Management Support Systems
Strategic Logistics Network
Design Modeling
Strategic Logistics Network
Design Modeling
What
Planning Horizons
Target Issues
Network Modeling Basics
Building Blocks
Structures
Applications to Logistics Networks
Modeling Targets
Validity of Integrated Logistics
Why
Contemporary Requirements
Impediments
How
Ten Steps To Success
Example Analysis
Choosing the Right Solver
What?
Planning Horizons
Planning Horizons
• Operational: immediate to one week
- shipment planning/dispatching
- production scheduling
• Tactical: one week to one year
- production planning
- MRP/DRP/forecasting
• Strategic: one year to multiple years
- network design
- fleet sizing
• From operational to strategic
- term of resource commitment increases
- speed of effecting change decreases
What?
Target Issues
System Structure Issues
•
•
•
•
•
Number and Location of Raw Material Suppliers
Number and Location of Plants
Number and Location of Production Lines
Number and Location of DCs
Assignment of
- Plants to Suppliers
- DCs to Plants and Other DCs
- Customers to Plants or DCs
Facility Ownership Issues
• Owned
• Leased
• Public
Facility Mission Issues
• Raw Material Suppliers
- Procurement Levels
- Costs
- Capacities
• Plant Locations
- Manufacturing Levels
• intermediate products
• finished products
- Costs
- Capacities
• DC Locations
- Throughput Levels
- Costs
- Capacities
“What If” Issues
• Business Environment Issues
- Economic Climate
• inflation
• regulation
- Competitive Pressure
• demand forecasts
• market share changes
- Disaster Planning
“What-If” Issues
• Business Decision and Policy Issues
-
Product Introductions/Deletions/Changes
Facility Capacity Changes
Transportation Policy Analysis
Multi-division Distribution System Merger
Alternative Echelon Structures
Implementation Priority Analysis
“What-If” Issues
• Sensitivity Issues
- Cost Vs Customer Service
- Cost Vs Number of DCs
- Parametric Analysis of Any input
What?
Network Modeling Basics
Building Blocks
Network Model Building Block: Node
• Supply Node (source nodes, origin nodes)
- location where commodities originiate
- examples
• raw material suppliers (raw materials)
• plants/vendors/copackers (intermediate products, finished
products)
• Transshipment Node
- location through which commodities flow
- examples
• DCs
• pools/crossdocks
• Demand Node (sink nodes, destination nodes)
- location where commodities consumed
- examples
• plants/vendors/copackers (raw materials, intermediate products)
• customers (finished products)
Network Model Building Block: Arc
• Connects two nodes
• Represents an activity or process
• Optional Attributes
- cost per unit of flow
- lower flow limit (capacity)
- upper flow limit (capacity)
• Examples
-
procurement activity
production process
DC handling/ storage activity
transportation flow
What?
Network Modeling Basics
Structures
Network Example 1
Two Echelons
Arc
Source Node
Destination Node
Network Example 2
Three Echelons
Source Node
Transshipment Node
Destination Node
Network Example 3
Three Echelons + Bypass Arc
Source Node
Transshipment Node
Destination Node
Network Example 4
Three Echelons + Activity or Process
Entry
Source Node
Transshipment Node
Exit
Destination Node
What?
Network Modeling Basics
Applications to Logistics Networks
Examples of Network Nodes
•
•
•
•
•
Suppliers
Plants
DC locations
Customers
All together now…..
Examples of Network Nodes
Examples of Network Arcs
Procurement Activity
Procurement
Process
Begin
Activity
Procurement Costs
Procurement Capacities
End
Activity
Examples of Network Arcs
Production Process
Production
Process (Line)
Begin
Process
Production Costs
Production Capacities
End
Process
Examples of Network Arcs
DC Activities
Entrance to
DC
(Unloading
Dock)
DC Handling/
Storage Activities
DC Costs
DC Handling Capacities
DC Storage Capacities
Exit from
DC
(Loading
Dock)
Examples of Network Arcs
What?
Modeling Targets
Question: What are we going to
model?
Top Level Answer:
• a finished goods (“physical distribution”) network
• an integrated logistics network
•a
supply
demand
value
??????
chain
It all depends on your “logistics perspective”
The 1960’s (and before)
Era of Dispersed Logistics Functions
1968 NCPDM Definition of Physical
Distribution
Physical Distribution is a term employed in manufacturing
and commerce to describe the broad range of activities
concerned with efficient movement of finished products
from the end of the production line to the consumer, and in
some cases includes the movement of raw materials from
the source of supply to the beginning of the production
line. These activities include freight transportation,
warehousing, material handling, protective packaging,
inventory control, plant and warehouse site selection, order
processing, market forecasting, and customer service.
