Chapter 3: Logistics NetworkPlanning3-1
3-1 Chapter 3: Logistics Network Planning
3.1 Why Network Planning?Find the rightbalancebetween inventorytransportationand manufacturingcostsMatch supply and demand underuncertainty by positioning and managinginventoryeffectivelyUtilizeresourceseffectivelybysourcingproductsfromthe mostappropriatemanufacturingfacility3-2
3-2 3.1 Why Network Planning? ⚫ Find the right balance between inventory, transportation and manufacturing 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
Three Hierarchical StepsNetworkdesignNumber,locationsandsizeofmanufacturingplantsandwarehousesAssignmentof retailoutletstowarehousesMajorsourcingdecisionsTypical planninghorizonisafewyearsInventory positioning:IdentifyingstockingpointsSelectingfacilitiesthat will produceto stockandthuskeepinventoryFacilities that will produce to orderand hencekeep no inventoryRelatedtotheinventorymanagementstrategiesResource allocation:Determinewhetherproductionand packaging of differentproducts is done at the right facilityWhatshould be the plants sourcing strategies?Howmuch capacity each plant should havetomeet seasonaldemand?3-3
3-3 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. ⚫ Inventory positioning: ⚫ 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 ⚫ Resource allocation: ⚫ 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?
3.2Network DesignPhysical configurationand infrastructureofthe supply chain.A strategic decisionwith long-lastingeffectsonthefirmDecisions relatingto plant andwarehouselocationaswell asdistributionandsourcing3-4
3-4 3.2 Network Design ⚫ Physical configuration and infrastructure of the supply chain. ⚫ A strategic decision with long-lasting effects on the firm. ⚫ Decisions relating to plant and warehouse location as well as distribution and sourcing
Reevaluation of InfrastructureChanges in:demand patternsproductmixproductionprocessessourcingstrategiescostofrunningfacilitiesMergers and acquisitions may mandatethe integrationof different logisticsnetworks3-5
3-5 Reevaluation of Infrastructure ⚫ Changes in: ⚫ demand patterns ⚫ product mix ⚫ production processes ⚫ sourcing strategies ⚫ cost of running facilities. ⚫ Mergers and acquisitions may mandate the integration of different logistics networks
Key Strategic DecisionsDeterminingtheappropriatenumberoffacilitiessuchasplantsandwarehousesDeterminingthe locationofeachfacilityDetermining the size of each facilityAllocating space for products in eachfacility.Determiningsourcing requirementsDeterminingdistributionstrategies,i.e.,theallocationof customersto warehouse3-6
3-6 Key Strategic Decisions ⚫ Determining the appropriate number of facilities such as plants and 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, i.e., the allocation of customers to warehouse
Objective and Trade-OffsObiective: Design or reconfigure thelogistics network inorder tominimizeannual system-wide costsubject to avariety of service levelrequirementsIncreasingthenumberofwarehousestypicallyyields:An improvement inservicelevel duetothereductionin averagetraveltimetothecustomersAnincreaseininventorycostsduetoincreasedsafetystocksrequiredtoprotecteachwarehouseagainstuncertaintiesincustomerdemandsAnincreaseinoverheadand setupcostsAreductioninoutboundtransportationcosts:transportationcostsfromthewarehousestothecustomersAnincreasein inbound transportationcosts:transportationcostsfromthesuppliersand/ormanufacturerstothewarehouses3-7
3-7 Objective and Trade-Offs ⚫ Objective: Design or reconfigure the logistics network in order to minimize annual system-wide cost subject to a variety of service level requirements ⚫ 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
Data CollectionLocations of customers,retailers,existing warehousesand distribution centers,manufacturing facilities,andsuppliersAll products,includingvolumes,and specialtransportmodes (e.g-,refrigerated)Annual demandforeachproductbycustomerlocationTransportation rates by modeWarehousing costs,includinglabor,inventory carryingcharges,andfixedoperating costs.Shipment sizes andfrequencies for customerdeliveryOrderprocessingcostsCustomerservicerequirements and goalsProduction and sourcing costs and capacities3-8
3-8 Data Collection ⚫ Locations of customers, retailers, existing warehouses and distribution centers, manufacturing facilities, and suppliers. ⚫ 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
Data AggregationCustomer ZoneAggregateusing a gridnetwork orotherclusteringtechnigueforthoseincloseproximityReplaceall customerswithina singleclusterbya singlecustomerlocatedatthecenteroftheclusterFive-digit orthree-digit zip codebased clusteringProductGroupsDistributionpatternProductspickedupatthesame sourceand destinedto the samecustomersLogisticscharacteristics likeweightandvolumeProducttypeproduct modelsor stylediffering only inthetype of packaging3-9
3-9 Data Aggregation ⚫ Customer Zone ⚫ Aggregate using a grid network or other clustering technique for those in close proximity. ⚫ 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 picked up at the same source and destined to the same customers ⚫ Logistics characteristics like weight and volume. ⚫ Product type ⚫ product models or style differing only in the type of packaging
Replacing Original Detailed Datawith Aggregated DataTechnologyexiststosolvethelogisticsnetwork designproblem withthe originaldataDataaggregationstill usefulbecauseforecastdemandissignificantlymoreaccurate at the aggregated levelAggregatingcustomersintoabout 150-200zones usuallyresultsin no more thana1percent error in the estimation of totaltransportationcosts3-10
3-10 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 error in the estimation of total transportation costs