1. Network design and optimization
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Network design overview
Enterprise facility network
Warehouse requirements
Systems concept and analysis
Total cost integration
Formulating logistical strategy

3. Strategic Planning Overview
External Environment
Economic
Regulatory
Technological
Competitive
Internal Factors
Strengths
Weaknesses
Opportunities
Threats
Corporate Objectives & Strategy
SWOT
PEST
Competitive Strategy
Functional strategic plans
marketing
production
finance
logistics
The handbook of Logistics & Distribution Management 4th Edition

4. PEST Analysis Political / Legal Monopolies legislation
Environmental protection laws
Taxation policies
Foreign trade regulations
Employment law
Government stability
Economic
Business cycles
Interest rates
Money supply, inflation
Unemployment
Disposable income
Energy availability costs
Socio-cultural
Population demographics
Income distribution
Social mobility
Lifestyle changes
Attitude to work & leisure
Consumerism
Education levels
Technological
Government spending on research
Government & industry focus on technological effort
New discoveries / developments
Speed of technology transfer
Rates of obsolescence

5. Logistics Network Design
Includes aspects related to the physical flow of the product through a company’s operation, the inventory that should be held, the number and location of warehouses, the use of stockless warehouses, and final product delivery. One key to the determination of an appropriate physical design is the use of trade-offs between logistics competencies and between the different company functions.
Corporate Objectives & Strategy
Competitive Strategy
Logistics process design
Logistics network design
Logistics information system design
Logistics organizational structure
The handbook of Logistics & Distribution Management 4th Edition

6. Logistics Network Design
Corporate Objectives & Strategy
Competitive Strategy
Competitive Strategy
Logistics process design
Logistics network design
Logistics information system design
Logistics organizational structure
The handbook of Logistics & Distribution Management 4th Edition

7. 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

8. 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

9. Local presence: an obsolete paradigm
Local presence paradigm
Transportation services started out erratic with few choices
Customers felt that inventory within the local market area was needed to provide consistent delivery
Contemporary view
Transportation services have expanded
Shipment arrival times are dependable and consistent
Information technology
Provides faster access to customer requirements
Enables tracking of transport vehicles

10. 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

11. 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

12. 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)
Requires substantial demand facing warehousing
Make to order (MTO)
Requires supply facing support, but little demand warehousing
Assemble to order (ATO)

13. 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

14. 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

15. 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?

16. The “Systems” Concept Order processing Inventory Transportation
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

17. seeks to quantify trade-offs between logistics functions
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

18. 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

19. 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

20. 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

21. 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?

22. Network transportation cost minimization
Figure 13.2 Transportation Cost as a Function of the Number of Warehouse Locations

23. 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

24. 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?

25. Additional warehouses typically reduce total in-transit inventory
6 days
6 days
10 days
4 days
Results
Figure 13.3 Logistical Network: Two Markets, One Warehouse
Figure 13.4 Logistical Network: Two Markets, Two Warehouses
Table 13.1 Transit Inventory under Different Logistical Networks

26. 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

27. Network Modeling Steps

28. 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

29. High-level Modeling Steps

30. Network design process

31. Analysis (example)

32. Recommendations and Implement

33. Network Design: Step 1 Step 1: Define Network Strategy & Requirements
Form a design team
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

34. 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
Use modeling to provide additional insights
Develop preliminary designs
Test model for sensitivity to key variables
Management of Business Logistics, 7th Ed.
Chapter 14

35. Logistics Audit Logistics Strategic Plan Strategic Logistics Issues
Logistics Provider Selection and Evaluation
Key Logistics Activities
Logistics System
Fundamental Business Information

36. 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

37. 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.

38. Major Locational Determinants
Regional Determinants
Site-Specific Determinants
Labor climate
Transportation access
Availability of transportation
Truck
Proximity to markets
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

39. 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.

40. Supply Chain Scenario for Network Analysis
Raw
Materials
Warehouse
Manufacture
Distribution
Center
Retail

41. 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.

42. 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.

43. 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.

44. 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.

45. 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.

46. 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

47. 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

48. Figure 13.6 Least-Total-Cost Network
Total cost concept
Figure 13.6 Least-Total-Cost Network

49. 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

50. 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