2 Three Hierarchical Steps Network designNumber, locations and size of manufacturing plants and warehousesAssignment of retail outlets to warehousesMajor sourcing decisionsTypical planning horizon is a few years.Inventory positioning:Identifying stocking pointsSelecting facilities that will produce to stock and thus keep inventoryFacilities that will produce to order and hence keep no inventoryRelated to the inventory management strategiesResource allocation:Determine whether production and packaging of different products is done at the right facilityWhat should be the plants’ sourcing strategies?How much capacity each plant should have to meet seasonal demand?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
3 3.2 Network DesignPhysical 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
4 Key Strategic Decisions Number of facilities.Location of each facility.Size of each facility.Allocating space for products.Sourcing requirements.Determining distribution strategiesIncreasing the number of warehouses typically yields:An improvement in service level due to the reduction in average travel time to the customersAn 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 costsA reduction in outbound transportation costs: transportation costs from the warehouses to the customersAn increase in inbound transportation costs: transportation costs from the suppliers and/or manufacturers to the warehouses.Objective: Design or reconfigure the logistics network in order to minimize annual system-wide cost subject to a variety of service level requirements
5 Data Collection & Aggregation 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 capacitiesTechnology exists to solve the logistics network design problem with the original dataData aggregation still useful because forecast demand is significantly more accurate at the aggregated levelAggregating customers into about zones usually results in no more than a 1 percent error in the estimation of total transportation costsGENERAL RULES FOR AGGREGATIONAggregate demand points into at least 200 zonesHolds for cases where customers are classified into classes according to their service levels or frequency of deliveryMake sure each zone has approximately an equal amount of total demandZones may be of different geographic sizes.Place aggregated points at the center of the zoneAggregate products into 20 to 50 product groupsCustomer Zones & Product Groups
6 Transportation Rates Rates linear with distance but not volume InternalTL - Zone-to-zone costs provides cost per mile per truckload between any two zones.LTL – Class, Exception & Commodity RatesMileage estimationINTERNALData Required:Annual costs per truckAnnual mileage per truckAnnual amount deliveredTruck’s effective capacityCalculate cost per mile per SKU.Class ratesstandard rates for almost all products or commodities shipped.Classification tariff system that gives each shipment a rating or a class.Factors involved in determining a product’s specific class include:product density, ease or difficulty of handling and transporting, and liability for damage.After establishing rating, identify rate basis number.Approximate distance between the load’s origin and destination.With the two, determine the specific rate per hundred pounds (hundred weight, or cwt) from a carrier tariff table (i.e., a freight rate table).Exception rates provides less expensive ratesCommodity rates are specialized commodity-specific rates
7 Warehouse Costs Handling costs Fixed costs Storage costs Labor and utility costsProportional to annual flow through the warehouse.Fixed costsAll cost components not proportional to the amount of flowTypically proportional to warehouse size (capacity) but in a nonlinear way.Storage costsInventory holding costsProportional to average positive inventory levels.
8 Warehouse Capacity Estimation of actual space required Average inventory level =Annual flow through warehouse/Inventory turnover ratioSpace requirement for item = 2*Average Inventory LevelMultiply by factor to account foraccess and handlingaisles,picking, sorting and processing facilitiesAGVsTypical factor value = 3
9 Potential Locations Geographical and infrastructure conditions. Natural resources and labor availability.Local industry and tax regulations.Public interest.Not many will qualify based on all the above conditions
10 Service Level Requirements Specify a maximum distance between each customer and the warehouse serving itProportion of customers whose distance to their assigned warehouse is no more than a given distance95% of customers be situated within 200 miles of the warehouses serving themAppropriate for rural or isolated areas
11 Future Demand Strategic decisions have to be valid for 3-5 years Consider scenario approach and net present values to factor in expected future demand over planning horizon
13 Sexy 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.
14 Unit Distribution Costs Facility warehousep1p2c1c2c3w1435w221Two heuristics and an optimization technique:Choose the cheapest warehouse to source demandChoose the warehouse where the total delivery costs to and from the warehouse are the lowestLP
15 Heuristic #1: Choose the Cheapest Warehouse to Source Demand $2 x 50,000$5 x 140,000D = 100,000$1 x 100,000$2 x 60,000Cap = 60,000D = 50,000$2 x 50,000Total Costs = $1,120,000
16 Market #1 is served by WH1, Markets 2 and 3 Heuristic #2: Choose the warehouse where the total delivery costs to and from the warehouse are the lowest [Consider inbound and outbound distribution costs]$0D = 50,000$3P1 to WH1 $3P1 to WH2 $7P2 to WH1 $7P2 to WH 2 $4$4$2$5$5D = 100,000P1 to WH1 $4P1 to WH2 $6P2 to WH1 $8P2 to WH 2 $3$4$1$2Cap = 60,000$2D = 50,000P1 to WH1 $5P1 to WH2 $7P2 to WH1 $9P2 to WH 2 $4Market #1 is served by WH1, Markets 2 and 3are served by WH2
17 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 50,000D = 50,000$3 x 50,000Cap = 200,000P1 to WH1 $3P1 to WH2 $7P2 to WH1 $7P2 to WH 2 $4$5 x 90,000D = 100,000P1 to WH1 $4P1 to WH2 $6P2 to WH1 $8P2 to WH 2 $3$1 x 100,000$2 x 60,000Cap = 60,000$2 x 50,000D = 50,000P1 to WH1 $5P1 to WH2 $7P2 to WH1 $9P2 to WH 2 $4Total Cost = $920,000
18 The Optimization Model The problem described earlier can be framed as the following linear programming problem.Letx(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
19 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) 60000x(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) = 50000x(w1,c2) + x(w2,c2) =x(w1,c3) + x(w2,c3) = 50000all flows greater than or equal to zero.
