The document discusses logistics network design and optimization. The objective is to minimize annual system-wide costs while meeting service level requirements. This involves determining the optimal configuration of facilities, locations, sizes, allocations and transportation modes. The network consists of vendors, manufacturing centers, warehouses, distribution centers and customers. Key considerations are balancing production, inventory, facility and transportation costs against service levels.

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Logistics Network Design
Objective of Logistics Networking
Design or configure the logistics network
so as to minimize annual system-wide cost
subject to a variety of service level
requirements
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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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Customers,
Field demand
Warehouses: centers
Sources: Regional sinks
plants Warehouses: stocking
vendors stocking points
ports points
Supply
Inventory &
warehousing
costs
Production/
purchase Transportation
costs Transportation
costs costs
Inventory &
warehousing
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 products
2. Location of customers, stocking points and sources
3. Demand for each product by customer location
4. Transportation rates
5. Warehousing costs
6. Shipment sizes by product
7. Order patterns by frequency, size, season, content
8. Order processing costs
9. 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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Length and Breadth
Length
Mfr. Distributor
Wholesaler Retailer
Breadth
Distributor Wholesaler Retailer
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Manufacturer Storage with
Direct Shipping
Manufacturer
Retailer
Customers
Product Flow
Information
Flow
In-Transit Merge Network
Factories
Retailer In-Transit Merge by
Carrier
Customers
Product Flow
Information Flow
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Distributor Storage with
Carrier Delivery
Factories
Warehouse Storage
by
Distributor/Retailer
Customers
Product Flow
Information
Flow
Distributor Storage with
Last Mile Delivery
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
Information
Flow
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B
E A
G
F D
C
Hub and Spoke System
Point to Point 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 -High Inventories (Due
warehouse to large lot size )
-Simple to Coordinate - Significant receiving
expense
Direct Shipping with -Lower transportation Increased coordination
milk runs cost for small lots complexities
- Lower inventories
All shipments via -Lower inbound -Increased inventory
central DC transportation costs cost
through consolidation - Increased handling at
DC
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Comparison ( contd )
Network Structure Pros Cons
All shipments through -Very low inventory Increased coordination
central DC with cross requirement complexity
docking - Lower transportation
cost through
consolidation
Shipping via DC using milk - Lower inbound - Further increase in
runs transportation cost for coordination complexity
small lots
Tailored network -Transportation choice Highest coordination
best matches needs of complexity
individual product and
store
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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
Retail Storage Manufacturer Manufacturer Distributor Distributor Manufacturer
with Customer Storage with Direct Storage with In- Storage with storage with storage with
Pickup Shipping Transit Merge Package Carrier last mile pickup
Delivery delivery
Response Time 1 4 4 3 2 4
Product Variety 4 1 1 2 3 1
Product Availability 2 3
4 1 1 1
Customer Experience 5
5 4 3 2 1
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Order Visibility 1 4 3 2 6
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility & Handling 6 1 2 3 4 5
Information 1 4 4 3 2 5
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Linking Product Characteristics and Customer
Preferences to Network Design
Retail Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
Storage with Storage with Storage with In- with Package Carrier with last mile storage with
Customer Direct Shipping Transit Merge Delivery delivery pickup
Pickup
High demand product
+2 -2 -1 0 +1 -1
Medium demand product
+1 -1 0 +1 0 0
Low demand product
-1 +1 0 +1 -1 +1
Very low demand product
-2 +2 +1 0 -2 +1
Many product sources
+1 -1 -1 +2 +1 0
High product value
-1 +2 +1 +1 0 -2
Quick desired response
+2 -2 -2 -1 +1 -2
High product variety
-1 +2 0 +1 0 +2
Low customer effort
-2 +1 +2 +2 +2 -1
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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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Logistics Service Providers
High
Physical Contracts Integrated Contract
Logistical Services Logistics
- Integrated Warehousing -
Physical Services
- Integrated Carrier
-Dedicated Contract Carrier Management and
-Dedicated warehousing transportation
Basic Services Management Contracts
-Common Carriage and Logistics Services
- Public Warehousing - Traffic Management
- Warehouse Management
Low
--Import Export Management
Low Management Services 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
Import into Customs Ware-
Supplier India Clearance house
Customer
FF CHA Courier Contract Courier
A B C D E
Fourth Party Logistics
Import into Customs Ware-
Supplier India Clearance house
Customer
