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Chapter 3

Network Planning

3.1 Why Network Planning?

Find the right balance between inventory, transportation and manufacturing costs costs, Match supply and demand under uncertainty by positioning and managing inventory effectively, Utilize resources effectively by sourcing products from the most appropriate manufacturing facility

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Three Hierarchical Steps

Network design

Number, locations and size of manufacturing plants and warehouses Assignment of retail outlets to warehouses Major sourcing decisions Typical planning horizon is a few years. Identifying stocking points Selecting facilities that will produce to stock and thus keep inventory Facilities that will produce to order and hence keep no inventory Related to the inventory management strategies Determine whether production and packaging of different products is done at the right facility What should be the plants sourcing strategies? How much capacity each plant should have to meet seasonal demand?
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Inventory positioning:

Resource allocation:

3.2 Network Design

Physical configuration and infrastructure of the supply chain chain. A strategic decision with long-lasting effects on the firm. Decisions relating to plant and warehouse location as well as distribution and sourcing

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Reevaluation of Infrastructure

Changes in:

demand patterns product d mix i production processes sourcing strategies cost of running facilities.

Mergers and acquisitions may mandate the integration of different logistics networks

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Key Strategic Decisions

Determining the appropriate number of facilities such as plants and warehouses warehouses. Determining the location of each facility. Determining the size of each facility. Allocating space for products in each facility. Determining sourcing requirements. Determining distribution strategies, strategies i i.e., e the allocation of customers to warehouse

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Objective and Trade-Offs

Objective: Design or reconfigure the logistics network in order to minimize annual system-wide cost subject to a variety i t of f service i l level l requirements i t Increasing the number of warehouses typically yields:

An improvement in service level due to the reduction in average travel time to the customers An increase in inventory costs due to increased safety stocks required to protect each warehouse against uncertainties in customer demands. An increase in overhead and setup costs A reduction in outbound transportation costs: transportation costs from the warehouses to the customers An increase in inbound transportation costs: transportation costs from the suppliers and/or manufacturers to the warehouses.

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Data Collection

Locations of customers, retailers, existing warehouses and distribution centers, manufacturing facilities, and suppliers. li All products, including volumes, and special transport modes (e.g., refrigerated). Annual demand for each product by customer location. Transportation rates by mode. Warehousing costs, including labor, inventory carrying charges, and fixed operating costs. Shipment sizes and frequencies for customer delivery. Order processing costs. Customer service requirements and goals. Production and sourcing costs and capacities
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Data Aggregation

Customer Zone

Aggregate using a grid network or other clustering technique for th those in i close l proximity. i it Replace all customers within a single cluster by a single customer located at the center of the cluster Five-digit or three-digit zip code based clustering.

Product Groups

Distribution pattern

Products p picked up p at the same source and destined to the same customers Logistics characteristics like weight and volume. product models or style differing only in the type of packaging.

Product type

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Replacing Original Detailed Data with Aggregated Data

Technology exists to solve the logistics network design problem with the original data Data aggregation still useful because forecast demand is significantly more accurate at the aggregated level Aggregating customers into about 150-200 zones usually results in no more than a 1 percent t error in i the th estimation ti ti of f total t t l transportation costs

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General Rules for Aggregation

Aggregate demand points into at least 200 zones

Holds H ld f for cases where h customers t are classified l ifi d i into t classes according to their service levels or frequency of delivery

Make sure each zone has approximately an equal amount of total demand

Zones may y be of different g geographic g p sizes.

Place aggregated points at the center of the zone Aggregate products into 20 to 50 product groups
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Customer Aggregation Based on 3-Digit Zip Codes

Total Cost:$5 Cost:$5,796,000 796 000 Total Customers: 18,000 Total Cost:$5,793,000 Cost:$5 793 000 Total Customers: 800

Cost Difference < 0.05%

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Product Aggregation
Total Cost:$104,564,000 Total Products: 46 Total Cost:$104,599,000 Total Products: 4

Cost Difference: 0.03%

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Transportation Rates

Rates are almost linear with distance but not with volume Differences between internal rate (owned truck) and external rate (rented truck)

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Internal Transportation Rate

For company-owned trucks D t Required: Data R i d

Annual costs per truck Annual mileage per truck Annual amount delivered Trucks effective capacity

C l l t cost Calculate t per mile il per SKU SKU.

