Recent Advances in The Management
of Logistics Networks
December 2006
Dr. Richard Pibernik
Professor of Supply Chain Management
MIT-Zaragoza International Logistics Program
rpibernik@zlc.edu.es
Zaragoza
 Logistics hub of high-speed railway, highway exchanges, and an airport
accommodating the world's largest cargo planes
 60% of Spain’s GDP and 20 million consumers within 300 kilometers
(200 miles)
 Host city for World Expo 2008
Ebro river flows past the Basilica
New high speed railway station
© Zaragoza Logistics Center
University of Zaragoza
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Zaragoza Logistics Park
 13-million square meter
(3200 acre) complex of
distribution centers,
transportation, dry port,
and intermodal services
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Zaragoza Logistics Park

Over 100 companies
under contract,
representing over 5,000
jobs

Phase 1 development
complete with over
20 companies already
operating: Zara,
Imaginarium,
MemorySet, & DHL

Phase 2 underway,
rail/intermodal yard
construction started
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Zaragoza Logistics Center (ZLC)
 Created by the Government of Aragón and industry partners as
a research institute associated with the University of Zaragoza
Partnership with the MIT CTL to create the
MIT-Zaragoza International Logistics Program
Spain Ministry of Education & Science named ZLC to lead the
National Center of Excellence in Integrated Logistics
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MIT-Zaragoza Mission
 Deliver world class education and perform leading-edge
research in logistics & supply chain management.
 Impact industry and society via outreach.
 Support the economic growth of the Aragón region.
 Create a new model for academia-industry-government
cooperation.
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World class education
 MIT-Zaragoza Master of Logistics & Supply Chain Management (ZLOG)
• Full-time, 9 month, professional degree taught in English
• Joint MLOG-ZLOG module at MIT and in Spain during IAP
• Builds upon MIT’s top-ranked graduate programs in supply chain
management
• Degree from University of Zaragoza, Certificate from MIT
 MIT-Zaragoza Ph.D. in Logistics and Supply Chain Management
• Coursework in Zaragoza and at MIT
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Leading-edge research
 Hired six full-time faculty members in three years
• Countries: Argentina, Germany, India, Spain, Turkey, US
• Degrees: Harvard Business School, Georgia Tech, Goethe-University
Frankfurt, Univ. of Washington, Univ. of Zaragoza, Univ. of Alabama
and IIT-Delhi
• One open position to be filled this year; one adjunct faculty member
 Visiting faculty
• Harvard, Dartmouth, Syracuse, London Business School, Lund
(Sweden), Instituto de Empresa (Madrid), INCAE (Costa Rica),
Mannheim (Germany), Cologne (Germany)
 3 full time research staff with a PhD
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Research Focus:
Management of Logistics Networks







Design of global supply chains (e.g. in high-tech industries)
Design and integration of logistics parks
Distribution network design
“Humanitarian” supply chains (HIV/Malaria treatment)
Cash Logistics network design
But also: new technologies in logistics (e.g. Auto-ID)
Future of Supply Chain Research (SC2020 Project)
 In the following: some examples of research projects
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Global Supply Chains in the High-Tech Industry
Risk pooling
contract with
major customer
Joint product
design team
VMI with major
supplier
Plant for
specialized
products
Global Procurement
Other
suppliers
Supply
intermediary



