1. Network Planning

2. Network Planning
A 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 design
Number, locations and size of manufacturing plants and warehouses
Assignment of retail outlets to warehouses
Major sourcing decisions
Typical planning horizon is a few years.
Inventory positioning:
Identifying stocking points
Selecting facilities that will produce to stock and thus keep inventory
Facilities that will produce to order and hence keep no inventory
Related to the inventory management strategies
Resource allocation:
Determine whether production and packaging of different products is done at the right facility
What should be the plants sourcing strategies?
How much capacity each plant should have to meet seasonal demand?

4. 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. Reevaluation of Infrastructure
Supply chain infrastructure needs to be reevaluated due to 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. 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 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
Firm must balance costs of opening new warehouses with the advantages of being close to the customer

8. Data Collection
Locations 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 Groups
Distribution pattern
All Products picked up at the same source and destined to the same customers
Sometimes by Logistics characteristics like weight and volume.
Product type
product models or style or differing only in the type of packaging.

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

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. External Transportation Rate Two Modes of Transportation
Truckload, TL
Country 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 distance
TL 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 rates
standard 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 commodity
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

14. Warehouse Costs Handling costs Fixed costs Storage 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 (cost is fixed in certain ranges of warehouse size)
Storage costs
Inventory holding costs
Proportional 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 required
Average inventory level =
Annual flow through warehouse/Inventory turnover ratio
Space requirement for item = 2*Average Inventory Level
Every pallet stored in the warehouse requires an empty space to allow for access and handling
So, Multiply required storage space by a factor to account for
access and handling
aisles,
picking, sorting and processing facilities
AGVs (automatic guided vehicles)
Typically multiply required storage space by a factor (>1)
Typical factor value = 3

18. Warehouse Capacity Example
Annual flow = 1,000 units
Inventory turnover ratio = 10.0
So, Average inventory level = 100 units
Assume each unit takes 10 sqft. of space
Required 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 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

21. Inventory Positioning and Logistics Coordination
Strategic Safety Stock
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?

22. Resource Allocation
With a fixed logistics network, firm needs to decide how to utilize resources effectively
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
This is known as Global Optimization

23. Global Optimization and DSS(decision support system) FACTORS TO CONSIDER
Facility locations: plants, distribution centers and demand points
Transportation resources including internal fleet and common carriers
Products and product information
Production 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 products
Demand 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?