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External Transportation Rate for Two Modes of Transportation

Truckload, TL Country sub sub-divided divided into zones zones. One zone/state except for:

Big states, such as Florida or New York (two zones)

Zone-to-zone costs provides cost per mile per truckload between any two zones.

TL cost from Chicago to Boston = Illinois-Massachusetts cost per mile X ChicagoBoston distance

TL cost structure is not symmetric

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External Transportation Rate for Two Modes of Transportation

Less-Than-Truckload, LTL Class rates

standard rates for almost all p products or commodities shipped. pp Classification tariff system that gives each shipment a rating or a class. Factors involved in determining a products specific class include:

product density, ease or difficulty of handling and transporting, and liability for damage. Approximate distance between the loads origin and destination.

After establishing rating, identify rate basis number.

With the two, determine the specific rate per hundred pounds (hundred weight weight, or cwt) from a carrier tariff table (i (i.e., e a freight rate table).

Exception rates provides less expensive rates Commodity rates are specialized commodity-specific rates
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Ex) SMC3s CzarLite

Engine to find transportation rates in fragmented LTL industry Nationwide LTL zip code-based rate system. Offers a market-based price list derived from studies of LTL pricing on a regional, interregional, and national basis. Af fair i pricing i i system t Often used as a base for negotiating LTL contracts between shippers, carriers, and thirdparty logistics providers
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Transportation Rate for Shipping 4,000 lbs.

FIGURE 3-7: Transportation rates for shipping 4,000 lb

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Mileage Estimation

Estimate lona and lata, the longitude and latitude of point a (and similarly for point b) Distance between a and b

For short distances

D a b 6 9 ( lo n a lo n b ) 2 ( la t a la t b ) 2

For large distances

Dab 2(69) sin 1 (sin( lata latb 2 lona lonb 2 )) cos(lata ) X cos(latb ) X (sin( )) 2 2

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Circuity Factor,

Equations underestimate the actual road distance. distance Multiply Dab by . Typical values:

= 1.3 in metropolitan areas = 1.14 for the continental United States

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Chicago-Boston Distance

lonChicago = -87.65 latChicago = 41.85 lonBoston = -71.06 lonBoston = 42.36 DChicago, Boston = 855 miles Multiply by circuity factor = 1.14 Estimated road distance = 974 miles Actual road distance = 965 miles GIS systems provide more accuracy Slows down systems Above approximation good enough!
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Warehouse Costs

Handling costs

Labor and utility costs Proportional to annual flow through the warehouse warehouse. All cost components not proportional to the amount of flow Typically proportional to warehouse size (capacity) but in a nonlinear way. Inventory holding costs Proportional to average positive inventory levels.

Fixed costs

Storage costs

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Determining Fixed Costs

FIGURE 3-8: Warehouse fixed costs as a function of the warehouse capacity

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Determining Storage Costs

Multiply inventory turnover by holding cost I Inventory t Turnover T = Annual Sales / Average Inventory Level

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Warehouse Capacity

Estimation of actual space required Average inventory level = Annual flow through warehouse/Inventory turnover ratio Space requirement for item = 2*Average Inventory Level Multiply by factor to account for

access and handling aisles, picking, p g sorting g and p processing g facilities AGVs

Typical factor value = 3

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Warehouse Capacity Example

Annual flow = 1,000 units I Inventory t turnover t ratio ti = 10.0 10 0 Average inventory level = 100 units Assume each unit takes 10 sqft. of space Required space for products = 2,000 sqft. Total space p required q for the warehouse is about 6,000 square feet

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Potential Locations

Geographical and infrastructure conditions. N t l resources and Natural dl labor b availability. il bilit Local industry and tax regulations. Public interest. Not many y will q qualify y based on all the above conditions

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Service Level Requirements

Specify a maximum distance between each customer and the warehouse serving it Proportion of customers whose distance to their assigned warehouse is no more than a given distance

95% of customers be situated within 200 miles of the warehouses serving them Appropriate for rural or isolated areas

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Future Demand

Strategic decisions have to be valid for 3-5 years C Consider id scenario i approach h and d net t present t values to factor in expected future demand over planning horizon

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Number of Warehouses
$90 $80 $70

Optimal Number of Warehouses

Cost (millions $)

$60 $50 $40 $30 $20 $10 $Total Cost Transportation Cost Fixed Cost Inventory Cost

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Number of Warehouses

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Industry Benchmarks: Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg. # of WH

3
- High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation

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- Low margin product - Service very important - Outbound transportation expensive relative to inbound

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Model Validation

Reconstruct the existing network configuration using the model and collected data Compare the output of the model to existing data Compare to the companys company s accounting information

Often the best way to identify errors in the data, problematic assumptions, modeling flaws.