Model for the 1960’s
That’s right…nothing!
(Almost nobody modeled physical
distribution networks in the 1960s)
Yet…other ideas were beginning to emerge
Business Logistics Management (OSU)
(1968)
Materials Management
Physical Distribution Management
Company
•Raw materials
•Sub-assemblies
•Manufactured parts
•Packing materials
Goods in Finished
process
goods
inventory inventory
Customer
or User
Field
inventory
Customer
Business Logistics
Source: Professor Bernard J. LaLonde, The Ohio State University, 1968
The 1970’s
Era of Functional Integration
1976 NCPDM Definition of Physical
Distribution Management
Physical Distribution Management is the term describing
the integration of two or more activities for the purpose of
planning, implementing and controlling the efficient flow
of raw materials, inprocess inventory and finished goods
from point of origin to point of consumption. These
activities may include, but are not limited to, customer
service, demand forecasting, distribution communications,
inventory control, material handling, order processing,
parts and service support, plant and warehouse site
selection, procurement, packaging, return goods handling,
salvage and scrap disposal, traffic and transportation, and
warehousing and storage.
Model for the 1970’s
Finished Products
DC1
CZ1
DC2
CZ2
P1
P2
CZ3
DC3
CZ4
DC4
P3
CZ5
DC5
CZ6
Replenishment
Outbound
Let’s Stop Right Here
• This is what most people still model
• This is how “logistics” is still practiced in
the majority of firms
• This is NOT
-
Integrated logistics
Supply chain management
Demand chain management
Value chain management
The 1980’s
Era of Integrated Logistics
(at least for “Leading Edge” firms)
1985 CLM Definition of Logistics
Logistics is the process of planning, implementing,and
controlling the efficient, cost effective flow and storage of
raw materials, in-process inventory, finished goods, and
related information from point of origin to point of
consumption for the purpose of conforming to customer
requirements.
Model for the 1980’s
Raw Intermediate
Materials Products
Finished
Products
FW1
CZ1
P1
FW2
CZ2
FW3
CZ3
PW1
P2
S1
PW2
P3
S2
CZ4
FW4
CZ5
PW3
Interplant
Inbound
FW5
CZ6
DC Transfer
Replenishment
Outbound
Multiple Stages of Production
Raw
Materials
In
Process 1
Process 2
Production Line 1
Production Line 1
Production Line 2
Production Line 2
Intermediate Product
Production Lines
Finished Product
Production Lines
Finished
Products
Out
The 1990’s
supply
Era of the demand
value
??????
chain
1995 CLM Definition of Logistics
Logistics is the process of planning, implementing,and
controlling the efficient, effective flow and storage of
goods, services, and related information from point of
origin to point of consumption for the purpose of
conforming to customer requirements.
Model for the 1990’s
Raw Intermediate
Materials Products
Finished
Products
FW1
CZ1
P1
FW2
CZ2
FW3
CZ3
PW1
P2
S1
PW2
P3
S2
CZ4
FW4
CZ5
PW3
Interplant
Inbound
FW5
CZ6
DC Transfer
Replenishment
Outbound
Multiple Stages of Production
Raw
Materials
In
Process 1
Process 2
Production Line 1
Production Line 1
Production Line 2
Production Line 2
Intermediate Product
Production Lines
Finished Product
Production Lines
Finished
Products
Out
What?
Validity of Integrated Logistics
Questions:
1 Is “Integrated Logistics” a Valid Idea?
2 Is “Supply Chain” a Valid Idea?
3 Are the “Leading Edge Firms” and CLM
and the Consultants and the Academic
Community Right?
Let’s See How a Strategic Logistics Network
Model Responds……..
