8 logistics network design

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Logistics Network Design

Design or configure the logistics network so as to minimize annual system-wide cost

subject to a variety of service level requirements

Objective of Logistics Networking

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The Logistics Network

The Logistics Network consists of:

• Facilities:Vendors, Manufacturing Centers, Warehouse/ Distribution Centers, and Customers

• Raw materials and finished products that flow between the facilities.

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Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs

Inventory &warehousing costs

Transportation costs

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Network Design: Key Issues

The objective is to balance service level against

• Production/ purchasing costs

• Inventory carrying costs

• Facility costs (handling and fixed costs)

• Transportation costs

That is, we would like to find a minimal-annual-cost configuration of the distribution network that satisfies product demands at specified customer service levels.

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Logistics Network Configuration

• Configuration of the logistics network may involve the following strategic decisions– Determining the number of retailers, distribution centers and

manufacturing facilities– Determining the location of each facility– Determining the size of each facility– Allocating retailers to different distribution centers– Determining transportation modes– Determining the operation of the network (direct shipments, e.g.)

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Data for Network Design

1. A listing of all products2. Location of customers, stocking points and sources3. Demand for each product by customer location4. Transportation rates5. Warehousing costs6. Shipment sizes by product7. Order patterns by frequency, size, season, content8. Order processing costs9. Customer service goals

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Roles of different type of facilities

• Manufacturing plants– Responsible for manufacturing the goods for distribution– Some companies may not own manufacturing plants

• Distribution centers– Reducing lead times, increasing product availability at the retailer level (depot effect)– Enabling economies of scale by consolidating shipments from the manufacturing

plants. – Delaying the allocation of material to retailers (joint ordering effect)– Providing a second level of support for emergency orders at retailer level– Consolidation point for reverse logistics– Localization of goods to different countries

• Retailers (stores, bases)– Primary access point for customers

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Factors influencing network design

• Strategic factors– Cost leadership– Responsiveness/variety

• Technological factors• Macroeconomic factors

– Tariffs and taxes– Exchange rate and demand risk

• Political factors• Infrastructure factors• Competitive factors

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Factors influencing network design

• Customer response time and local presence• Logistics and facility costs

– Inventory costs– Transportation costs

• Inbound versus outbound• External versus internal fleet• Truckload (TL) versus less than truckload (LTL)

– Facility costs• Setup • Operating costs

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Open questions in network design

• Do I need a distribution center at all?• How many levels do I need in distribution?• How many distribution centers do I need?• What is the impact of competition on facility decisions?• How many retail stores do I need?

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Channel Structure

• Depends on- Length. How many intermediaries/ distributor, wholesaler, retailer, sub retailers?

- Breadth : How many wholesalers, distributors etc?

- How many different types of channels?

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Design Options for a Distribution Network

• Manufacturer Storage with Direct Shipping• Manufacturer Storage with Direct Shipping and In-Transit

Merge• Distributor Storage with Carrier Delivery• Distributor Storage with Last Mile Delivery• Manufacturer or Distributor Storage with Consumer Pickup• Retail Storage with Consumer Pickup• Selecting a Distribution Network Design

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Mfr. DistributorWholesaler

Length

Retailer

Distributor Wholesaler Retailer

Bre

adth

Length and Breadth

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Manufacturer Storage withDirect Shipping

Manufacturer

Retailer

Customers

Product Flow

Information Flow

In-Transit Merge Network

Factories

Retailer

Product Flow

Information Flow

In-Transit Merge by Carrier

Customers

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Distributor Storage withCarrier Delivery

Factories

Customers

Product Flow

Information Flow

Warehouse Storage by Distributor/Retailer

Distributor Storage withLast Mile Delivery

Factories

Customers

Product Flow

Information Flow

Distributor/Retailer Warehouse

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B

E A

G

F C D

Point to Point System

Hub and Spoke System

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Power Centre

• Who controls the channel, distributor, manufacturer or the retailer?

• Is there a trend towards supermarkets?

