Logistics
network
Vittorio Maniezzo
University of Bologna
Vittorio Maniezzo - University of Bologna - Transportation Logistics
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Logistics
• Logistics is concerned with the organization,
movement and storage of material and people.
• The term logistics was first used by the military
to describe the activities associated with
maintaining a fighting force in the field and, in
its narrowest sense, describes the housing of
troops.
• Over the years the meaning of the term has
gradually generalized to cover business and
service activities.
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Logistics
• The domain of logistics activities is providing
the customers of the system with the right
product, in the right place, at the right time.
• The key issue is to decide how and when raw
materials, semi-finished and finished goods
should be acquired, moved and stored
• “Logistics is the second largest employer of
college graduates” ( R.G.Kasilingam, 1998)
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Logistics costs
Percentage of GDP in EU countries.
( T, transportation; W, warehousing;
I, inventory; A, administration)
Sector
T
W
I
A
Total
Food/beverage
3.7
2.2
2.8
1.7
10.4
Electronics
2.0
2.0
3.8
2.5
10.3
Chemical
3.8
2.3
2.6
1.5
10.2
Automotive
2.7
2.3
2.7
1.2
8.9
Pharmaceutical
2.2
2.0
2.5
2.1
8.8
Newspapers
4.7
3.0
3.6
2.1
13.4
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Key logistics functions and
activities
Logistics function
Activities/decisions
1) Purchasing
Vendor selection, order processing, order
follow-up
2) Inventory control
Order quantity, ordering frequency,
inventory valuation, inventory disposal
3) Facilities location
and layout
Number and location of facilities, layout of
components within a facility
4) Transportation
Fleet sizing, routing and scheduling, crew
planning, hub or break-bulk terminal
location, mode and carrier selection
Selection of material handling equipment,
capacity planning, path design for
5) Intra-facility logistics automated guided vehicles, warehouse
design in terms of location and space for
items, order picking rules
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1 - Purchasing
• Purchasing includes all the activities that ensure the
availability of materials on time.
• One of the major challenges is selecting the right vendors
for a raw material, component, part or product and
determining the amount of order to be placed on each
vendor.
• The quality of parts received from vendors and the
timeliness of supply have a significant impact on the ability
of a company to meet the demands of its customers.
• Vendor selection is based on several conflicting criteria such
as price, quality, delivery time and service.
• Other important activities of the purchasing function include
order processing, following up the orders and rating of
vendors based on their past performance
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2 - Inventory control
• Inventory planning and control typically follow vendor
selection.
• Inventory control decisions focus on the order quantity
and the timing between orders. This is done based on
lead time, ordering cost, inventory carrying cost,
transportation cost, shortage cost, in-transit inventory
carrying cost and the level of service in terms of
allowable inventory or shortage.
• The objectives are to minimize the total cost and
provide maximum customer service. Since these two
are often conflicting, an economic trade-off is needed
between inventory levels and customer service levels.
• Inventory control decisions include the number of
stocking locations, product mix at stocking points and
the type of inventory strategy.
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3 - Facilities planning
•Facilities planning addresses two major logistics decisions
that are generally made at the initial stages of planning a
logistics system: facilities location and facilities layout.
•Layout and location of facilities play a vital role in minimizing
the total cost of logistics. Moreover, the location of facilities
has a huge impact on land and construction costs, local
taxes and insurance, labor availability and costs and on the
costs of transportation to and from other facilities.
•The number, size and location of the facilities have a
significant impact on inventory-related costs and customer
service levels.
•The layout of a facility has an impact on intra-facility
logistics costs such as material handling costs and the costs
of material handling equipment.
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4 - Transportation
• Transportation costs are the largest component of
logistics cost.
• Transportation includes both inbound movement from
the sources of raw materials or parts direct to plants or
through warehouses and outbound movement of
finished products or components from plants to
customers directly or through distribution centers.
• Transportation encompasses a wide spectrum of
planning and operational problems.
• Planning problems include fleet sizing, vehicle
routing, crew planning, network design and hub
and terminal location.
• Operational problems include crew and vehicle
scheduling, dispatching and reservation control.