Network Model Response 1
Manufacturing: Typical Network
Design Considerations
•
•
•
•
•
•
Plant Locations
Plant Missions
Production Costs
Production Capacities
Replenishment (plant
DC) freight
Outbound (plant
customer) freight
Manufacturing: When It Makes
No Difference
You may safely ignore IF for any given product:
• Landed cost at any given DC is identical
regardless of source
• Landed cost at any given direct ship customer
is identical regardless of source
• No capacity limits
- by facility
- by line
- by product
Network Model Response 2
Procurement: Typical Network
Design Considerations
•
•
•
•
•
Supplier locations
Supplier missions
Procurement costs
Procurement capacities
Inbound freight
Procurement: When It Makes No
Difference
You may safely ignore IF for any given raw
material:
• Landed cost at any given plant is identical
regardless of source
landed cost = procurement + transportation
• No capacity limits
Why?
Contemporary Requirements
Question: Why Build a Network
Model?
• Traditional Response
- To minimize cost while maintaining or
improving customer service
- This response is incomplete
• Contemporary Response
- to enhance return on investment
- to enhance return on shareholder equity
Mission of Corporate Management
LOGISTICS
MANAGEMENT
RESPONSIBILITIES
CORPORATE
MANAGEMENT
OBJECTIVES
Demand Creation
(Sales)
Customer Service
(Sales)
Resource Allocation
(Capital)
Inventories Equipment
Facilities
(Capital)
Financial Control
(Costs)
Procurement Production
Transportation Warehousing
(Costs)
ROI
Return on Investment
Return on Investment =
Profit Margin =
Capital Turnover =
Profits
Total Assets
Profits
Sales
Sales
Total Assets
Return on Investment
Profits =
Total Assets
Profits
Sales
x
Sales
Total Assets
Return on =
Investment
Profit
Margin
x
Capital
Turnover
Return on Investment Matrix
PROFIT MARGIN: % BEFORE TAXES
CAPITAL
TURNS
3.0
2.5
2.0
1.5
1.0
0.5
3
9
7.5
6.0
4.5
3.0
1.5
6
9
12
15
18
21
18 27 36 45 54 63
15 22.5 30 37.5 45 52.5
12 18 24 30 36 42
9 13.5 18 22.5 27 31.5
6
9
12 15 18 21
3 4.5 6 7.5 9 10.5
Return on Investment Matrix
PROFIT MARGIN: % BEFORE TAXES
CAPITAL
TURNS
3.0
2.5
2.0
1.5
1.0
0.5
3
6
9
12
15
9
18
27
36
45
54
63
7.5
15
22.5
30
37.5
45
52.5
6.0
12
18
24
30
36
42
4.5
9
13.5
18
22.5
27
31.5
3.0
6
9
12
15
18
21
1.5
3
4.5
6
7.5
9
10.5
THE 20% ROI FRONTIER
18
21
Observation
To Maximize (or at least enhance) ROI, You
Must Be Willing and Able To Trade Off Sales,
Capital and Costs.
Tradeoff Example 1: Service
Enhancements
• Possible Increase in Sales
• Probable Increase in Costs
-
Manufacturing
Transportation
Inventory
Warehousing
Question : Which Impact is Greater?
Observation: Often, Marketing/Sales Doesn’t
Know or Care
Tradeoff Example 2: New
Manufacturing Location
• Possible Increases
- Asset Base (unless close another)
- Manufacturing Costs (if outsourcing better)
- Transportation Costs (if poorly located)
• Shipment Fragmentation
• Poor Carrier Base
• Possible Decreases
- Manufacturing Costs (if more efficient)
- Transportation Costs (if well-located)
• Shipment Consolidation
• Good Carrier Base
Tradeoff Example 3: Add DC
Location
• Possible Increases
- Asset Base (if owned or leased)
• Building and Equipment (if owned or leased)
• Inventory
- Transportation (if poorly located)
• Shipment Fragmentation (in or out)
• Poor Carrier Base
- Sales (service enhancement)
• Possible Decreases
- Asset Base
• Building and equipment (if public)
• inventory (if properly repositioned)
- Transportation(if well-located)
• Minimize LTL Secondary Leg
• Good Carrier Base
- Sales (if inventory poorly located)
The 3PL (Third Party Logistics)
Provider Message
• Increase Sales
- Improved Service
- Enhanced Market Penetration
• Decrease Capital
- Building and Equipment
- Inventory Stratification
• Decrease Costs
- Facility
- Transportation
You Must Decide If Reality Lives Up To
Promise/Expectations
Logistics: A Powerful Influence on
Shareholder Equity
• Logistics Impacts Sales
- Customer Service
- Competitive Weapon
• Logistics Impacts Capital
-
Plant Locations and Equipment
DC Locations
Inventory
Transportation Equipment
Data Processing Equipment
Logistics: A Powerful Influence on
Shareholder Equity
• Logistics Impacts Costs
-
Procurement
Manufacturing
DC Operations
Transportation
Inventory Holding
Information Services
The DuPont Model
$
$ GROSS
MARGIN
Income Statement

$
SALES
$ COST OF
GOODS SOLD
$ OPERATING
PROFIT
PROFIT
%
MARGIN
$ VARIABLE
EXPENSES
$ TOTAL
EXPENSES
+
$
“RETURN ON
ASSETS” %
SALES
FIXED
EXPENSES
TIMES ...............................................................................