Make local or small changes in the network configuration to see how the system estimates impact on costs and service levels.

Positing a variety of what-if questions. Does the model make sense? Are the data consistent? Can the model results be fully explained? Did you perform sensitivity analysis?

Answer the following gq questions:

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Solution Techniques

Mathematical optimization techniques: 1. Exact algorithms: find optimal solutions 2. Heuristics: find good solutions, not necessarily optimal

Simulation models: provide a mechanism to evaluate specified design alternatives created by the designer.

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Example

Single product Two plants p1 and p2

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.

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Unit Distribution Costs

Facility y warehouse w1 w2 p1 p2 c1 c2 c3

0 5

4 2

3 2

4 1

5 2

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Heuristic #1:
Choose the Cheapest Warehouse to Source Demand
P1 W1
$2 x 50,000

D1 = 50,000

$5 x 140,000 $1 x 100,000

D2 = 100,000

C = 60 Cap 60,000 000

P2

$2 x 60,000

W2

$2 x 50,000

D3 = 50,000

Total Costs = $1,120,000

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Heuristic #2:
Choose the warehouse where the total delivery costs to and from the warehouse are the lowest [Consider inbound and outbound distribution costs]
$0 $3 $4 $2

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4

$5 $5 $4

D = 100,000
$1
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3

C = 60 Cap 60,000 000

$2 $2

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4

Market #1 is served by WH1, Markets 2 and 3 are served by WH2

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Heuristic #2: Choose the warehouse where the total delivery costs to and from the warehouse are the lowest [Consider inbound and outbound distribution costs]
$0 x 50,000 $3 x 50,000

Cap = 200,000
$5 x 90,000 $1 x 100,000

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $3 $7 $7 $4

D = 100,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $4 $6 $8 $3

C = 60 Cap 60,000 000

$2 x 60,000 $2 x 50,000

D = 50,000
P1 to WH1 P1 to WH2 P2 to WH1 P2 to WH 2 $5 $7 $9 $4

Total Cost = $920,000

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The Optimization Model

The problem described earlier can be framed as the following linear programming problem. Let x(p1,w1), x(p1,w2), x(p2,w1) and x(p2,w2) be the flows from the plants to the warehouses. x(w1,c1), x(w1,c2), x(w1,c3) be the flows from the warehouse w1 to customer zones c1, c2 and c3. x(w2,c1), x(w2,c2), x(w2,c3) be the flows from warehouse w2 to customer zones c1, c2 and c3

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The Optimization Model

The problem we want to solve is:
min 0x(p1,w1) + 5x(p1,w2) + 4x(p2,w1) + 2x(p2,w2) + 3x(w1,c1) + 4x(w1,c2) + 5x(w1,c3) + 2x(w2,c1) + 2x(w2,c3)

subject to the following constraints:

x(p2,w1) + x(p2,w2) 60000 x(p1,w1) + x(p2,w1) = x(w1,c1) + x(w1,c2) + x(w1,c3) x(p1,w2) + x(p2,w2) = x(w2,c1) + x(w2,c2) + x(w2,c3) x(w1,c1) + x(w2,c1) = 50000 x(w1,c2) + x(w2,c2) = 100000 x(w1,c3) + x(w2,c3) = 50000

all flows greater than or equal to zero.

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Optimal Solution
Facility warehouse w1 w2 p1 p2 c1 c2 c3 140,000 0 0 60,000 50,000 0 40,000 60,000 50,000 0

Total cost for the optimal strategy is $740,000

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Simulation Models

Useful for a given design and a micro-level analysis. Examine:

Individual I di id l ordering d i pattern. tt Specific inventory policies. Inventory movements inside the warehouse.

Not an optimization model Can only consider very few alternate models

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Which One to Use?

