8 logistics network design

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Logistics Network Design
Design or configure the logistics network
so as to minimize annual system - wide cost
subject to a variety of service level
requirements
Objective of Logistics Networking

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The Logistics Network
The Logistics Network consists of:
• Facilities:
Vendors, Manufacturing Centers, Warehouse/ Distribution
Centers, and Customers
• Raw materials and finished products that flow between the
facilities.
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Supply
Sources:
plants
vendors
por ts
Regional
Warehouses:
stocking
points
Field
Warehouses:
stocking
points
Customers,
demand
centers
sinks
Production/
purchase
costs
Inventor y &
warehousing
costs
Transpor tation
costs
Inventor y &
warehousing
costs
Transpor tation
costs

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Network Design: Key Issues
The objective is to balance ser vice level against
• Production/ purchasing costs
• Inventory carrying costs
• Facility costs (handling and fixed costs)
• Transportation costs
That is, we would like to find a minimal - annual - cost
configuration of the distribution network that satisfies
product demands at specified customer service levels.
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Logistics Network Configuration
• Configuration of the logistics network may involve the following
strategic decisions
– Determining the number of retailers, distribution centers and
manufacturing facilities
– Determining the location of each facility
– Determining the size of each facility
– Allocating retailers to different distribution centers
– Determining transportation modes
– Determining the operation of the network (direct shipments, e. g.)
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Data for Network Design
1. A listing of all products
2. Location of customers, stocking points and sources
3. Demand for each product by customer location
4. Transportation rates
5. Warehousing costs
6. Shipment sizes by product
7. Order patterns by frequency, size, season, content
8. Order processing costs
9. Customer service goals
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Roles of different type of facilities
• Manufacturing plants
– Responsible for manufacturing the goods for distribution
– Some companies may not own manufacturing plants
• Distribution centers
– Reducing lead times, increasing product availability at the retailer level (depot effect)
– Enabling economies of scale by consolidating shipments from the manufacturing
plants.
– Delaying the allocation of material to retailers ( joint ordering effect)
– Providing a second level of support for emergency orders at retailer level
– Consolidation point for reverse logistics
– Localization of goods to different countries
• Retailers (stores, bases)
– Primary access point for customers
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Factors influencing network design
• Strategic factors
– Cost leadership
– Responsiveness/variety
• Technological factors
• Macroeconomic factors
– Tariffs and taxes
– Exchange rate and demand risk
• Political factors
• Infrastructure factors
• Competitive factors
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Factors influencing network design
• Customer response time and local presence
• Logistics and facility costs
– Inventory costs
– Transportation costs
• Inbound versus outbound
• External versus internal fleet
• Truckload (TL) versus less than truckload (LTL)
– Facility costs
• Setup
• Operating costs
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Open questions in network design
• Do I need a distribution center at all?
• How many levels do I need in distribution?
• How many distribution centers do I need?
• What is the impact of competition on facility decisions?
• How many retail stores do I need?
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Channel Structure
• Depends on
- Length. How many intermediaries/
distributor, wholesaler, retailer, sub retailers?
- Breadth : How many wholesalers, distributors
etc?
- How many different types of channels?
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Design Options for a
Distribution Network
• Manufacturer Storage with Direct Shipping
• Manufacturer Storage with Direct Shipping and In - Transit
Merge
• Distributor Storage with Carrier Delivery
• Distributor Storage with Last Mile Delivery
• Manufacturer or Distributor Storage with Consumer Pickup
• Retail Storage with Consumer Pickup
• Selecting a Distribution Network Design
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Mfr.
Distributor
Wholesaler
Length
Retailer
Distributor
Wholesaler
Retailer
Breadth
Length and Breadth

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Manufacturer Storage with
Direct Shipping
Manufacturer
Retailer
Customers
Product Flow
Information
Flow
In - Transit Merge Network
Factories
Retailer
Product Flow
Information Flow
In - Transit Merge by
Carrier
Customers

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Distributor Storage with
Carrier Delivery
Factories
Customers
Product Flow
Information
Flow
Warehouse Storage
by
Distributor/Retailer
Distributor Storage with
Last Mile Delivery
Factories
Customers
Product Flow
Information
Flow
Distributor/Retailer
Warehouse