$ INVENTORY
$

CAPITAL
TURNOVER
$
Balance Sheet
SALES
+
$ CURRENT
ASSETS
$ ACCOUNTS
RECEIVABLE
+
+
TOTAL
ASSETS
$
FIXED
ASSETS
OTHER
$ CURRENT
ASSETS
The DuPont Model
$
$ GROSS
MARGIN
Income Statement
$ OPERATING
PROFIT

PROFIT
%
MARGIN
$
SALES
-
$ COST OF
GOODS SOLD
$ VARIABLE
EXPENSES
$ TOTAL
EXPENSES
+
$
Logistics Affects All ROI
Components
“RETURN ON
ASSETS” %
$
$
Balance Sheet
FIXED
EXPENSES
$ INVENTORY
SALES

CAPITAL
TURNOVER
SALES
+
$ CURRENT
ASSETS
$ ACCOUNTS
RECEIVABLE
+
+
TOTAL
ASSETS
$
FIXED
ASSETS
OTHER
$ CURRENT
ASSETS
Why Not?
Impediments
The “Corporate Silos”
Procurement
Distribution
Production
Marketing
Finance
Corporate Objectives and
Evaluation Criteria
• Often Set at Departmental Level (MBO mania)
• Often Conflicting
- lack of common goals
- lack of common measures
• Often Mutually Exclusive
• In Short…Many Compensation/Evaluation
Systems are Designed to SUBVERT Corporate
ROI Objectives
As A Result…
• Many firms
-
are organized along functional boundaries
minimize procurement costs
minimize manufacturing costs
minimize distribution costs
• Few firms
- adopt fully integrated logistics
- consider tradeoffs among procurement,
manufacturing, distribution
The “Easy” Savings Within Function Have
Been Realized
The Integrated Logistics System
Puzzle
DATA INTENSIVE
COMPLEX
TRADEOFFS
Seasonal
fluctuations
Facility
capacities
CONFLICTING
OBJECTIVES
ENVIRONMENTAL
UNCERTAINTY
INTERRELATED
How?
Ten Steps to Success
Ten Steps to Success
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
Step 6:
Step 7:
Step 8:
Step 9:
Step 10:
Establish Project Scope
Describe the Network
Obtain Customer Demand Data
Obtain Freight Costs
Obtain Facility Data
Prepare Scenario Generation Data
Validate the Model
Run Solver (Optimization) Exercises
Analyze Solver Results
Implement the Results
Step 1
Establish Project Scope
Establish Project Scope
• Establish Project Issues
-
System Structure
Facility Ownership and Mission
Business Environment
Sensitivity
• Establish Logistics Scope
- Given: Finished Goods Distribution
- Optional: Manufacturing Detail
- Optional: Procurement Detail
Establish Project Scope
• Establish Facility Scope
- ownership (owned, leased, public)
- candidates
- mission
• Establish Metrics
- base time period
- flow unit
- cost unit
Establish Project Scope: Making
It Easier
• Use Experienced Internal Team
• Use Experienced External Consultants
• Learn From Other Users
Step 2
Describe the Network
Network Description Data
• Lists of Commodities
- raw materials
- intermediate products
- finished products
• Lists of Locations (Nodes)
-
raw material suppliers
plant locations
DC locations
Customer regions
• Miscellaneous
- product bundles
- customer classes
- time periods
Product Aggregation
Stock Codes
Product Groups
TR 968-14
TR 472-10
TR 784-16
1. Tires
TR 968-14
TR 472-10
TR 784-16
EL 497-23
2. Electronics
TR 968-14
TR 472-10
TR 784-16
CQ 491-79
3. Mechanical
Geographic Aggregation:
1-Digit Zip Zone
5
0
9
8
6
7
1
4
2
3
Network Description Data:
Making It Easier
• Keep List Sizes Reasonable
(detail = accuracy)
• Use Predefined Location Lists Such As
-
Major Cities (Worldwide)
Major DC Locations
Metropolitan County Areas
Zip Code Sectional Centers
3-Digit Zip Codes
Step 3
Obtain Customer Demand Data
Customer Demand Data
For Each Customer Region:
Finished Products
1 2 3 4 5 … N
Customer
Classes 1
Base Period Demand in
2
X
(Channels)
• Weight
3
4
5
:
M
• Cube
• Units
– cases
– gallons or liters
– pallets
– and so on...
