8 logistics network design


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8 logistics network design

  1. 1. 07-08-2011 Logistics Network DesignObjective 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 1
  2. 2. 07-08-2011 The Logistics NetworkThe Logistics Network consists of:• Facilities: Vendors, Manufacturing Centers, Warehouse/ Distribution Centers, and Customers• Raw materials and finished products that flow between the facilities. 3 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 2
  3. 3. 07-08-2011 Network Design: Key IssuesThe 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. 5 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.) 6 3
  4. 4. 07-08-2011 Data for Network Design1. 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 7 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 8 4
  5. 5. 07-08-2011Factors 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 9Factors 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 10 5
  6. 6. 07-08-2011 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? 11 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? 12 6
  7. 7. 07-08-2011 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 13 Length and Breadth Length Mfr. Distributor Wholesaler RetailerBreadth Distributor Wholesaler Retailer 7
  8. 8. 07-08-2011 Manufacturer Storage with Direct Shipping Manufacturer Retailer Customers Product Flow Information Flow In-Transit Merge Network FactoriesRetailer In-Transit Merge by Carrier Customers Product Flow Information Flow 8
  9. 9. 07-08-2011Distributor Storage with Carrier Delivery Factories Warehouse Storage by Distributor/Retailer Customers Product Flow Information FlowDistributor Storage with Last Mile Delivery Factories Distributor/Retailer Warehouse Customers Product Flow Information Flow 9
  10. 10. 07-08-2011 B E A G F D C Hub and Spoke System Point to Point System 19 Power Centre• Who controls the channel, distributor, manufacturer or the retailer?• Is there a trend towards supermarkets? 20 10
  11. 11. 07-08-2011 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 21 Comparison ( contd )Network Structure Pros ConsAll shipments through -Very low inventory Increased coordinationcentral DC with cross requirement complexitydocking - Lower transportation cost through consolidationShipping via DC using milk - Lower inbound - Further increase inruns transportation cost for coordination complexity small lotsTailored network -Transportation choice Highest coordination best matches needs of complexity individual product and store 22 11
  12. 12. 07-08-2011 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 23 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 deliveryResponse Time 1 4 4 3 2 4Product Variety 4 1 1 2 3 1Product Availability 2 3 4 1 1 1Customer Experience 5 5 4 3 2 1 5Order Visibility 1 4 3 2 6Returnability 1 5 5 4 3 2Inventory 4 1 1 2 3 1Transportation 1 4 3 2 5 1Facility & Handling 6 1 2 3 4 5Information 1 4 4 3 2 5 24 12
  13. 13. 07-08-2011 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 PickupHigh demand product +2 -2 -1 0 +1 -1Medium demand product +1 -1 0 +1 0 0Low demand product -1 +1 0 +1 -1 +1Very low demand product -2 +2 +1 0 -2 +1Many product sources +1 -1 -1 +2 +1 0High product value -1 +2 +1 +1 0 -2Quick desired response +2 -2 -2 -1 +1 -2High product variety -1 +2 0 +1 0 +2Low customer effort -2 +1 +2 +2 +2 -1 25 When to Outsource • Is Logistics a core competency? • Any measurable advantage? • Management Commitment • Capabilities of the service provider. • Cheaper. 26 13
  14. 14. 07-08-2011 Logistics Service Providers HighPhysical Contracts Integrated ContractLogistical Services Logistics - Integrated Warehousing - Physical Services - Integrated Carrier-Dedicated Contract Carrier Management and-Dedicated warehousing transportationBasic 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 28 14
  15. 15. 07-08-2011 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 15
  16. 16. 07-08-2011 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 16
  17. 17. 07-08-2011 Postponement• Manufacturing Postponement - Computer assemblies - Paint Industry• Logistical Postponement 33 Warehouse selection• Where ?• How many ?• Who owns ? 34 17
  18. 18. 07-08-2011 WarehousingWhere should warehouses be located?Neighborhood Consider available space, soil support, nearness to market; not restricted to warehouse districtsServices Availability of services is most important factorCosts Services, location (urban costs more), taxes, insurance, transportation (tradeoff with cheaper land)Community Tax incentives, infrastructure support, trained andinducements available workforce at correct wagesRegulations Local tax laws can have an impact on location WarehousingWhere should warehouses be located?Customer What is the lead time that the customer givesNeedAccessible Is it easily accessible ? Availability of PowerTransport transportation availability. Railway siding.Potential forExpansion Is it expandable ?Government Does the Government encourage creation ofSupport warehouses ? 18
  19. 19. 07-08-2011 Number of facilities Required Number of Facilities Desired Response Time37 Number of facilities Inventory Costs Number of Facilities38 19
  20. 20. 07-08-2011 Number of facilities Transportation Costs Number of Facilities39 Number of facilities Facility Costs Number of Facilities40 20
  21. 21. 07-08-2011 Number of facilities Response time Total Logistics Costs Number of Facilities41 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 42 21
  22. 22. 07-08-2011 Warehousing The effects of adding warehouses Customer service improves. TotalPro 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 costCon redundant functions, safety stock. Cost of lost sales Setup and overhead costs go up. Number of Warehouses WarehousingWho should own the warehouses? Private Public ContractStructure Firm itself owns Independent Independent ownership; warehouses ownership; fee for longer-term relationship servicesBenefits Control; no markup; Flexibility; economies of Tailored services; lower strongest market scale and lower labor costs; flexibility; access to presence costs more markets; stable relationshipDrawbacks Inflexible budget; Loss of control; less Loss of control; less depreciation; market presence; market presence; illiquidity of asset markups markups 44 22
  23. 23. 07-08-2011 Types of warehouses• Bonded Warehouse• Field Warehouses• Cold Storages• Agricultural warehouses• Distribution Warehouses• Export-Import warehouses 45 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 46 23
  24. 24. 07-08-2011 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 47 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? 48 24
  25. 25. 07-08-2011 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 49 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 50 25
  26. 26. 07-08-2011 10 rules of logistics optimization• Integration must supply fully automated data transfer – Manual data hampers accuracy and timeliness 51 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 52 26
  27. 27. 07-08-2011 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 53 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 54 27
  28. 28. 07-08-2011 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 55 10 rules of logistics optimization• Business processes must support optimization and have the ability to continuously improve 56 28
  29. 29. 07-08-2011 10 rules of logistics optimization• Return on investment must be provable, considering the total cost of technology, people, and operations 57 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 58 29
  30. 30. 07-08-2011 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. 59 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 60 30
  31. 31. 07-08-2011Questions? 31