Network and Operational Planning McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Overview of network and operational planning Planning methodology Phase 1: Problem definition and planning Phase 2: Data collection and analysis Phase 3: Recommendations and implementation Supply chain analysis methods and techniques

Decisions often require complex and data-intensive analysis Planning methodologies enable evaluation of options in response to customer behavior Decisions often require complex and data-intensive analysis Complexity is due to Large number of factors impacting total cost Range of alternative solutions available Data-intensiveness is due to Large amount of information required to evaluate each alternative E.g., range of service alternatives, range of cost assumptions, range of operating technologies

Generalized planning methodology showing major phases of work Problem definition and planning Data collection and analysis Recommendations and implementation Figure 14.1 Research Process

Problem definition and planning provides the foundation for the overall analysis Feasibility assessment Analyze the current situation Develop supporting logic Estimate the cost-benefit to proceed Project planning State objectives of proposed changes State constraints to scope of study Establish measurement standards Select analysis techniques Create a project work plan

Feasibility assessment begins with analysis of the current situation Requires an Internal operational review Market assessment Technology assessment Tables in text illustrate topics of inquiry for this work See Tables 14.1, 14.2 and 14.3 Situational analysis should determine existing capabilities and help define improvement potential

Develop a supporting logic to integrate the findings from the current state analysis Identify the value proposition to justify investment in detailed research and analysis Critical fact-based evaluation of current procedures and practices What is working well? What areas can we improve? Identify potential alternatives Define current operations Identify likely design alternatives Suggest innovative approaches

Estimate the project’s potential benefits and risks Benefits should be estimated for Service improvements Cost reductions Cost prevention “Low hanging fruit” opportunities Illustration of sample risks defined for each alternative

Project planning involves these specific tasks State objectives of proposed changes State constraints to scope of study Establish measurement standards Assumptive logic Select analysis techniques Create a project work plan

Statement of objectives should be stated specifically and in measurable terms Should define market segment, the time frame for change and specific performance expectations Example objectives Provide 100 most profitable customers with perfect order performance on all orders All other customers receive 99% inventory availability for category A products 95% inventory availability for category B products Delivery of 98% of all orders within 48 hours of placement

Statement of constraints should identify restrictions placed by senior management Defines the specific organizational elements to be retained in current system Facility, alliance, resource, system, procedural or channel constraints Common examples Hold existing manufacturing facilities and product mix constant Omit some divisions from a centralized logistics system “Why study things we don’t plan to do anything about?”

Measurement standards direct the analysis by listing assumptions about cost and performance Standards should adequately reflect a total system performance view Avoid a suboptimal focus on logistics functions List assumptions that support standards How is each cost component to be quantified?

Develop a project work plan for the remaining phases of the study Schedule of tasks Resource requirements Personnel Data collection and analysis Analysis tools Meeting schedules Updates to share progress with executives Illustration of sample project work plan with meeting schedule

Data collection and analysis activities Assumptions and data collection Define analysis approach and select techniques Define and review assumptions Identify data sources Collect data Collect validation data Analysis Develop questions for analysis Validate the baseline analysis Analyze each alternative Complete sensitivity analysis

Analytical approach uses numerical tools to evaluate each alternative Spreadsheet and statistical software availability have increased use of these techniques Examples Determine the inventory/service trade-offs using safety stock and fill rate formulae Determine the order cycle time that is required to deliver 95% of customer orders Determine the transportation dollar benefits for consolidating LTL orders into TL orders

Simulation is widely used, particularly when significant uncertainty is involved Conduct experiments using a physical or numerical model of the real system Understand overall system behavior over time Use to evaluate operations under different strategies Appropriate when Limited number of variables are evaluated Need a more realistic representation of the process Need customer order or SKU level of detail

Optimization uses linear programming to evaluate and select best alternative Appropriate for Problems where objectives and constraints can be expressed in mathematical terms Alternatives involving sweeping changes to the logistics systems Limitations include Demand on computing resources Models are smaller in scope than simulations Example Determine the best location for distribution facilities subject to meeting supply, demand, and delivery time constraints

Define and review assumptions Business E.g., relevant market, consumer and product trends, resource availability, and competitive actions Management E.g., alternative warehouse locations, transport modes, ownership arrangements, logistics processes, fixed and variable costs Analysis Define constraints and limitations to fit the problem to the technique selected

Detailed description of assumptions by category Table 14.4 Assumption Categories Elements

Identify data sources to fit the analytical technique What are the sources for Sales and customer orders? Specific customer data that includes a spatial dimension? Manufacturing and purchasing costs? Transportation data? Benchmarking data on competitive capabilities and flow?