Customer Demand Data: Making It
Easier
• Use Existing Spreadsheet
- Questionable Accuracy
- Likely Unavailable
- Poor Flexibility
• Use Transaction History File
-
Best Possible Accuracy
Likely Available
Outstanding Flexibility
Supports Baseline Analysis
Enables Demand Pattern Analysis
Transaction History File
document number
customer account
ship-to address
shipment origin
item code
quantity
date
Step 4
Obtain Freight Costs
Transportation Data: Target
Destinations
1
Origins 1
2
3
4
5
:
M
2
3
4
5
… N
X
Average Cost /unit of flow
Weighted Average Freight Cost
Mode
LTL
LTL
LTL
LTL
LTL
LTL
LTL
LTL
LTL
Weight
Rate
Profile Rate X
Break (in (¢/CWT) Fraction Profile
CWT)
0-5
3187
.03
95.61
5-10
2695
.07
188.65
10-20
2240
.15
336.00
20-50
1983
.25
495.75
50-100
1626
.10
162.60
100-200
1279
.15
191.85
200-300
877
.10
87.70
300-400
746
.05
37.30
400+
653
.10
65.30
1.00
1660.76
Transportation Data: Making It
Easier
• Use Convenient Sources of Rates
- Published Tariffs
• LTL: Yellow 500, Roadway 507, CZAR Lite
• parcel: UPS, FedEx
• state/state TL matrix
- Distance-Based Relationships
• multiple intervals
• linear for given distance interval
- User-Supplied Database
- Combinations
Transportation Data: Making It
Easier
• Locate Sources of Shipment Profiles
-
Historical Data (Bill of Lading Files)
Freight Payment System
Transportation Improvement Program
Estimates
Step 5
Obtain Facility Data
Facility Data Types (all optional)
• Raw Material Supplier
- Procurement Costs
- Procurement Capacities
• Manufacturing
- Overall Plant
• Fixed Costs
• Capacities and Violation Penalties
- Production Line (Process)
• Fixed Costs
• Capacities and Violation Penalties
- Production Line (Process) and Product
• Variable Costs
• Capacities
• Line Rates
- Conversion Recipes
Facility Data Types (all optional)
• Distribution Center
-
Fixed Costs
Capacities and Violation Penalties
Product-Specific Variable Costs
Customer Class-Specific Variable Costs
Facility Data: Making It Easier
• Use Accounting Data
-
Locate Chart of Accounts
Classify Each as Fixed or Variable
Remove Regional Differences
Analyze for Consistency
Reintroduce Regional Differences
Facility Data: Making It Easier
•
Use Regression Data
Variable Cost “m”
Total
Cost
y = mx + b
Fixed Cost “b”
Total Volume
Facility Data: Making It Easier
• Use Published Data
-
Market Access (commerce within N day radius)
Transportation Services (# of carriers)
Payroll Indices
Utility Indices
Occupancy Cost Indices (construction, rent)
Tax Rates
Insurance Rates
Step 6
Prepare Scenario Generation Data
Scenario Generation Data Types
• Data Selection
- Demand Data Source
- Freight Cost Type
• Data Modifications
- Lock in / Lock Out Options (All Model
Components)
- Scaling
• customer demand
• freight costs
• facility costs and capacities
• Automatic Link Generation
- Facility Mission
- Service Levels
- Manual Overrides
Scenario Generation: Making It
Easier
• Easy and Intuitive
• Master Database Remains Unchanged (onthe-fly modifications)
• Transportation Link Generation Control By
Location, Not Link
- Few Locations But Many Links
- Let Computer Do Work
Scenario Generation: Making It Easier
Step 7
Validate the Model
Model Validation
• Set Up Model Baseline Exercise
- lock in existing facility locations / missions
- lock out candidate locations
- lock up all commodity flows per history
• each facility
• each transportation link
- “cost out” existing network
• Compare Results with Accounting Data
• May Need to Adjust Both Model and
Accounting Data
Model Validation: Making it
Easier
• Choose Representative Base Time Period
• Know Strengths and Weaknesses of
Accounting System
• Use Transaction Files
Step 8
Run Solver (Optimization) Exercises
Typical Solver Exercises
•
•
•
•
Network Rationalization
Unconstrained Exercises
Candidate Location Analysis
Sensitivity Analysis
- Cost vs. Service
- Cost Vs. Number of DC Locations
- Parametric Analysis of Input Data
• Customer Demand
• Freight Costs
• Facility Costs / Capacities
• Out-Year Analysis
Step 9
Analyze Solver Results
Analysis Tools
•
•
•
•
•
Maps
Business Graphics
Spreadsheets
Database Manager
Written Reports
- standard
- custom
Step 10
Implement the Results
Steps to Implementation
• Establish Changes to be Made
• Set Implementation Priorities and Schedule
• Obtain Assistance, as Required
- Facility Location (Site Selection)
- Transportation Policy / Operations
- Computer Systems
How?
