2 Network PlanningA process by which the firm structures and manages the supply chain, in order to: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 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?
4 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
5 Reevaluation of Infrastructure Supply chain infrastructure needs to be reevaluated due to Changes in:demand patternsproduct mixproduction processessourcing strategiescost of running facilities.Mergers and acquisitions may mandate the integration of different logistics networks
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
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 requirementsIncreasing 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 warehousesFirm must balance costs of opening new warehouses with the advantages of being close to the customer
8 Data CollectionLocations 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
9 Data Aggregation Customer Zone Product Groups 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 (referred to as customer zone)Five-digit or three-digit zip code based clustering.Product GroupsDistribution patternAll Products picked up at the same source and destined to the same customersSometimes by Logistics characteristics like weight and volume.Product typeproduct models or style or differing only in the type of packaging.
10 Transportation RatesRates are almost linear with distance but not with volumeDifferences between internal rate and external rate
11 Internal Transportation Rate For company-owned trucksData Required:Annual costs per truckAnnual mileage per truckAnnual amount deliveredTruck’s effective capacityCalculate cost per mile per SKU
12 External Transportation Rate Two Modes of Transportation Truckload, TLCountry sub-divided into zones. One zone/state except for:Big states, such as U.P , Rajasthan(two zones)Zone-to-zone costs provides cost per mile per truckload between any two zones.TL cost from Jaipur to Patiala =Jaipur-Patiala cost per mile X Jaipur-Patiala distanceTL cost structure is not symmetric (its not same for Jaipur-Patiala and Patiala-Jaipur)
13 Less-Than-Truckload, LTL Three Basic type of freight rates: Class ratesstandard rates for almost all products or commodities shipped.Found with help of Classification tariff system that gives each shipment a rating or a class.Higher the rating/class greater relative charge for transporting the commodityFactors 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
14 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 (cost is fixed in certain ranges of warehouse size)Storage costsInventory holding costsProportional to average positive inventory levels
15 Determining Storage Costs Inventory Turnover Ratio=Annual Sales / Average Inventory Level(Annual Sales or Annual OutFlow)Annual Storage Costs= Multiply average inventory level by inventory holding cost
16 Determining Fixed Costs Warehouse fixed costs as a function of the warehouse capacity
17 Calculating Fixed Cost(By calculating Warehouse Capacity Estimation of actual space requiredAverage inventory level =Annual flow through warehouse/Inventory turnover ratioSpace requirement for item = 2*Average Inventory LevelEvery pallet stored in the warehouse requires an empty space to allow for access and handlingSo, Multiply required storage space by a factor to account foraccess and handlingaisles,picking, sorting and processing facilitiesAGVs (automatic guided vehicles)Typically multiply required storage space by a factor (>1)Typical factor value = 3
18 Warehouse Capacity Example Annual flow = 1,000 unitsInventory turnover ratio = 10.0So, Average inventory level = 100 unitsAssume each unit takes 10 sqft. of spaceRequired space for products = 2,000 sqft.Total space required for the warehouse is about 6,000 square feet
19 Potential Warehouse Locations Locations must satisfy these conditions: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
20 Service Level Requirements Various ways to define service levels: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
21 Inventory Positioning and Logistics Coordination Strategic Safety StockMulti-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?
22 Resource AllocationWith a fixed logistics network, firm needs to decide how to utilize resources effectivelySupply chain master planningThe process of coordinating and allocating production, and distribution strategies and resources to maximize profit or minimize system-wide costProcess takes into account:interaction between the various levels of the supply chainidentifies a strategy that maximizes supply chain performanceThis is known as Global Optimization
23 Global Optimization and DSS(decision support system) FACTORS TO CONSIDER Facility locations: plants, distribution centers and demand pointsTransportation resources including internal fleet and common carriersProducts and product informationProduction 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 productsDemand forecast by location, product and time.
24 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. 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?