Use mathematical optimization for static analysis Use a 2-step approach when dynamics in system t has h t to be b analyzed: l d
1) Use an optimization model to generate a number of least-cost solutions at the macro level, taking into account the most important cost components. 2) Use a simulation model to evaluate the solutions generated in the first phase.

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DSS for Network Design

Flexibility to incorporate a large set of preexisting network characteristics Other Factors:

Customer-specific service level requirements. Existing warehouses kept open Expansion of existing warehouses. Specific flow patterns maintained Warehouse-to-warehouse flow possible Production and Bill of materials details may be important Relative quality of the solution independent of specific environment, data variability or specific settings

Robustness

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3.3 Inventory Positioning and Logistics Coordination

Multi-facility supply chain that belongs to a single firm Manage inventory so as to reduce system wide cost Consider the interaction of the various facilities and the impact of this interaction on the inventory policy of each facility Ways to manage:

Wait for specific orders to arrive before starting to manufacture them [make-to-order facility] Oth Otherwise, i d decide id on where h t to keep k safety f t stock? t k? Which facilities should produce to stock and which should produce to order?

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Single Product, Single Facility Periodic Review Inventory Model

Assume

SI: amount of time between when an order is placed until the facility receives a shipment (Incoming Service Time) S: Committed Service Time made by the facility to its own customers. T: Processing Time at the facility. SI T S

Net Lead Time = SI + T - S Safety stock at the facility: zh

SI T S
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2-Stage System

Reducing committed service time from facility 2 to facility 1 impacts required inventory at both facilities

Inventory at facility 1 is reduced Inventory at facility 2 is increased the committed service time at each facility the location and amount of inventory minimize total or system wide safety stock cost.
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Overall objective is to choose:

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3.3.2 Integrating Inventory Positioning and Network Design

Consider a two-tier supply chain

Items shipped from manufacturing facilities to primary warehouses From there, they are shipped to secondary warehouses and finally to retail outlets

How to optimally position inventory in the supply chain?

Should every SKU be positioned both at the primary and secondary warehouses?, OR Some SKU be positioned only at the primary while others only at the secondary?

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Integrating Inventory Positioning and Network Design EX 3-4 (P103)

FIGURE 3-18: Sample plot of each SKU by volume and demand

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Three Different Product Categories

High variability - low volume products L Low variability i bilit - high hi h volume l products, d t and d Low variability - low volume products.

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Supply Chain Strategy Different for the Different Categories

High variability low volume products

Inventory risk is the main challenge for this products P iti th Position them mainly i l at t th the primary i warehouses h demand from many retail outlets can be aggregated reducing inventory costs. Position close to the retail outlets at the secondary warehouses Ship fully loaded tracks as close as possible to the customers reducing transportation costs. Require more analysis since other characteristics are important, such as profit margins, etc.
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Low variability high volume products

Low variability low volume products

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3.4 Resource Allocation

Supply chain master planning The process of coordinating and allocating production, and distribution strategies and resources to t maximize i i profit fit or minimize i i i system-wide cost Process takes into account:

interaction between the various levels of the supply chain identifies a strategy that maximizes supply chain performance

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Global Optimization and DSS

FACTORS TO CONSIDER

Facility locations: plants, distribution centers and demand points p Transportation resources including internal fleet and common carriers Products and product information Production line information such as min lot size, capacity, costs, etc. Warehouse capacities and other information such as certain technology (refrigerators) that a specific warehouse has and hence can store certain products Demand forecast by location, product and time.

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Focus of the Output

Sourcing Strategies:

where should each product be produced during the planning horizon, horizon OR production quantities, shipment size and storage requirements by product, location and time period.

Supply Chain Master Plan:

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The Extended Supply Chain: From Manufacturing to Order Fulfillment

FIGURE 3-19: The extended supply pp y chain: from manufacturing g to order fulfillment

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Questions to Ask During the Planning Process

Will leased warehouse space alleviate capacity problems? When and where should the inventory for seasonal or promotional demand be built and stored? Can capacity problems be alleviated by re-arranging warehouse territories? What impact do changes in the forecast have on the supply chain? What will be the impact of running overtime at the plants or out-sourcing production? What plant should replenish each warehouse? Should the firm ship by sea or by air air. Shipping by sea implies long lead times and therefore requires high inventory levels. On the other hand, using air carriers reduces lead times and hence inventory levels but significantly increases transportation cost. Should we rebalance inventory between warehouses or replenish from the plants to meet unexpected regional changes in demand?