Example Analysis
Ten Steps to Success
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
Step 6:
Step 7:
Step 8:
Step 9:
Step 10:
Establish Project Scope
Describe the Network
Obtain Customer Demand Data
Obtain Freight Costs
Obtain Facility Data
Prepare Scenario Generation Data
Validate the Model
Run Solver (Optimization) Exercises
Analyze Solver Results
Implement the Results
Step 1
Establish Project Scope
Establish Project Scope
• Establish Project Issues
- Number, Location and Size of
• Supplier Locations
• Manufacturing Locations
• DC Locations
- Owned vs Public DC
- Impact of Customer Service on Network Design
- Impact of Manufacturing Capacity on Network Design
Establish Project Scope
• Establish Logistics Scope
- Full Supply Chain
• Establish Facility Scope
- Suppliers: Independent
- Plants: Owned. No Candidates
- DC’s: Owned or Public. Evaluate Candidates
• Establish Metrics
- Base Time Period: CY 97
- Flow Unit: CWT
- Cost Unit: $
Step 2
Describe the Network
Describe the Network:
Locations
• Raw Material Suppliers
-
Jersey City
Charlotte
Kansas City
Dallas-Ft Worth
Los Angeles
Raw Material Suppliers
Describe the Network:
Locations
• Plant Locations
-
Jersey City
Atlanta
Indianapolis
Phoenix
Portland
Plant Locations
Describe the Network:
Locations
• DC Locations
-
Jersey City
Los Angeles
Chicago
Atlanta
Dallas-Ft Worth
Memphis
St. Louis
San Francisco
Norfolk
Boston
Houston
Kansas City
-
Denver
Columbus
Buffalo
Miami
Jacksonville
Minneapolis-St Paul
Portland
Knoxville
New Orleans
Salt Lake
Pittsburgh
Phoenix
Indianapolis
DC Locations
Describe the Network:
Locations
• Customer Regions
- Standard List: Major American Cities (261)
Customer Regions
Describe the Network:
Commodities
• Raw Materials
-
raw milk
water
grains
flour
yeast
sugar
salt
baking powder
baking soda
corn oil
• Intermediate Products
-
processed milk
butter
bread dough
French bread dough
croissant dough
sourdough dough
Describe the Network:
Commodities
• Finished Products
-
milk-liquid
milk-powder
cheese
butter
sandwich bread
-
sandwich buns
French bread
sourdough bread
croissants
pastries
Describe the Network:
Miscellaneous
• Product Bundles
- Liquid
- Dry
• Customer Classes (Channels)
- Institutional
- Retail
• Time Period
- Annualized Model
Step 3
Obtain Customer Demand Data
Obtain Customer Demand Data
• Full year Invoice File
• Product (SKU) Master File
• Units of Measure
- Cases
- Weight
- Cube
Customer Demand Data
Step 4
Obtain Freight Costs
Obtain Freight Costs
•
•
•
•
•
Inbound:
Interplant:
Replenishment:
DC Transfer:
Outbound:
Distance-Based Equation
Distance-Based Equation
Distance-Based Equation
Distance-Based Equation
Traffic Manager Simulation
- LTL rates: Yellow Freight System
- Parcel Rates: UPS
- TL Rates: State/State TL Table
Step 5
Obtain Facility Data
Obtain Facility Data
• Raw material Supplier
• costs:
• capacities:
variable
none
• Plant Locations
- Overall Plant
• costs:
• capacities
fixed
none
- Overall Production Line
• costs:
• capacities:
fixed
hours
- Product-Specific
• costs:
• capacities:
variable
none
- DC Locations
• costs:
fixed and variable by facility
Step 6
Prepare Scenario Generation Data
Scenario Generation Data
• Demand Data
- Source:
Transaction File