FF CHA Courier Contract Courier
F F F F F
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3PL and 4PL
3PL tradeoffs
Potential Benefits Risks
• Improved focus on areas of • Less control over some
competence aspects of logistics, including
• More current technology; more overall strategy
technological flexibility • Possible disruption of
• More efficient warehousing customer relationships; leaks
(economies of scale) of confidential information
• Improved customer service • Potential for inefficient
service—at a price
• More workforce flexibility
3PL and 4PL
4PL tradeoffs
Potential Benefits Risks
• Improved focus on areas of • Less control over all aspects
competence of logistics, including strategy
• Higher-quality logistics, lower • Possible disruption of
costs, or both customer relationships; leaks
• Greater business flexibility of confidential information
• Overall logistics strategy • Potential loss of quality or
developed by specialist to higher cost if 4PL deals with
meet firm’s expressed goals favored providers
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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?
Neighborhood Consider available space, soil support, nearness to
market; not restricted to warehouse districts
Services Availability of services is most important factor
Costs Services, location (urban costs more), taxes, insurance,
transportation (tradeoff with cheaper land)
Community Tax incentives, infrastructure support, trained and
inducements available workforce at correct wages
Regulations Local tax laws can have an impact on location
Warehousing
Where should warehouses be located?
Customer What is the lead time that the customer gives
Need
Accessible
Is it easily accessible ? Availability of Power
Transport transportation availability. Railway siding.
Potential for
Expansion Is it expandable ?
Government Does the Government encourage creation of
Support warehouses ?
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Number of facilities
Required
Number of
Facilities
Desired
Response
Time
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Number of facilities
Inventory
Costs
Number of
Facilities
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Number of facilities
Transportation
Costs
Number of
Facilities
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Number of facilities
Facility
Costs
Number of
Facilities
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Number of facilities
Response time
Total Logistics Costs
Number of
Facilities
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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 warehouses
Customer service improves. Total
Pro
Transportation costs decline with cost
shorter distances to travel. Total cost
Rapid delivery may improve Inventory cost
competitive position.
Warehousing
Decentralized system allows cost
better service to small customers.
Transportation
Inventory costs rise with cost
Con
redundant functions, safety
stock. Cost of lost
sales
Setup and overhead costs go
up.
Number of Warehouses
Warehousing
Who should own the warehouses?
Private Public Contract
Structure Firm itself owns Independent Independent ownership;
warehouses ownership; fee for longer-term relationship
services
Benefits Control; no markup; Flexibility; economies of Tailored services; lower
strongest market scale and lower labor costs; flexibility; access to
presence costs more markets; stable
relationship
Drawbacks Inflexible budget; Loss of control; less Loss of control; less
depreciation; market presence; market presence;
illiquidity of asset markups markups
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Types of warehouses
• Bonded Warehouse
• Field Warehouses
• Cold Storages
• Agricultural warehouses
• Distribution Warehouses
• Export-Import warehouses
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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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10 rules of logistics optimization
• 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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10 rules of logistics optimization
• 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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10 rules of logistics optimization
• 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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10 rules of logistics optimization
• Integration must supply fully automated data
transfer
– Manual data hampers accuracy and timeliness
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10 rules of logistics optimization
• 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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10 rules of logistics optimization
• 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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10 rules of logistics optimization
• Computing platforms must have sufficient
power to produce optimum plans in the time
required
– Too much data, too little time
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10 rules of logistics optimization
• 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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10 rules of logistics optimization
• Business processes must support optimization
and have the ability to continuously improve
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10 rules of logistics optimization
• 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?
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