Download Int.Log.Chap013sl

Network design and optimization
Network Design
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Network design overview





Enterprise facility
network
Warehouse
requirements
Systems concept and
analysis
Total cost integration
Formulating logistical
strategy
13-2
Strategic Planning Overview
External
Environment
Economic
Regulatory
Technological
Competitive
Internal Factors
Strengths
Weaknesses
Opportunities
Threats
Corporate
Objectives &
Strategy
PEST
SWOT
Competitive
Strategy
Functional strategic plans
marketing
production
finance
logistics
The handbook of Logistics & Distribution Management 4th Edition
13-3
PEST Analysis






Political / Legal
Monopolies legislation
Environmental protection laws
Taxation policies
Foreign trade regulations
Employment law
Government stability







Socio-cultural
Population demographics
Income distribution
Social mobility
Lifestyle changes
Attitude to work & leisure
Consumerism
Education levels






Economic
Business cycles
Interest rates
Money supply, inflation
Unemployment
Disposable income
Energy availability costs
Technological
 Government spending on research
 Government & industry focus on
technological effort
 New discoveries / developments
 Speed of technology transfer
 Rates of obsolescence
13-4
Logistics Network Design
Corporate Objectives &
Strategy
Logistics Network Design:
Includes aspects related to the physical flow of the
Competitive Strategy
product through a company’s
operation, the
inventory that should be held, the number and
location of warehouses, the use of stockless
Competitive Strategy
warehouses, and final product delivery. One key to
the determination of an appropriate physical design
is the use of trade-offs between logistics
Logistics
competencies
and
between
the
different
company
Logistics
Logistics
Logistics
information
network
organization
process design
system
functions.
design
al structure
design
The handbook of Logistics & Distribution Management 4th Edition
13-5
Logistics Network Design
Corporate Objectives &
Strategy
Competitive Strategy
Competitive Strategy
Logistics
process design
Logistics
network
design
Logistics
information
system
design
Logistics
organization
al structure
The handbook of Logistics & Distribution Management 4th Edition
13-6
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
13-7
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
13-8
Local presence: an obsolete
paradigm
Local presence paradigm Contemporary view
 Transportation services
 Transportation services
started out erratic with
have expanded
few choices
 Shipment arrival times are
 Customers felt that
dependable and consistent
inventory within the local  Information technology
market area was needed
 Provides faster access to
to provide consistent
customer requirements
delivery
 Enables tracking of
transport vehicles
13-9
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
13-10
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
13-11
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)


Make to order (MTO)


Requires substantial demand facing warehousing
Requires supply facing support, but little demand
warehousing
Assemble to order (ATO)
13-12
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
13-13
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
13-14
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?
13-15
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
13-16
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
13-17
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
13-18
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
13-19
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
13-20
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?
13-21
Network transportation cost
minimization
Figure 13.2 Transportation Cost as a Function of the Number of
Warehouse Locations
13-22
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
13-23
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?
13-24
Additional warehouses typically reduce
total in-transit inventory
6
days
6
days
10
days
4
days
Figure 13.3 Logistical Network: Two Markets,
One Warehouse
Table 13.1 Transit Inventory under Different Logistical Networks
Figure 13.4 Logistical Network: Two Markets,
Two Warehouses
Results
13-25
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
13-26
Network Modeling Steps
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
13-28
High-level Modeling Steps
13-29
Network design process
13-30
Analysis (example)
13-31
Recommendations and
Implement
13-32
Network Design: Step 1


Step 1: Define Network Strategy & Requirements
Form a design team


33
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
Management of Business Logistics, 7th Ed.
Chapter 14
13-33
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



34
Use modeling to provide additional insights
Develop preliminary designs
Test model for sensitivity to key variables
Management of Business Logistics, 7th Ed.
Chapter 14
13-34
Logistics Audit
Logistics
Strategic
Plan
Strategic
Logistics Issues
Logistics Provider
Selection and Evaluation
Key Logistics Activities
Logistics System
Fundamental Business Information
13-35
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
36
13-36
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.
13-37
Major Locational Determinants
Regional Determinants
Labor climate
Site-Specific Determinants
Transportation access
Availability of transportation
Proximity to markets
●
●
Truck
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
13-38
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.
13-39
Supply Chain Scenario for
Network Analysis
Raw
Materials
Warehouse
Manufacture
Warehouse
Distribution
Center
Retail
40
13-40
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.
13-41
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.
13-42
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.
13-43
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.
13-44
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.
13-45
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
13-46
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
13-47
Total cost concept
Figure 13.6 Least-Total-Cost Network
13-48
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
13-49
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
13-50