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SUMMARY Network Planning Characteristics

Network Design Inventory Positioning and Management Resource Allocation

Decision focus

Infrastructure

Safety stock

Production Distribution

Planning Horizon

Years

Months

Months

Aggregation Level

Family

Item

Classes

Frequency ROI Implementation Users

Yearly High Very Short Very Few

Monthly/Weekly Medium Short Few

Monthly/Weekly Medium Short Few

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SUMMARY

Optimizing supply chain performance is difficult

conflicting objectives demand and supply uncertainties supply chain dynamics. Combines network design, inventory positioning and resource allocation Consider the entire network taking into account

Through network planning, firms can globally optimize supply chain performance

production Warehousing transportation inventory costs service level requirements.

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SUMMARY

Demonstrate applicability of risk pooling and postponement EOQ modeling, postponement, modeling and inventory sizing to improve customer service in make-toorder job shop setting Demonstrates value from getting and looking at data

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HW #3

(all) Answer and solve problems in page 108-109: 1~6

Present CASE studies: - ElecComp (in page 97~102) (2 people) - H. C. Starck, Inc. (in page 109~121) (2 people)

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ElecComp Case

Large contract manufacturer of circuit boards and other high g tech p parts. About 27,000 high value products with short life cycles Fierce competition => Low customer promise times < Manufacturing Lead Times High inventory of SKUs based on long-term forecasts => Classic PUSH STRATEGY

High shortages Huge risk

PULL STRATEGY not feasible because of long lead times

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New Supply Chain Strategy

OBJECTIVES:

Reduce inventory and financial risks Provide customers with competitive response times. Determining D t i i th the optimal ti l location l ti of f inventory i t across the th various i stages Calculating the optimal quantity of safety stock for each component at each stage Push Stages produce to stock where the company keeps safety stock Pull stages keep no stock at all. Identify the location where the strategy switched from Push-based Push based to Pull-based Identify the Push-Pull boundary For same lead times, safety stock reduced by 40 to 60% Company could cut lead times to customers by 50% and still reduce safety stocks by 30%
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ACHIEVE THE FOLLOWING:

Hybrid strategy of Push and Pull

Challenge:

Benefits:

Notations Used

FIGURE 3-11: How to read the diagrams

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Trade-Offs

If Montgomery facility reduces committed lead time to 13 days

assembly facility does not need any inventory of finished goods Any customer order will trigger an order for parts 2 and 3.

Part 2 will be available immediately, since it is held in inventory Part 3 will be available in 15 days

13 days committed response time by the manufacturing facility 2 days transportation lead time.

Another 15 days to process the order at the assembly facility Order is delivered within the committed service time.

Assembly y facility y produces to order, i.e., a Pull based strategy Montgomery facility keeps inventory and hence is managed with a Push or Make-to-Stock strategy.

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Current Safety Stock Location

FIGURE 3-12: Current safety stock location

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Optimized Safety Stock Location

FIGURE 3-13: Optimized safety stock

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Current Safety Stock with Lesser Lead Time

FIGURE 3-14: Optimized safety stock with reduced lead time

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Supply Chain with More Complex Product Structure

FIGURE 3-15: Current supply chain

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Optimized Supply Chain with More Complex Product Structure

FIGURE 3-16: Optimized supply chain

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Key Points

Identifying the Push-Pull boundary Taking advantage of the risk pooling concept

Demand for components used by a number of finished products has smaller variability and uncertainty than that of the finished goods.

Replacing traditional supply chain strategies that are typically referred to as sequential, or local optimization by a globally optimized local, supply chain strategy.

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Local vs. Global Optimization

FIGURE 3-17: Trade-off between quoted lead time and safety stock

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Global Optimization

For the same lead time, cost is reduced significantly For the same cost, lead time is reduced significantly Trade-off curve has jumps in various places

Represents situations in which the location of the Push Pull boundary changes Push-Pull Significant cost savings are achieved.

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Problems with Local Optimization

Prevalent strategy for many companies:

try to keep as much inventory close to the customers hold some inventory at every location hold as much raw material as possible. Low inventory turns Inconsistent service levels across locations and products, and The need to expedite shipments, with resulting increased transportation costs
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This typically yields leads to:

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