1. IE 8580 Module 2: Transportation in the Supply Chain
Lecture 2.1:
Transportation Networks

2. Owned by 12 shareholders and run by a new CEO
The Bis Corporation
Paint manufacturer
Established in 1964
8 manufacturing plants
17 warehouses
2,000 retail stores
4,000 SKUs
Owned by 12 shareholders and run by a new CEO
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3. Need to re-engineer their distribution and supply chain network
Problem
Although a high profit margin business (gross margin of 20%), idea is that the distribution system could be improved
Designed 15 years ago
Produce and store at manufacturing plants
Pick, load, and ship to warehouse
Unload and store at the warehouse
Pick, load, and deliver to stores
Need to re-engineer their distribution and supply chain network
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4. What is the best network configuration?
Design Requirements
What is the best network configuration?
1-tier network not efficient
Given the network, where should the inventory be held?
4,000 SKUs – not obvious how to position inventory
Which plant should produce which product?
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5. Data Aggregate demand Collect data
Grouped customers into 550 zones and products into 5 families
Collect data
Demand by SKU per product family for each zone
Annual production capacity by SKU’s at each facility
Max capacity by SKU at each warehouse
Transportation costs per product family per mile between all production facilities and warehouses
Setup cost to establish a new warehouse
Potential locations for new warehouses
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6. Other Relevant Information
CEO requires delivery time from warehouse to customer < 24 hours
Implies distance between warehouse and customer zone <450 miles
Growth industry with 7%, 3%, 6%, 5%, and 6% annual growth rate projected for families 1 through 5, respectively
Questions
Should Bis keep current strategy or switch to 2-tier?
Is the model good enough to trust the results?
What is the optimal inventory positioning?
Should production of SKUs be consolidated?
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7. What is Network Planning?
Way a firm structures and manages the physical supply chain – suppliers, plants, warehouses, distribution centers, cross-docking facilities
Typically, there are three steps
Network design: number, location, size of plants, warehouses, DC’s
Inventory positioning: where to keep stock, how much
Resource allocation: capacity allocation, outsourcing, offshoring
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8. General Network Design
Mathematical models are used to identify
Supply points: suppliers and plants
Distribution: warehouses, DC’s, cross-docking
Connecting pathways
Assumptions are used to make the problem more tractable
Becoming less critical with better computing and approximation algorithms
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9. Assume supplier and customer locations are fixed Determine
Focus on Warehouses
Admittedly this is a very simple example but it lets us work all the way through a scenario
Adapting this “strategy” to your environment will require some thinking and creativity … and maybe working with a university!
Assume supplier and customer locations are fixed
Determine
Number of warehouses
Location of warehouses
Size of warehouses
Space allocation for warehouses
Assignment of products to warehouses to customers
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10. Increasing the Number of Warehouses …
Improves service level
Increases inventory cost
Increases overhead and start-up costs
Reduces outbound transportation costs
Increases inbound transportation costs
What is the right thing to do?
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11. We Need Data—Some is Easy to Get/Accurate, Some Is Not
Locations
customers, warehouses, DC’s, production facilities and suppliers
Product information
Volumes and special transport considerations
Demands
Existing and forecasted
Transportation costs
Warehouse costs
Labor, inventory holding, material handling, etc.
Delivery restrictions
Shipment sizes and frequency of deliveries
Customer service requirements
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12. If your problem is big, effective data aggregation is critical
Customers can often be aggregated according to location
According to 3 or 5 digit ZIP code
Products can be aggregate according to similarities
Distribution patterns or product types
This sword has two edges
Advantages: smoothes variability, produces a tractable problem
Disadvantage: easy to over-do and get meaningless answers
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13. Ground transportation rates in the US are available
Internal fleet – (cost/mile) x miles
External fleet TL
each state is a zone (except FL, CA, TX)
cost per mile established from each zone to all other zones
LTL
rates based on class of cargo
ZIP code to ZIP code
There are ways to estimate mileage
Straight line for short distances; long distance correction for earth’s curvature
“Fudge factor” because roads are not straight
Google Earth/Maps API calls
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14. Warehouse costs are higher than most folks think
Handling costs
Labor and utility
Typically proportional to annual flow through warehouse
Fixed costs
Equipment and rent, for example
Not related to volume
Storage costs
Inventory holding costs typically computed as proportional to the average inventory level
Finding the average inventory level for a particular customer is sometimes difficult – one solution is the inventory turnover ratio
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15. Other warehouse related items
Capacity
Inventory turnover ratio can help to estimate
Potential locations
Geographical and infrastructure locations
Natural resources and labor
Taxes and incentives
Service level requirements
Minimum distance or maximum time
Future demand considerations
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16. Model building and validation
Use most appropriate tool
OR model, simulation
Solve for plant conditions and verify output is reasonable approximation of reality
Be careful of extrapolation
Use this as a starting point for decision making
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17. Example (Page 92, Simchi Levi et al.)
Single product, two plants, two warehouses, 3 customers
Plant capacities: 140,000 and 60,000
Customer demands: 50,000, 100,000, and 50,000
Unit distribution costs ($) P1 P2 C1 C2 C3 W1 4 3 5 W2 2 1
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18. The Basic Problem 50 3 140 Customer 1 4 5 5 Plant 1 W/H 1 100 2 4 1
Customer 1 4 5 5
Plant 1
W/H 1
100 2 4 1
Customer 2 2 2 60 50
Plant 2
W/H 2
Customer 3
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19. Surely you can do this one in your head, right?
Who needs math, anyways?!?!?
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20. Approach #1 50 3
140
Customer 1 4 5 5
Plant 1
140
W/H 1
100 2 1 50 4
100
Customer 2 2 60 60 50 50
W/H 2
Plant 2
Since shipping from W/H 2 is cheaper than W/H 1 for both customers, use only W/H 2.
Customer 3
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21. Approach #2 50 50 3
140
Customer 1 4 90 5 5
Plant 1
W/H 1
100 2 1 4
Customer 2 2 60 60 50
W/H 2
Plant 2
Select the path with the minimum cost starting with Customer 1 and proceed sequentially.
Customer 3
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22. Resulting Costs Heuristic 1 Heuristic 2
140K units*$5/unit+60K*$2+50K*$2+100K*$1+50K*$2 = $1,120,000
Heuristic 2
50K units*$0/unit+90K*$5+60K*$2+50K*$3+100K*$1+50K*$2 = $920,000
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23. So How Well Do You Trust Yourself?
Are you going to use and bet your career on:
1. opinions based on experience and gut feel or
2. hardcore, mathematical analysis
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24. Comparisons Heuristic 1: $1,120,000 Heuristic 2: $ 920,000
Optimal: $740,000
You just overpaid by:
51% if you used Heuristic 1
25% if you used Heuristic 2
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25. Simulation and Optimization
Models are typically inferior because assumptions have to be made for tractability
Solutions are determined; that is, you don’t have to guess them – you just develop the model
Solutions can be great starting points for system design
Simulation
Models can be quite accurate with many of the stochastic elements captured
It only shows system performance based on the controls that you guess
Can be of great value when you have a really good starting point and want to “tune” things or play “what if”
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26. Scope of Network Configuration
In practice, there are both greenfield and brownfield requirements
Greenfield
Complete new design because you are just starting or because the existing structure has been modified so much that a fresh approach is required
Brownfield
Must modify within the existing structure or include new features like adding warehouse-to-warehouse flow or customer specific service level requirements
Your authors call the ability to accommodate this range “flexibility” and it is critical to network configuration design
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