annual storage cost = Average inventory level * Annual Handling costs

Warehouse Capacities - The question is how to estimate the actual space required, given the specific annual flow of material through the warehouse. Potential Warehouse Locations - It is also important to effectively identify potential locations for new warehouses. Typically, these

locations must satisfy a variety of conditions: o Geographical and infrastructure conditions o Natural resources and labor availability o Local industry and tax regulations o Public interest Service Level Requirements - Service level is the proportion of customers whose distance to their assigned warehouse is no more than a given distance. o Ex. We require that 95% of the customers be situated within

200 miles of the warehouses serving them. Future Demand - Changes in customer demand over the next few years should be taken into account when designing the network. Model and Data Validation - How do we ensure that the data and model accurately reflect the network design problem? - This is typically done by reconstructing the existing network configuration using the model and collected data, and comparing the

output of the model to existing data. - The data can be compared with the accounting information. This is often the best way to identify errors in the data, problematic assumptions, modeling flaws, and so forth. o Does the model make sense? o Are the data consistent? o Can the model results be fully explained? o Did you perform sensitivity analysis? Solution Techniques

- Once data are collected, tabulated, and verified, the next step is to optimize the configuration of the logistics network. o Mathematical Optimization that includes:

Exact algorithms that are guaranteed to find optimal solutions

Heuristic algorithms that find good solutions, not necessarily optimal solutions. o Simulation models that provide a mechanism to evaluate specified design alternatives created by the designer.

Key Features of a Network Configuration Decision-Support System - Flexibility, the ability of the system to incorporate a large set of preexisting network characteristics. - Customer-specific service level requirements - Existing warehouse. - Expansion of existing warehouses - Specific flow pattern - Warehouse-to-warehouse flow - Bill of materials