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4 - Transportation: planning
Fleet sizing comprises sizing of transportation resources
such as trucks, locomotives, cars, aircraft and boats and
vessels.
Vehide routing focuses on the determination of optimal
routings for the various origin-destination traffic,
considering route structure, distances and route
capacity. Selection of transportation mode and carrier is
part of the routing plan but is most often done
separately to manage problem size and complexity.
Crew planning involves the determination of the staffing
requirements to meet the overall fleet operating plan.
Network design typically includes the development of
routes, schedules and transportation modes and
determining the hub locations.
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5 - Intra-facility logistics
• This is the material handling within a facility (plant or warehouse).
Intra-facility logistics depends on layout, material handling
equipment, stock locations in the warehouse, operating rules for
handling equipment movement and order picking strategies.
• Typically, a part spends almost 50% of its manufacturing time in
moving between machines and storage. Several planning and
operational problems for minimizing intra-facility logistics costs.
• The first and foremost is the selection of material handling
equipment in order to meet the requirements in terms of weight,
volume and frequency of movement and size, value and
packaging of the item.
• The next step is to determine the amount of equipment of each
type required and its location if it is fixed-position equipment. If it is
flexible-path equipment, then a route structure must be designed.
• The operational problems include scheduling of parts and
materials to material-handling equipment and vehicles and
assigning different types of vehicles between stations.
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The logistics network
A logistics network (system) is made up of a set of
facilities linked by transportation services.
Facilities are sites where materials are processed, e.g.
manufactured, stored, sorted, sold or consumed.
They include manufacturing and assembly centers,
warehouses, distribution centers (DCs),
transshipment points, transportation terminals,
retail outlets, dump sites, etc.
Transportation services move materials between
facilities using vehicles and equipment such as
trucks, tractors, trailers, crews, pallets, containers,
cars and trains.
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Logistics network design
Objective: determine the number, location, equipment and
size of new facilities, as well as the divestment,
displacement or downsizing of facilities.
• The objectives and constraints vary depending on the type
of facilities. The aim usually is the minimization of the
annual total logistics cost subject to side constraints related
to facility capacity and required customer service level.
• Usually, the cost to be minimized is associated with facility
operations (manufacturing. storage, sorting, consolidation,
selling, incineration, parking, etc.), and to transportation
between facilities, or between facilities and users.
• Different objectives, such as achieving equity in servicing
users, may have to be considered
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Design of a logistics system
The design of a logistics system is based on four major planning
areas: customer service levels, location decisions, inventory
planning and transportation management.
• Customer service in logistics includes product availability,
lead time to obtain the product, condition of the product
when received and accuracy of filling an order.
• Location decisions relate to the placement of facilities such
as warehouses, terminals, stores and plants and the
assignment of demands to supply points.
• Inventory planning encompasses setting up inventory levels
and inventory replenishment schemes.
• Transportation management deals with transportation
mode, fleet size, route selection, vehicle scheduling and
freight consolidation.
All four areas are economically interrelated
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Logistics network modeling
Some of the complexities involved in designing a logistics
system with use of network modeling are as follows:
• the integration of vehicle routing and scheduling;
• the uncertainty in demand, which requires demand to
be forecasted;
• the identification and development of the appropriate
type of cost functions;
• the dynamic nature of the demand and cost functions
over a period of time;
• dependency relationships between inventory and
transportation decisions;
• the size of the problem
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Logistics network modeling
Logistics network modeling tools attempt to include as much
detail as possible but still address problem in an integrated
manner. Some of the questions answered by an integrated
logistics network model are as follows:
• the number of warehouses, their location, ownership
(private or public) and their size;
• the allocation of customer demand to supply points
(warehouses or plants); allocation to single or multiple
supply points;
• the amount of inventory to be maintained at various
locations;
• the type of transportation services to use;
• the level of customer service to be provided.
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How Logistics Systems Work
Logistics systems are made up of three main
activities:
1. order processing,
2. inventory management
3. transportation strategies
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1 - Order processing
• Customers request the products by filling out an order form.