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Comparison

Network Structure Pros Cons

Direct Shipping -No intermediate warehouse

-Simple to Coordinate

-High Inventories (Due to large lot size )

- Significant receiving expense

Direct Shipping with milk runs

-Lower transportation cost for small lots

- Lower inventories

Increased coordination complexities

All shipments via central DC

-Lower inbound transportation costs through consolidation

-Increased inventory cost

- Increased handling at DC

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Comparison ( contd )

Network Structure Pros ConsAll shipments through central DC with cross docking

-Very low inventory requirement- Lower transportation cost through consolidation

Increased coordination complexity

Shipping via DC using milk runs

- Lower inbound transportation cost for small lots

- Further increase in coordination complexity

Tailored network -Transportation choice best matches needs of individual product and store

Highest coordination complexity

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Choice of network

• Customer segmentation• Volume of business• Available modes of transport• Cost of Logistics• Type of Product• New products in the same family may require

a different set up. e.g. Prius

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Comparative Performance of Delivery Network Designs

24Information

Facility & Handling

Transportation

Inventory

Returnability

Order Visibility

Customer Experience

Product Availability

Product Variety

Response Time

Manufacturer storage with

pickup

Distributor storage with

last mile delivery

Distributor Storage with

Package Carrier Delivery

Manufacturer Storage with In-Transit Merge

Manufacturer Storage with Direct

Shipping

Retail Storage with Customer

Pickup

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Linking Product Characteristics and Customer Preferences to Network Design

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Low customer effort

High product variety

Quick desired response

High product value

Many product sources

Very low demand product

Low demand product

Medium demand product

High demand product

Manufacturer storage with

pickup

Distributor storage with last mile

delivery

Distributor Storage with Package Carrier

Delivery

Manufacturer Storage with In-Transit Merge

Manufacturer Storage with

Direct Shipping

Retail Storage with

Customer Pickup

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When to Outsource

• Is Logistics a core competency?• Any measurable advantage?• Management Commitment• Capabilities of the service provider.• Cheaper.

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Physical Contracts

Logistical Services

-Dedicated Contract Carrier

-Dedicated warehousing

Integrated Contract Logistics- Integrated Warehousing -- Integrated Carrier Management and transportation

Basic Services-Common Carriage

- Public Warehousing

Management Contracts and Logistics Services- Traffic Management

- Warehouse Management

--Import Export Management

Logistics Service Providers

Management ServicesLow High

Ph

ysic

al S

ervi

ces

Low

High

Outsourcing -Advantages

• Capital Expenses are low.• Recurring Expenses are low.• Inherent problems are eliminated, like truck

breaking down, insurance etc.• Less Coordination efforts.• Service provider will be willing to invest as it

his main business

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Third Party Logistics

Supplier Import intoIndia

Ware-house

CustomsClearance

Customer

FF CHA Courier Contract Courier

A B C D E

Fourth Party Logistics

Supplier Import intoIndia

Ware-house

CustomsClearance

Customer

FF CHA Courier Contract Courier

F F F F F

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3PL and 4PL

Potential Benefits Risks

• Improved focus on areas of competence

• More current technology; more technological flexibility

• More efficient warehousing (economies of scale)

• Improved customer service

• More workforce flexibility

• Less control over some aspects of logistics, including overall strategy

• Possible disruption of customer relationships; leaks of confidential information

• Potential for inefficient service—at a price

3PL tradeoffs

3PL and 4PL

Potential Benefits Risks

• Improved focus on areas of competence

• Higher-quality logistics, lower costs, or both

• Greater business flexibility

• Overall logistics strategy developed by specialist to meet firm’s expressed goals

• Less control over all aspects of logistics, including strategy

• Possible disruption of customer relationships; leaks of confidential information

• Potential loss of quality or higher cost if 4PL deals with favored providers

4PL tradeoffs

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Postponement

• Manufacturing Postponement- Computer assemblies- Paint Industry

• Logistical Postponement

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Warehouse selection

• Where ?• How many ?• Who owns ?

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Warehousing

Where should warehouses be located?

Services

Consider available space, soil support, nearness to market; not restricted to warehouse districts

Availability of services is most important factor

Services, location (urban costs more), taxes, insurance, transportation (tradeoff with cheaper land)

Tax incentives, infrastructure support, trained and available workforce at correct wages

Local tax laws can have an impact on location

Costs

Regulations

Neighborhood

Community inducements

Warehousing

Where should warehouses be located?

