1. McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 Network Planning

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

3. 3-3 Three Hierarchical Steps Network design Inventory positioning: Resource allocation:

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

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

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

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.

8. 3-8 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.

9. 3-9 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

10. 3-10 Transportation Rates Rates are almost linear with distance but not with volume Differences between internal rate and external rate

11. 3-11 Internal Transportation Rate For company-owned trucks Data Required: Annual costs per truck Annual mileage per truck Annual amount delivered Truck’s effective capacity Calculate cost per mile per SKU.

12. 3-12 External Transportation Rate Two Modes of Transportation Truckload, TL Country sub-divided into zones. One zone/state except for: Big states, such as Florida or New York (two zones) Zone-to-zone costs provides cost per mile per truckload between any two zones. TL cost from Chicago to Boston = Illinois-Massachusetts cost per mile X Chicago- Boston distance TL cost structure is not symmetric

13. 3-13 Less-Than-Truckload, LTL Class rates standard 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 rates Commodity rates are specialized commodity-specific rates External Transportation Rate Two Modes of Transportation

14. 3-14 Warehouse Costs Handling costs Labor and utility costs Proportional to annual flow through the warehouse. Fixed costs All cost components not proportional to the amount of flow Typically proportional to warehouse size (capacity) but in a nonlinear way. Storage costs Inventory holding costs Proportional to average positive inventory levels.

15. 3-15 Determining Storage Costs Multiply inventory turnover by holding cost Inventory Turnover = Annual Sales / Average Inventory Level

16. 3-16 Warehouse Capacity Estimation of actual space required Average inventory level = Annual flow through warehouse/Inventory turnover ratio Space requirement for item = 2*Average Inventory Level Multiply by factor to account for access and handling aisles, picking, sorting and processing facilities AGVs Typical factor value = 3

17. 3-17 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

18. 3-18 Service Level Requirements Specify a maximum distance between each customer and the warehouse serving it Proportion of customers whose distance to their assigned warehouse is no more than a given distance 95% of customers be situated within 200 miles of the warehouses serving them Appropriate for rural or isolated areas

19. 3-19 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

20. 3-20 Number of Warehouses Optimal Number of Warehouses

21. 3-21 Industry Benchmarks: Number of Distribution Centers Avg. # of WH 31425 Pharmaceuticals Food CompaniesChemicals - High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation - Low margin product - Service very important - Outbound transportation expensive relative to inbound

22. 3-22 Solution Techniques Mathematical optimization techniques: 1. Exact algorithms: find optimal solutions 2. Heuristics: find “good” solutions, not necessarily optimal Simulation models: provide a mechanism to evaluate specified design alternatives created by the designer.

23. 3-23 Simulation Models Useful for a given design and a micro-level analysis. Examine: Individual ordering pattern. Specific inventory policies. Inventory movements inside the warehouse. Not an optimization model Can only consider very few alternate models

24. 3-24 3.3 Inventory Positioning and Logistics Coordination Multi-facility supply chain that belongs to a single firm Manage inventory so as to reduce system wide cost Consider the interaction of the various facilities and the impact of this interaction on the inventory policy of each facility Ways 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?

25. 3-25 New Supply Chain Strategy OBJECTIVES: Reduce inventory and financial risks Provide customers with competitive response times. ACHIEVE THE FOLLOWING: Determining the optimal location of inventory across the various stages Calculating the optimal quantity of safety stock for each component at each stage Hybrid strategy of Push and Pull Push Stages produce to stock where the company keeps safety stock Pull stages keep no stock at all. Challenge: Identify the location where the strategy switched from Push-based to Pull-based Identify the Push-Pull boundary Benefits: 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%

26. 3-26 Key Points Identifying the Push-Pull boundary Taking advantage of the risk pooling concept Demand 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.

27. 3-27 Global Optimization For the same lead time, cost is reduced significantly For the same cost, lead time is reduced significantly Trade-off curve has jumps in various places Represents situations in which the location of the Push-Pull boundary changes Significant cost savings are achieved.

28. 3-28 Consider a two-tier supply chain Items shipped from manufacturing facilities to primary warehouses From there, they are shipped to secondary warehouses and finally to retail outlets How to optimally position inventory in the supply chain? Should every SKU be positioned both at the primary and secondary warehouses?, OR Some SKU be positioned only at the primary while others only at the secondary? Integrating Inventory Positioning and Network Design

29. 3-29 Three Different Product Categories High variability - low volume products Low variability - high volume products, and Low variability - low volume products.

30. 3-30 Supply Chain Strategy Different for the Different Categories High variability low volume products Inventory risk the main challenge for Position them mainly at the primary warehouses demand from many retail outlets can be aggregated reducing inventory costs. Low variability high volume products Position close to the retail outlets at the secondary warehouses Ship fully loaded tracks as close as possible to the customers reducing transportation costs. Low variability low volume products Require more analysis since other characteristics are important, such as profit margins, etc.

31. 3-31 3.4 Resource Allocation Supply chain master planning The process of coordinating and allocating production, and distribution strategies and resources to maximize profit or minimize system-wide cost Process takes into account: interaction between the various levels of the supply chain identifies a strategy that maximizes supply chain performance

32. 3-32 Focus of the Output Sourcing Strategies: where should each product be produced during the planning horizon, OR Supply Chain Master Plan: production quantities, shipment size and storage requirements by product, location and time period.

33. 3-33 SUMMARY Network Planning Characteristics Network DesignInventory Positioning and Management Resource Allocation Decision focusInfrastructureSafety stockProduction Distribution Planning HorizonYearsMonths Aggregation LevelFamilyItemClasses FrequencyYearlyMonthly/Weekly ROIHighMedium ImplementationVery ShortShort UsersVery FewFew

34. 3-34 SUMMARY Optimizing supply chain performance is difficult conflicting objectives demand and supply uncertainties supply chain dynamics. Through network planning, firms can globally optimize supply chain performance Combines network design, inventory positioning and resource allocation Consider the entire network account production Warehousing transportation inventory costs service level requirements.