• These orders are transmitted and checked.
• The availability of the requested items and customer's credit
status are then verified.
• Later on, items are retrieved from the stock (or produced),
packed and delivered along with their shipping documentation.
• Finally, customers have to be kept informed about the status of
their orders.
Order processing used to be very time-consuming (up to 70% of
the total order-cycle time), but it has benefited greatly from ICT.
• Bar code scanning allows retailers to rapidly identify the
required products and update inventory level records.
• Laptop and connections allow salespeople to check in real time
whether a product is available in stock and to enter orders.
• EDI allows companies to enter orders for industrial goods
directly in the seller's computer without any paperwork.
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2 - Inventory management
Holding an inventory can be very expensive:
• First, a company that keeps stocks incurs an
opportunity (or capital) cost represented by the
return on investment the firm would have
realized if money had been better invested.
• Second, warehousing costs must be incurred,
whether the warehouse is privately owned,
leased or public.
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2 - Inventory management
Several reasons why a logistician may wish to hold inventories.
• Improving service level. Having a stock of finished goods in
warehouses close to customers yields shorter lead times.
• Reducing overall logistics cost. Freight transportation has
economies of scale because of high fixed costs. Rather than
frequently delivering small orders over long distances, it could be
more convenient to satisfy demands from local warehouses.
• Coping with randomness in customer demand and lead times.
Inventories (safety stocks) help satisfy customer demand even if
unexpected peaks of demand or delivery delays occur.
• making seasonal items available throughout the year, by storing
them in warehouses at production time and selling them in
subsequent months.
• Speculating on price patterns. Merchandise whose price varies
greatly during the year can be purchased when prices are low,
then stored and finally sold when prices go up.
• Overcoming inefficiencies in system management: e.g. a
company may hold a stock because it is unable to coordinate
supply and demand.
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2 - Inventory management
The aim of inventory management is to determine stock
levels in order to minimize total operating cost while
satisfying customer service requirements.
A good inventory management policy should take into
account five issues:
• the relative importance of customers;
• the economic significance of the different products;
• transportation policies;
• production process flexibility;
• competitors' policies.
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3 - Transportation services
These services include both local delivery and pick-up operations
as well as over-the-road or trunking services.
Transportation decisions include the mode of transportation,
shipment size and allocation of product flow from source to sink
to various transportation modes.
Each transportation mode has restrictions in terms of capacity
and availability. Other important characteristics to be considered
include transit time, transit time variability, costs and the number
of carriers.
Costs include all fixed and variable transportation costs and intransit inventory costs. Movement of products between two
places, for instance from a plant to a warehouse, may be split
among multiple transportation modes. Within the same mode, it
may be split among different carriers.
The transportation decisions made at the network level are
aggregate in nature and hence will not deal with tactical
decisions such as vehicle routing and scheduling
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3 - Transportation strategies
When distributing a product, three main strategies can
be used: direct shipment, warehousing, crossdocking.
In direct shipment, goods are shipped directly from the
manufacturer to the end-user (the retailers in the case of
retail goods).
Direct shipments eliminate the expenses of operating a
DC and reduce lead times. On the other hand, if a typical
customer shipment size is small and customers are
dispersed over a wide geographic area, a large fleet of
small trucks may be required. As a result, direct
shipment is common when fully loaded trucks are
required by customers or when perishable goods have to
be delivered timely
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Course topics
Of all problem areas involved in optimized logistics
system design and operations, we will consider only
two foremost ones:
1) Warehousing
2) Transportation
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Warehousing
Warehousing is a traditional approach in which goods
are received by warehouses and stored in tanks, pallet
racks or on shelves.
When an order arrives, items are retrieved, packed and
shipped to the customer.
Warehousing consists of four major functions: reception
of the incoming goods, storage, order picking and
shipping.
Out of these four functions, storage and order picking
are the most expensive because of inventory holding
costs and labor costs, respectively.
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Centralized versus
decentralized warehousing
In centralized warehousing, a single warehouse serves the whole
market, while in decentralized warehousing the market is divided
into zones, each of which is served by a different warehouse.