20 Optimal Solution Facility warehouse p1 p2 c1 c2 c3 w1 140,000 50,000 50,00040,0000*w260,00050,000*Total cost for the optimal strategy is $740,000*Your text has the w2c3 and w1c3 numbers reversed
21 DSS for Network DesignFlexibility to incorporate a large set of preexisting network characteristicsOther Factors:Customer-specific service level requirements.Existing warehouses kept openExpansion of existing warehouses.Specific flow patterns maintainedWarehouse-to-warehouse flow possibleProduction and Bill of materials details may be importantRobustnessRelative quality of the solution independent of specific environment, data variability or specific settings
22 Inventory Positioning and Logistics Coordination Multi-facility supply chain that belongs to a single firmManage inventory so as to reduce system wide costConsider the interaction of the various facilities and the impact of this interaction on the inventory policy of each facilityWays to manage:Wait for specific orders to arrive before starting to manufacture them [make-to-order facility]Otherwise, decide on where to keep safety stock?Which facilities should produce to stock and which should produce to order?
23 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.Net Lead Time = SI + T - SSafety stock at the facility:
24 2-Stage System Overall objective is to choose: Reducing committed service time from facility 2 to facility 1 impacts required inventory at both facilitiesInventory at facility 1 is reducedInventory at facility 2 is increasedOverall objective is to choose:the committed service time at each facilitythe location and amount of inventoryminimize total or system wide safety stock cost.
25 ElecComp CaseLarge contract manufacturer of circuit boards and other high tech parts.About 27,000 high value products with short life cyclesFierce competition => Low customer promise times < Manufacturing Lead TimesHigh inventory of SKUs based on long-term forecasts => Classic PUSH STRATEGYHigh shortagesHuge riskPULL STRATEGY not feasible because of long lead times
26 New Supply Chain Strategy OBJECTIVES:Reduce inventory and financial risksProvide customers with competitive response times.ACHIEVE THE FOLLOWING:Determining the optimal location of inventory across the various stagesCalculating the optimal quantity of safety stock for each component at each stageHybrid strategy of Push and PullPush Stages produce to stock where the company keeps safety stockPull stages keep no stock at all.Challenge:Identify the location where the strategy switched from Push-based to Pull-basedIdentify the Push-Pull boundaryBenefits: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%
27 Notations UsedFIGURE 3-11: How to read the diagrams
28 Trade-OffsIf Montgomery facility reduces committed lead time to 13 daysassembly facility does not need any inventory of finished goodsAny customer order will trigger an order for parts 2 and 3.Part 2 will be available immediately, since it is held in inventoryPart 3 will be available in 15 days13 days committed response time by the manufacturing facility2 days transportation lead time.Another 15 days to process the order at the assembly facilityOrder is delivered within the committed service time.Assembly facility produces to order, i.e., a Pull based strategyMontgomery facility keeps inventory and hence is managed with a Push or Make-to-Stock strategy.
29 Current Safety Stock Location FIGURE 3-12: Current safety stock location
31 Current Safety Stock with Lesser Lead Time FIGURE 3-14: Optimized safety stock with reduced lead time
32 Supply Chain with More Complex Product Structure FIGURE 3-15: Current supply chain
33 Optimized Supply Chain with More Complex Product Structure FIGURE 3-16: Optimized supply chain
34 Key Points Identifying the Push-Pull boundary Taking advantage of the risk pooling conceptDemand 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 supply chain strategy.
35 Local vs. Global Optimization FIGURE 3-17: Trade-off between quoted lead time and safety stock
36 Global OptimizationFor the same lead time, cost is reduced significantlyFor the same cost, lead time is reduced significantlyTrade-off curve has jumps in various placesRepresents situations in which the location of the Push-Pull boundary changesSignificant cost savings are achieved.
37 Problems with Local Optimization Prevalent strategy for many companies:try to keep as much inventory close to the customershold some inventory at every locationhold as much raw material as possible.This typically yields leads to:Low inventory turnsInconsistent service levels across locations and products, andThe need to expedite shipments, with resulting increased transportation costs
38 Integrating Inventory Positioning and Network Design Consider a two-tier supply chainItems shipped from manufacturing facilities to primary warehousesFrom there, they are shipped to secondary warehouses and finally to retail outletsHow to optimally position inventory in the supply chain?Should every SKU be positioned both at the primary and secondary warehouses?, ORSome SKU be positioned only at the primary while others only at the secondary?
39 Integrating Inventory Positioning and Network Design FIGURE 3-18: Sample plot of each SKU by volume and demand
40 Three Different Product Categories High variability - low volume productsLow variability - high volume products, andLow variability - low volume products.
41 Supply Chain Strategy Different for the Different Categories High variability low volume productsInventory risk the main challenge forPosition them mainly at the primary warehousesdemand from many retail outlets can be aggregated reducing inventory costs.Low variability high volume productsPosition close to the retail outlets at the secondary warehousesShip fully loaded tracks as close as possible to the customers reducing transportation costs.Low variability low volume productsRequire more analysis since other characteristics are important, such as profit margins, etc.