Consumer Packaged Goods Manufacturing Industry

Strategies for the Distribution NetworkCase Study #2

Team: AymarasPan American Advanced Studies Institute

Simulation and Optimization of Globalized Physical Distribution Systems

Santiago, Chile August 17th 2013.

Outline

Company Presentation Problem statement Issues to be addressed Scope of the Problem Assumptions and baseline results Applications of milk runs Conclusion & Recommendations

St. OngeSupply Chain Engineering

Top 100 SC partners SC strategy & Logistics

http://www.stonge.com/default.aspx

Problem Statement

Operations

- Regional presence- Leases expiring for Western USA DCs & Canada. -Salt Lake City serves Western demand.- Consolidated plants.

Demand

Retailers across Canada and USA

Steady forcasted growth

The Problem

Optimize use of capacity of Distribution Centers to

serve Western customers

Reduce total supply chain costs and reduce delivery

times.

Locations

SLC

O

LAM

SLS

Al

ATu

T

NM

MDC

West DC

Mfg

Customers

Problem Statement

Operations

- Regional presence- Leases expiring for Western USA DCs & Canada. -Salt Lake City serves Western demand.- Consolidated plants.

Demand

Retailers across Canada and USA

Steady forcasted growth

The Problem

Optimize use of capacity of Distribution Centers to

serve Western customers

Reduce total supply chain costs and reduce delivery

times.

Demand for the Western Region by States

Issues To Be Addressed - Objectives

• Constraints:Problem bounded for Western distribution network (unknown total demand)

Define the scope of the problem : set of options to be compared and metrics to be used

Calculate and design the distribution network and its main indicators for the each options selected.

Select a distribution center according to the metrics esthablished

Scope of the Problem : The Network

SLC

M

F

SL

S

Al

A

Tu

TN

M

M

PlantsPlants DCs Customers

?

East andCentral NA

WesternNA

D = ??

D = known

Canada

? %

%

%

%

%

%

%

Scope of the Problem : Total Demand Calculation

• Toronto : 100% utilized• SLC = known (sum all western customers)• Assumption :

– Allentown, Atlanta and Tulsa 80% utilized

• Formula : – Turnover = Demand/ average inventory– Average *1.12% = peak inventory = 80% DC sft– DemandDCi =

DC DC Sq FtFixed Cost Per

YearFixed $/sf

Variable $/lb Estimated Demand

Allentown 650 000 4 500 000$ 6,92$ 0,120$ 577 719 156Tulsa 600 000 4 000 000$ 6,67$ 0,130$ 533 279 221

Atlanta 400 000 2 500 000$ 6,25$ 0,110$ 355 519 481Salt Lake City 500 000 3 300 000$ 6,60$ 0,100$ 401 959 872

Toronto 200 000 1 750 000$ 8,75$ 0,115$ 222 199 675total 2 090 677 404

Scope of the Problem : Optimization Model – Inbound Flows

• Inbound flows only– No information on eastern and central customers

• Minimize

• Plants capacity

• DC demand

• Non negativity

Scope of the Problem : Flows Between Plants and DCs (Inbound Flows)

Al

ATu

SLC

T

N

M

SLS

M

Scope of the Problem:Inbound + DC + Outbound

SLC

O

LAM

SLS

Assumptions for the Baseline

• Customers are served at least once a quarter• Square footage for Los Angeles and Oakland is assumed the same

as in existing Salt Lake City DC• Holding costs are the amount of money required to keep the product

in the warehouse– Capital cost, insurance, spoilage, utilities

• Outsourcing Transportation– Infinite fleet of trucks: we can ship as many product as required– Once the trucks deliver the product they do not belong to us anymore: The

cost of empty trucks is not consider

Baseline Results

$-$10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $60,000,000 $70,000,000 $80,000,000 $90,000,000

Salt Lake City

Oakland Los Angeles

Yearly Costs -- Baseline

Fixed and Variable Costs Based on 40 Days of Storage

Outbound Freight

Inbound Freight

14%

32%

15%

13%

26%

BaselineDays between deliveries

[0,1)

[1,7)

[8,14)

[15,30)

[31,120)

• Los Angeles is the best option to locate the DC based on minimal total cost• Transportation Costs account for about 90% of the total cost• Locating the DC in Los Angeles is 8.5% cheaper than locating the DC in Salt Lake City (as it

is done now)• More than half of the customers (about 60%) are visited at least twice a month

Application of Milk Runs

• Assumptions:– Transportation costs only include travel to deliver product (excludes

empty runs)– Customers were ordered based on geography– Distances between customers were determined by mileage on

Google map + 50 mile buffer (adjust for city-city & multiple customers)

– Customer routes based on logical clusters based on distance• Goal: – Group low volume with high volume customers to reduce

transportation

Milk Run Results

• Benefits:– Reduced time between deliveries for low volume customers– Reduced facility costs – only need 20 day supply

• Disadvantages:– Increased transportation cost due to high variation between low and high

volume customers

69.90%

20.39%

6.80% 2.91%

% of Customers in Each Delivery Frequency -- ALL Milk Runs

1+ Times / dayEvery 1- 5 DaysEvery 5 - 10 DaysEvery 10 - 15 DaysEvery 15 - 20 DaysEvery 20 - 25 Days

Salt Lake City Oakland Los Angeles $-

$10,000,000.00 $20,000,000.00 $30,000,000.00 $40,000,000.00 $50,000,000.00 $60,000,000.00 $70,000,000.00 $80,000,000.00 $90,000,000.00

$100,000,000.00

Yearly Costs -- All Milk Runs

Fixed and Variable Costs Based on 20 Days of StorageOutbound FreightInbound Freight

Application of Combination of Milk Runs & Direct Runs

• Assumptions:– All assumptions from milk runs still apply– For each milk run, there are only 300 deliveries/yr– Customers who have enough demand to send 300+ trucks/yr

will receive direct shipments for the remaining demand (“extra” trucks)

• Goals: – Group low volume with high volume customers to

reduce transportation– Reduce transportation costs by allowing high volume

customers to receive “extra” shipments

Milk Run Examples

SLCSLC

SLC

SLC

Example 1Example 2

Combination of Milk Runs & Direct Runs Results• Benefits:– Reduced time

between deliveries for low volume customers

– Reduced facility costs only need 20 day supply

– Reduced transportation costs

Salt Lake City Oakland Los Angeles $-

$10,000,000.00

$20,000,000.00

$30,000,000.00

$40,000,000.00

$50,000,000.00

$60,000,000.00

$70,000,000.00

$80,000,000.00

$90,000,000.00

Yearly Costs -- Some Milk Runs

Fixed and Variable Costs Based on 20 Days of StorageOutbound FreightInbound Freight

$14M/yr in Savings 19.4% Impr

Consider using this approach for Toronto, Allentown, Tulsa, Atlanta

Conclusions

• Los Angeles selected as the single Distribution Center.• Rough sizing for selected DC based on milk runs hybrid approach

(250,000 SqFt).• Inventory levels reduced by 50%• Inbound freight costs reduces from ~41M to ~33M.• Outbound freight costs reduces from ~72M to ~58M.• Impact to transit times more frequent delivery based on milk runs

approach• DC costs reduced by 50%• Savings of 14M a year will offset building costs.• Los Angeles DC for serving Western Canadian demand.• Investigate expansion Mexicali plant to serve Western demand.