Decentralized warehousing leads to reduced lead times since
warehouses are much closer to customers.
Centralized warehousing has lower facility costs because of
larger economies of scale. In addition, if customers' demands are
uncorrelated, the aggregate safety stock required by a
centralized system is significantly smaller than the sum of the
safety stocks in a decentralized system (risk pooling).
Finally, inbound transportation costs (the costs of shipping the
goods to warehouses) are lower in a centralized system while
outbound transportation costs (the costs of delivering the goods
from the warehouses) are lower in a decentralized system
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Crossdocking
Crossdocking (or just-in-time distribution) is a relatively new
logistics technique that has been successfully applied by
several retail chains.
A crossdock is a transshipment facility in which incoming
shipments are sorted, consolidated with other products and
transferred directly to outgoing trailers without intermediate
storage or order picking. As a result, shipments spend just a
few hours at the facility.
In predistribution crossdocking, goods are assigned to a
retail outlet before the shipment leaves the vendor.
In post-distribution crossdocking, the crossdock itself
allocates goods to the retail outlets.
In order to work properly, crossdocking requires high volume
and low variability of demand (otherwise it is difficult to
match supply and demand).
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Freight transportation
A manufacturer or a distributor can choose among three
alternatives to transport its materials.
• First, the company may operate a private fleet of
owned or rented vehicles (private transportation).
• Second, a carrier may be in charge of transporting
materials through direct shipments regulated by a
contract (contract transportation).
• Third, the company can resort to a carrier that uses
common resources (vehicles, crews, terminals) to fulfill
several client transportation needs (common
transportation).
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Freight consolidation
A common way to achieve considerable logistics cost
savings is to take advantage of economies of scale in
transportation by consolidating small shipments into larger
ones. Consolidation can be achieved in three ways.
• First, small shipments that have to be transported over
long distances may be consolidated so as to transport
large shipments over long distances and small
shipments over short distances (facility consolidation).
• Second, less-than-truckload pick-up and deliveries
associated with different locations may be served by
the same vehicle on a multi-stop route (multi-stop
consolidation).
• Third, shipment schedules may be adjusted forward or
backward so as to make a single large shipment rather
than several small ones (temporal consolidation).
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Freight consolidation
Merchandise is often consolidated into pallets or
containers in order to protect it and facilitate handling
at terminals.
Common pallet sizes are 100 x 120 cm2, 80 x 100 cm2,
90 x 110 cm2 and 120 x 120 cm 2.
Containers may be refrigerated, ventilated, closed or
with upper openings, etc. Containers for transporting
liquids have capacities between 14000 and 20000 L
Type
Size
Tare
Capacity
Capacity
(m3)
(kg)
(kg)
(m3)
ISO 20
5.899 x 2.352 x 2.388
2300
21 700
33.13
ISO 40
12.069 x 2.373 x 2.405
3850
26 630
67.80
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Modes of transportation
There are five basic modes (ship, rail, truck, air and pipeline),
which can be combined in order to obtain door-to-door services.
When selecting a carrier, a shipper must take two fundamental
parameters into account: price (or cost) and transit time.
The cost of a shipper's operated transportation service is the sum
of all costs associated with operating terminals and vehicles. The
price of a transportation service is simply the rate charged by the
carrier to the shipper.
Air is the most expensive mode, followed by truck, rail, pipeline
and ship. Transportation by truck is seven times more expensive
than by train, which is four times more costly than by ship.
Transit time is the time a shipment takes to move between its
origin to its destination (a random variable).
Some modes (e.g. air) have to be used jointly with other modes
(e.g. truck) to provide door-to-door transportation. The standard
deviation and the coefficient of variation (standard deviation over
average transit time) of the transit time are two measures of the
reliability of a service.
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Transport cost dependencies
Transport costs are related with other logistics decision.
• Inventory and transportation costs: fast and frequent
transports are the key for small inventories, while if a
slower mode is used then a higher level of inventory
may be needed. Hence a trade-off is needed to
determine the optimal inventory level.