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B
E
A
G
F
C
D
Point to Point System
Hub and Spoke System
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Power Centre
• Who controls the channel, distributor,
manufacturer or the retailer?
• Is there a trend towards supermarkets?
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Comparison
Network Structure Pros Cons
Direct Shipping - No intermediate
w arehouse
- Simple to Coordinate
- High Inventories (Due
to large lot size )
- Significant receiving
expense
Direct Shipping w ith
milk runs
- Low er transportation
cost for small lots
- Low er inventories
Increased coordination
complexities
All shipments via
central DC
- Low er inbound
transportation costs
through consolidation
- Increased inventory
cost
- Increased handling at
DC
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Comparison ( contd )
Network Structure Pros Cons
All shipments through
central DC w ith cross
docking
- Very low inventory
requirement
- Low er transportation
cost through
consolidation
Increased coordination
complexity
Shipping via DC using milk
runs
- Low er inbound
transportation cost for
small lots
- Further increase in
coordination complexity
Tailored netw ork - Transportation choice
best matches needs of
individual product and
store
Highest coordination
complexity
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Choice of network
• Customer segmentation
• Volume of business
• Available modes of transport
• Cost of Logistics
• Type of Product
• New products in the same family may require
a different set up. e.g. Prius
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Comparative Performance of Delivery
Network Designs
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Informati on
Faci l ity & Handl i ng
Transportation
Inventory
Returnabi lity
Order Vi si bi lity
Customer Experi ence
Product Avai l abi lity
Product Vari ety
Response Ti me
M anufacturer
storage with
pickup
Distributor
storage with
last m ile
delivery
Distributor
Storage with
Package Carrier
Delivery
M anufacturer
Storage with In -
Transit M erge
M anufacturer
Storage with Direct
Shipping
Retail Storage
with Custom er
Pickup
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Linking Product Characteristics and Customer
Preferences to Network Design
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Low custom er ef f ort
Hi gh product v ari ety
Qui ck desi red response
Hi gh product v al ue
Many product sources
Very l ow dem and product
Low dem and product
Medi um dem and product
Hi gh dem and product
M anufacturer
storage with
pickup
Distributor storage
with last m ile
delivery
Distributor Storage
with Package Carrier
Delivery
M anufacturer
Storage with In -
Transit M erge
M anufacturer
Storage with
Direct Shipping
Retail
Storage with
Custom er
Pickup
+2
+2
+2
+2
+2
+2
+2 +2 +2
+2
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
0
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0 0
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When to Outsource
• Is Logistics a core competency?
• Any measurable advantage?
• Management Commitment
• Capabilities of the service provider.
• Cheaper.
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Physical Contracts
Logistical Services
- Dedicated Contract Carrier
- Dedicated warehousing
Integrated Contract
Logistics
- Integrated W arehousing -
- Integrated Carrier
Management and
transportation
Basic Services
- Common Carriage
- Public W arehousing
M anagement Contracts
and Logistics Services
- Traffic Management
- W arehouse Management
- - Import Export Managem ent
Logistics Service Providers
M anagement Services
Low High
Physical Services
Low
High
Outsourcing - Advantages
• Capital Expenses are low.
• Recurring Expenses are low.
• Inherent problems are eliminated, like truck
breaking down, insurance etc.
• Less Coordination efforts.
• Service provider will be willing to invest as it
his main business
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Third Party Logistics
Supplier
Import into
India
W are -
house
Customs
Clearance
Customer
FF CHA
Courier
Contract Courier
A B C D E
Fourth Party Logistics
Supplier
Import into
India
W are -
house
Customs
Clearance
Customer
FF CHA
Courier
Contract Courier
F F F F F

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3PL and 4PL
Potential Benefits Risks
• Im proved focus on areas of
com petence
• More current technology; m ore
technological flexibility
• More efficient warehousing
(econom ies of scale)
• Im proved custom er service
• More work force flexibility
• Less control over som e
aspects of logistics, including
overall strategy
• Possible disruption of
custom er relationships; leak s
of confidential inform ation
• Potential for inefficient
service — at a price
3PL tradeoffs
3PL and 4PL
Potential Benefits Risks
• Im proved focus on areas of
com petence
• Higher - quality logistics, lower
costs, or both
• Greater business flexibility
• Overall logistics strategy
developed by specialist to
m eet firm ’s expressed goals
• Less control over all aspects
of logistics, including strategy
• Possible disruption of
custom er relationships; leak s
of confidential inform ation
• Potential loss of quality or
higher cost if 4PL deals with
favored providers
4PL tradeoffs

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Postponement
• Manufacturing Postponement
- Computer assemblies
- Paint Industry
• Logistical Postponement
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Warehouse selection
• Where ?
• How many ?
• Who owns ?
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Warehousing
Where should w arehouses be located?
Services
Consider available space, soil support, nearness to
m ark et; not restricted to warehouse districts
Availability of services is m ost im portant factor
Services, location (urban costs m ore), taxes, insurance,
transportation (tradeoff with cheaper land)
Tax incentives, infrastructure support, trained and
available work force at correct wages
Local tax laws can have an im pact on location
Costs
Regulations
Neighborhood
Com m unity
inducem ents
Warehousing
Where should w arehouses be located?
Accessible
W hat is the lead tim e that the custom er gives
Is it easily accessible ? Availability of Power
transportation availability. Railway siding.
Is it expandable ?
Does the Governm ent encourage creation of
warehouses ?
Transport
Governm ent
Support
Custom er
Need
Potential for
Expansion