Analysis involves use of technique and data to evaluate logistics alternatives First, develop questions about alternatives and the range of acceptable uncertainty Second, validate the technique and model using validation data Third, repeat the analysis for each alternative to be evaluated Finally, the best-performing alternatives can be evaluated for sensitivity to other factors or scenarios

Recommendations and implementation Development of recommendations Identify best alternative Estimate costs and benefits Develop risk appraisal Develop presentation Implementation Define implementation plan Schedule implementation Define acceptance criteria Implementing the plan

Sample presentation visual showing best alternative Recommendations to management are developed through critical review of the analysis results Identify best alternative Estimate costs and benefits Develop risk appraisal Develop presentation Sample presentation visual showing best alternative

Implementation is necessary to realize any business benefits from the recommendations Define implementation plan Events, activities and decisions with dependent relationships Schedule implementation Timeline of plan details E.g., acquire facilities, negotiate agreements, mobilize teams, and conduct training Define acceptance criteria How will we measure success? Implement the recommendation Establish controls to monitor plan and acceptance criteria

Methods and techniques of analysis for supply chain decisions Design decisions Design logic Inventory decisions Transportation decisions Freight lane analysis Inventory analysis

Design decisions focus on selecting number and location of plants, warehouses and other nodes Determine total costs and trade-offs for alternative channel strategies, activity outsourcing or offshoring decisions Typical questions include Where should plants and distribution centers be located? Which market areas should be served by each distribution center? Which product line should be stocked at each warehouse? What marketing channels should be used to serve international markets? Which service providers should be used for long-term contracts?

Design logic defines the method used to select from a number of available options Optimization models consider a range of complex data to evaluate alternatives Aggregate customer demand Aggregate supply availability Product and information flows at each stage Transportation alternatives and costs Other variable costs Major problems with linear programming Need explicit functional relationships for full range of design options Only as valid as the design problem definition Often limited by number of stages in the supply chain and problem size

Illustration of scope of typical supply chain analysis Figure 14.2 Total Cost Analysis Approach

Data requirements for supply chain analysis include the following key elements Markets defined by geographic segments Products defined by the number of stock keeping units required Network defines channel members and locations including current and proposed Customer demand as shipment volume by market geography Transportation rates for inbound and outbound volume For each shipment size For each potential transportation link Variable and fixed costs Tax incentives

Illustration of how US might be segmented in market areas Figure 14.3 Supply Chain Network

Figure 14.4 Channel Network Example Illustration of a network definition for channel of industrial and retail customers Figure 14.4 Channel Network Example

Evaluation of alternatives Baseline analysis is done first to validate cost and establish credibility of the analysis Other alternatives are modeled and analyzed Results can be compared to baseline to identify performance improvements Baseline Model Alternative Models

Illustration of baseline network with two plants and two warehouses Figure 14.5 Base Supply Chain Network

Illustrates an alternative supply chain with 3 plants and 4 warehouses Figure 14.6 Alternative Supply Chain Network

Concerns of supply chain design tools Treatment of inventory carrying cost Assumptions of shipment sizes over range of alternatives Constant or varies with change in number of warehouses Focus of analyses Expanding boundaries of supply chain members Minimize total cost vs. maximize profit Periodic vs. ongoing

Figure 14.7 Analytic Inventory Overview Illustration of the analytic inventory concept to make inventory decisions Results of analysis Figure 14.7 Analytic Inventory Overview

Illustration of the simulation approach to inventory analysis Results of analysis Figure 14.8 Inventory Simulation Overview

Transportation decisions range from strategic to tactical in scope Strategic routing decisions Identify long-term fixed transport modes Monthly or yearly routes Tactical routing decisions Allocate resources for the short-term Daily or weekly routes Objective is to minimize the combination of vehicles, hours and miles required to deliver product

Illustration of typical transportation problem Figure 14.9 Typical Routing or Delivery Problem

Transportation analysis techniques Heuristic approaches Use rule-of-thumb techniques to sequentially add and delete stops Exact approaches Use linear programming to identify best routes Interactive approaches Use simulation, cost calculator or graphics capability to support interactive decision process Combination approaches Blend of the three approaches is very effective Criteria for evaluating approaches How general is the approach? E.g., special situations, multiple depots, time windows, vehicle capacities How accurate is the approach? Is it a close approximation of performance characteristics?

Data requirements for transportation analysis Network defines all possible routes Demand data defines periodic customer pickup and delivery requirements Operating characteristics define Number of vehicles Vehicle limitations Driver constraints Operating costs

Figure 14.10 Example of Triangular Freight Lane Freight lane analysis seeks to balance volume between origin and destination points Results of analysis Develop additional volume between Cincinnati and Chicago Move product sources to Chicago Alliance with shipper with no back-haul Figure 14.10 Example of Triangular Freight Lane Table 14.6 Freight Lane Analysis of Monthly Movements

Illustration of inventory analysis showing key results for management review Table 14.7 Typical Inventory Analysis Report