• Location, transportation mode and carrier decisions
impact one another. Location costs may be lower in
terms of acquisition cost, taxes, insurance, etc. but
transportation rates may be higher
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Logistics Managerial Issues
When devising a logistics strategy, managers aim at a
compromise between three main objectives: capital reduction,
cost reduction and service level improvement.
Capital reduction. Minimize the level of investment in the logistics
system (owned equipment and inventories). This can be
accomplished in a number of ways, for example, by choosing
public warehouses instead of privately owned ones, or by using
common carriers instead of privately owned vehicles. Capital
reduction usually comes at the expense of higher operating costs.
Cost reduction. Minimize the total cost associated with
transportation and storage. For example, one can operate
privately owned warehouses and vehicles (provided that sales
volume is large enough).
Service level improvement. The level of logistics service greatly
influences customer satisfaction which in turn has a major impact
on revenues. Improving the logistics service level may increase
revenues, especially in markets with low-price products where
competition is not based on product features.
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Logistics Decisions
Strategic decisions have long-lasting effects (usually over many
years). They include logistics systems design and the acquisition
of costly resources (facility location, capacity sizing, plant and
warehouse layout, fleet sizing).
Because data are often incomplete and imprecise, strategic
decisions generally use forecasts based on aggregated data.
Tactical decisions are made on a medium-term basis (e.g.
monthly or quarterly) and include production and distribution
planning, as well as resource allocation (storage allocation,
order picking strategies, transportation mode selection,
consolidation strategy).
Tactical decisions often use forecasts based on disaggregated
data.
Operational decisions are made on a daily basis or in real-time
and have a narrow scope. They include warehouse order
picking and vehicle dispatching.
Operational decisions are customarily based on very detailed
data.
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Strategic decisions
1. Determining the appropriate number of
warehouses.
2. Determining the location of each warehouse.
3. Determining the size of each warehouse.
4. Allocating space for products in each
warehouse.
5. Determining which products customers will
receive from each warehouse
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Decision support
Quantitative analysis is essential for intelligent logistics
decision-making. Operations research offers a variety of
planning tools.
There are three basic situations in which quantitative
analysis may be helpful.
• If a logistics system already exists, one may wish to
compare the current system design or current operating
policy to an industry standard (benchmarking).
• One may wish to evaluate specified alternatives. In
particular, one may wish to answer a number of what-if
questions regarding specified alternatives to the existing
system (simulation).
• One may wish to generate a configuration or a policy
which is optimal (or at least good) with respect to a given
performance measure (optimization).
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Benchmarking
Benchmarking consists of comparing the performance of
a logistics, system to a 'best-practice' standard, i.e. the
performance of an industry leader in logistics operations.
The most popular logistics benchmarking is based on the
Supply Chain Operations References (SCOR) model.
The SCOR model makes use of several performance
parameters that range from highly aggregated indicators
(named key performance indicators, KPls) to indicators
describing a specific operational issue
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Simulation
Simulation enables the evaluation of the behavior of a
particular configuration or policy by considering the
dynamics of the system.
For instance, a simulation model can be used to estimate
the average order retrieval time in a given warehouse
when a specific storage policy is used. Whenever a
different alternative is to be evaluated, a new simulation
is run.
Simulation models can easily incorporate a large
amount of details, such as individual customer ordering
patterns. However, detailed simulations are time
consuming and can be heavy when a large number of
alternatives are considered.
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Optimization
The decision-making process can usually be cast as a mathematical
optimization problem.
'Easy' (polynomial) optimization problems can be consistently solved
within a reasonable amount of time even if instance size is large.
This is the case, for example, in linear programming (LP) problems
and, in particular, of linear network flows (NF) problems.
NP-hard optimization problems can be solved consistently within a
reasonable amount of time only if instance size is sufficiently small.
Most integer programming (IP), mixed-integer programming (MIP),
and nonlinear programming (NLP) problems are difficult to optimize.
Unfortunately, several classes of logistics decisions (production
planning, location decisions, vehicle routing and scheduling, etc.)
can only be modeled as IP or MIP problems. This has motivated th e
development of fast heuristic algorithms that search for good but not
necessarily the best solutions.
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