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Number of facilities
37
Requi red
Number of
Faci l ities
Desi red
Response
Ti me
Number of facilities
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Inventory
Costs
Number of
Faci l ities

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Number of facilities
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Transportation
Costs
Number of
Faci l ities
Number of facilities
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Faci l ity
Costs
Number of
Faci l ities

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Number of facilities
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Number of
Faci l ities
Total Logi sti cs Costs
Response ti me
The Impact of Increasing the
Number of Warehouses
• Improve service level due to reduction of average service time
to customers
• Increase inventory costs due to a larger safety stock
• Increase overhead and set - up costs
• Reduce transportation costs in a certain range
– Reduce outbound transportation costs
– Increase inbound transportation costs
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Warehousing
The effects of adding w arehouses
Custom er service im proves.
Transportation costs decline with
shorter distances to travel.
Rapid delivery m ay im prove
com petitive position.
Decentralized system allows
better service to sm all custom ers.
Inventory cost
Pro
Total cost
Cost of lost
sales
Transportation
cost
Warehousing
cost
Number of W arehouses
Inventory costs rise with
redundant functions, safety
stock.
Setup and overhead costs go
up.
Total
cost
Con
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Warehousing
Who should ow n the w arehouses?
Private Public Contract
Structure
Firm itself owns
warehouses
Independent
ownership; fee for
services
Independent ownership;
longer - term relationship
Benefits
Control; no m arkup;
strongest m arket
presence
Flexibility; econom ies of
scale and lower labor
costs
Tailored services; lower
costs; flexibility; access to
m ore m arkets; stable
relationship
Draw backs
Inflexible budget;
depreciation;
illiquidity of asset
Loss of control; less
m arket presence;
m arkups
Loss of control; less
m arket presence;
m arkups

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Types of warehouses
• Bonded Warehouse
• Field Warehouses
• Cold Storages
• Agricultural warehouses
• Distribution Warehouses
• Export - Import warehouses
OR models for facility decisions
• Facility location model
– minimize transportation and facility costs
• Vehicle routing
– minimize transportation and vehicle costs
• Location - routing:
– combination of facility location and vehicle routing
• Location - inventory
– minimize transportation, facility and inventory holding costs
• Inventory - routing
– minimize transportation, vehicle and inventory costs
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10 rules of logistics optimization
• Suggestions by Don Ratliff
– Founder of CAPS and Velant
• Strategic level decisions
– Facility location
• Execution level decisions
– Loads, routes, schedules for trucks that deliver
products
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10 rules of logistics optimization
• Objectives must be quantifiable and
measurable
– If you can’t (don’t) measure it, how do you know
when it is accomplished?
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10 rules of logistics optimization
• Models must faithfully represent the actual
logistic processes
– Weight and volume of products may be what is
needed, not just weight
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10 rules of logistics optimization
• Data must be accurate, timely, and
comprehensive
– There’s a tendency to use old data even after it
has run its course
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10 rules of logistics optimization
• Integration must supply fully automated data
transfer
– Manual data hampers accuracy and timeliness
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10 rules of logistics optimization
• Optimized plans must be delivered in a form
that facilitates execution, management and
control
– Get the solutions to the people that will use them
in a practical way
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10 rules of logistics optimization
• Algorithms must intelligently exploit individual problem
structure
– Say that there are 40 shipments on a truck
• There are 40 ways the deliveries can be made
– It ’s not possible to calculate all of the possibilities
– Algorithms take advantage of the special structure to
reduce the complexity to a manageable size
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10 rules of logistics optimization
• Computing platforms must have sufficient
power to produce optimum plans in the time
required
– Too much data, too little time
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10 rules of logistics optimization
• People responsible for the technology must
have the domain and technology expertise
required to support the models, data, and
optimization engines
– Optimization engines are very complex so you
need a rocket scientist
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10 rules of logistics optimization
• Business processes must support optimization
and have the ability to continuously improve
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10 rules of logistics optimization
• Return on investment must be provable,
considering the total cost of technology,
people, and operations
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The Strategic Importance of
Logistics 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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The Strategic Importance of Logistics Network
Design: Changing Customer Service
Requirements
• A customer ’s business has changed and the company may
need to change some aspect(s) of its service to those
customers.
• Some customers will be looking for new supply chain partners
and the company needs to be responsive to these
potential new business partners.
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The trend
• Towards third party logistics
• Towards sharing of warehouses.
• Towards a dynamic set up, based on customer
segmentation.
• Towards postponement, cross docking.
• Towards automated material handling system
• GPS
• ECommerce
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Questions?