3PL warehouse
Other
customers
Logistics
Services
Provider
Strategic
carrier
Contract
Manufacturer
Collaborative
forecasting
team
Joint venture in
an emerging
market
Alliance with
competitor who
complementary
services
Forces: globalization, outsourcing, product proliferation, customer demands,
communication capabilities, etc.
Examples: high tech, fashion, etc.
Product design, network design, and coordination capabilities drive competitive
advantage
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Case Study: Telecommunications Industry
 How does the OEM strategically invest in and allocate
capacities among partners and locations?
 Focus on the circuit pack supply chain
Note: Pictures of equipment captured from the internet by the presenter
are representative, but not the actual products studied
 Bell Labs Ireland: Lou Manzione
 MIT-Zaragoza Faculty: Richard Pibernik, Jarrod Goentzel
 MIT-Zaragoza Students: Joseph Pruett, Brett Thiessen
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Specialized Testing and Remanufacturing
Self-Embedded
Testing could be
developed
Sourcing
Delivery
Testing
Manufacturing
(Assembly)
Remanufacturing
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Strategic Deployment Among Partners
0.25
1.00
0.19
0.04
0.17
0.12
Test Sets: $1-2 million each
Zaragoza Logistics
Should the OEM©develop
a Center
self-testable product?
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Example Network Design
Component
Suppliers
Assembling &
Testing
Warehouses
Customer
Regions
NA
CALA
Europe
ME/A
E.Asia
S.Asia
Assemble Standard Product
Test Capability
Center
Remanufacturing
flow
Assemble Self Tested Product© Zaragoza Logistics
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Supply and Demand Complications
Yield at different locations
 Demand can be very volatile, based on a handful of large
contracts
 Assembly requests outside a range around the contracted
amount result in penalties
 Assembly cannot always occur
in low cost regions due to
local content requirements
 New products/processes are
deployed frequently and can
strongly impact the test yield
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Parameters
 30 month horizon
 Cost parameters, yield and demand scenarios based on
realistic data
 Assembly quantity allocations among partners is given
Assembly Cost
Test Cost
Rework Cost
Assembly Allocation
(% of Overall
Contracted Capacity)
China
4.1%
1.7%
2.8%
Malaysia
12.1%
5.0%
8.3%
Czech
19.2%
7.9%
13.1%
Poland
25.7%
10.5%
17.5%
Mexico
17.1%
7.0%
11.7%
USA
100.0%
40.9%
68.2%
20%
40%
5%
5%
10%
20%
Costs are relative to assembly in USA
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Model
 Model fixed costs of test set installation and
variable costs of material flow
 Use a MIP with the following objective function:
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Results for Test Set Deployment
 Despite additional shipping costs, it is not optimal to deploy
test sets at each location, but instead at four locations
 Cost of completely centralizing test sets is >10% above the
optimal
Optimal
Centralized
2 Location
3 Location
China
Malaysia
Czech. Rep.
Mexico
Malaysia
China
Malaysia
USA
China
Malaysia
USA
Test Sets
9
6
1
3
18
0
15
6
12
5
4
Testing
48%
30%
6%
16%
100%
0%
89%
11%
70%
27%
4%
Rework
94%
0%
0%
6%
100%
10%
90%
0%
100%
0%
0%
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Impact of Self-Embedded Testing
 If the incremental cost for self-testing (as a percent of COGS) is
Share of Self-Testable
Product
• < 1.5%, then self-testing is deployed at all manufacturing partners
• > 6.5%, then conventional testing is deployed as in our previous scenarios
• 3.5% to 6.5%, then a small amount of self-testable product is produced to
balance supply and demand while avoiding the fixed investment for an
additional conventional test set
• 1.5% to 3.5%, then it is optimal to deploy a mixed testing strategy with
self-testing capabilities in high cost regions and conventional testing in low
cost regions
100%
Volatile Demand (VC)
Stable Demand (SC)
80%
60%
40%
20%
0%
1.5%
2.5%
3.5%
4.5%
5.5%
6.5%
Incremental Product Cost (% of COGS)
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Transportation Cost Analysis
Global shipping cost increases shifts testing from China to…
60%
China
Malaysia
50%
Czech Rep.
Share of Global Testing
Malaysia (large assembly site)
Mexico
40%
30%
Step changes reflect redeployment
of test sets – the OEM can adjust
testing capacity in discrete
increments across its partners
20%
Mexico (close to US demand)
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Global Shipping Cost Increase
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Labor Cost Analysis
Labor cost increases in Asia shifts Malaysia testing to…
80%
Share of Global Testing
70%
60%
China
50%
China, which retains comparative
advantage as labor cost increases
simultaneously in both locations
40%
Malaysia
Czech Rep.
Mexico
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Labor Cost Increase in Asia
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Volatile commodity and labor prices impact the
total supply chain
 Energy Cost
• Transportation costs
• Material costs (e.g., oil-based
materials)
• Production operating costs
• Packaging costs
Want lowest total landed cost
•
•
•
•
•
•
•
 Other Commodities
 Labor Cost
Facility
Labor
Raw Materials
Production
Inventory
Transportation
Duties/Taxes
Network Effects are complex
 Land Cost
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Long-term Research Project
 Supply Chain 2020 is a pioneering project mapping innovations to
successful supply chains as far into the future as the year 2020.
• Phase I
– Define excellent supply chains
– Identify principles that drive excellent supply chain practices
• Phase II
– Create scenarios of the future: technology, regulation, consumer expectations,
environmental pressures, etc.
– Determine how future supply chains should be designed to be excellent in
various scenarios
– Create a roadmap of actions organizations should take in order to be prepared
 Collaborators
• Industry Advisory Council
• European Advisory Council
• Academic Partners
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Supply Chain 2020 Advisory Council
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Zaragoza Supply Chain Summit 2007
March 21-22, 2007  Zaragoza, Spain
Theme: Supply Chain Innovation
http://www.zlc.edu.es/summit07
Susan Hockfield
President, MIT
Robert W. Moffat
Sr. VP, Integrated Supply Chain, IBM
LaVerne H. Council
CIO, Johnson & Johnson
Diego del Alcázar
President, Instituto de Empresa
Robert A. Willett
CIO, Best Buy
CEO, Best Buy International
Presidents of the Cotec Foundations
of Spain, Portugal, and Italy
More questions?
goentzel@mit.edu
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