Accessible

What is the lead time that the customer gives

Is it easily accessible ? Availability of Power

transportation availability. Railway siding.

Is it expandable ?

Does the Government encourage creation of warehouses ?

Transport

Government Support

Customer Need

Potential for Expansion

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Number of facilities

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RequiredNumber of Facilities

Desired Response Time


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InventoryCosts

Number ofFacilities

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TransportationCosts

Number ofFacilities


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FacilityCosts

Number ofFacilities

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Number ofFacilities

Total Logistics Costs

Response time

The Impact of Increasing the Number of Warehouses

• Improve service level due to reduction of average service time to customers

• Increase inventory costs due to a larger safety stock

• Increase overhead and set-up costs

• Reduce transportation costs in a certain range

– Reduce outbound transportation costs

– Increase inbound transportation costs

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Warehousing

The effects of adding warehousesCustomer service improves.

Transportation costs decline with shorter distances to travel.

Rapid delivery may improve competitive position.

Decentralized system allows better service to small customers.

Inventory cost

Pro

Total cost

Cost of lost sales

Transportation cost

Warehousing cost

Number of Warehouses

Inventory costs rise with redundant functions, safety stock.

Setup and overhead costs go up.

Total cost

Con

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Warehousing

Who should own the warehouses?

Private Public Contract

Structure Firm itself owns warehouses

Independent ownership; fee for services

Independent ownership; longer-term relationship

Benefits Control; no markup; strongest market presence

Flexibility; economies of scale and lower labor costs

Tailored services; lower costs; flexibility; access to more markets; stable relationship

Drawbacks Inflexible budget; depreciation; illiquidity of asset

Loss of control; less market presence; markups

Loss of control; less market presence; markups

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Types of warehouses

• Bonded Warehouse

• Field Warehouses

• Cold Storages

• Agricultural warehouses

• Distribution Warehouses

• Export-Import warehouses

OR models for facility decisions

• Facility location model– minimize transportation and facility costs

• Vehicle routing– minimize transportation and vehicle costs

• Location-routing: – combination of facility location and vehicle routing

• Location-inventory– minimize transportation, facility and inventory holding costs

• Inventory-routing – minimize transportation, vehicle and inventory costs

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10 rules of logistics optimization

• Suggestions by Don Ratliff– Founder of CAPS and Velant

• Strategic level decisions– Facility location

• Execution level decisions– Loads, routes, schedules for trucks that deliver

products

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• Objectives must be quantifiable and measurable– If you can’t (don’t) measure it, how do you know

when it is accomplished?

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• Models must faithfully represent the actual logistic processes– Weight and volume of products may be what is

needed, not just weight

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• Data must be accurate, timely, and comprehensive– There’s a tendency to use old data even after it

has run its course

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• Integration must supply fully automated data transfer– Manual data hampers accuracy and timeliness

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• Optimized plans must be delivered in a form that facilitates execution, management and control– Get the solutions to the people that will use them

in a practical way

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• Algorithms must intelligently exploit individual problem structure– Say that there are 40 shipments on a truck

• There are 40 ways the deliveries can be made– It’s not possible to calculate all of the possibilities– Algorithms take advantage of the special structure to

reduce the complexity to a manageable size

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• Computing platforms must have sufficient power to produce optimum plans in the time required– Too much data, too little time

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• People responsible for the technology must have the domain and technology expertise required to support the models, data, and optimization engines– Optimization engines are very complex so you

need a rocket scientist

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• Business processes must support optimization and have the ability to continuously improve

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• Return on investment must be provable, considering the total cost of technology, people, and operations

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The Strategic Importance of Logistics 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

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The Strategic Importance of Logistics Network Design: Changing Customer Service

Requirements• A customer’s business has changed and the company may

need to change some aspect(s) of its service to those customers.

• Some customers will be looking for new supply chain partners and the company needs to be responsive to these potential new business partners.

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The trend

• Towards third party logistics• Towards sharing of warehouses.• Towards a dynamic set up, based on customer

segmentation.• Towards postponement, cross docking. • Towards automated material handling system• GPS• ECommerce

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Questions?

8 logistics network design

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