- Measurement Unit: Weight
• Lock In/Lock Out Facilities
- Baseline:
Existing Only
- Rationalization:
Existing Only
- Full Optimization: Existing and Candidates
• Scaling
- Baseline:
None
- Rationalization:
None
- Some Optimizations: Out-Year Estimates
Scenario Generation Data:
Transportation Links
Freight Cost
Link Gen
Service Limit
Inbound
Equation
Auto
None
Interplant
Equation
Auto
None
Replenishment Equation
Auto
None
DC Transfer
Equation
Auto
None
Outbound
Simulation
Auto
Selected Runs
Supplier Eligibility
Production Eligibility: Intermediate Products
Production Eligibility: Finished Products
DC Eligibility: Institutional Customers
DC Eligibility: Retail Customers
Step 7
Validate the Model
Model Validation
• Set Up Model Baseline Exercise
- locked in existing facility locations / missions
- locked out candidate locations
- locked up all commodity flows per history
• each facility
• each transportation link
- “costed out” existing network
• Compared Results with Accounting Data
• Adjusted Both Model and Accounting Data
Bottom Line: Model Results Within 2% of
Accounting Data
Step 8
Run Solver (Optimization) Exercises
Run Solver (Optimization)
Exercises
Run
DC Fixed Cost
1
25,000
Customer Service
Limit
None
2
100,000
None
3
250,000
None
4
100,000
500 mi (retail)
Step 9
Analyze Solver Results
Analyze Solver Results
Run DC Fixed Cust Service # of Open Total Cost
Cost
Limit
DC's
1
25,000
None
7
84,492
2
100,000
None
4
84,860
3
250,000
None
3
85,325
4
100,000
500 mi
(retail)
12
85,721
Run 1: Fixed Cost Sensitivity
DC Fixed Cost:
25,000
Customer Service Limit:
None
Number of Open DC’s:
7
Total Cost
84,492
Run 2: Fixed Cost Sensitivity
DC Fixed Cost:
100,000
Customer Service Limit:
None
Number of Open DC’s:
4
Total Cost
84,860
Run 3: Fixed Cost Sensitivity
DC Fixed Cost:
250,000
Customer Service Limit:
None
Number of Open DC’s:
3
Total Cost
85,325
Run 4: Service Sensitivity
DC Fixed Cost:
100,000
Customer Service Limit:
500 miles
Number of Open DC’s:
12
Total Cost
85,721
Step 10
Implement the Results
Steps to Implementation
• Establish Changes to be Made
• Set Implementation Priorities and Schedule
• Obtain Assistance, as Required
- Facility Location (Site Selection)
- Transportation Policy / Operations
- Computer Systems
Ten Steps to Success
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
Step 6:
Step 7:
Step 8:
Step 9:
Step 10:
Establish Project Scope
Describe the Network
Obtain Customer Demand Data
Obtain Freight Costs
Obtain Facility Data
Prepare Scenario Generation Data
Validate the Model
Run Solver (Optimization) Exercises
Analyze Solver Results
Implement the Results
How?
Choosing the Right Solver
Solver Technology: Terminology
Problems
Numerical computation
Integrated Logistics System Design Model
Potential Network Schematic
Raw Intermediate
Materials Products
Finished
Products
FW1
CZ1
P1
FW2
CZ2
FW3
CZ3
PW1
P2
S1
PW2
P3
S2
CZ4
FW4
CZ5
PW3
Interplant
Inbound
FW5
CZ6
DC Transfer
Replenishment
Outbound
Integrated Logistics System Design Model
Actual Network Design
Raw Intermediate
Materials Products
Finished
Products
FW1
CZ1
P1
FW2
CZ2
FW3
CZ3
PW1
P2
S1
PW2
P3
S2
CZ4
FW4
CZ5
PW3
Interplant
Inbound
FW5
CZ6
DC Transfer
Replenishment
Outbound
Dynamic Simulation
• Characteristics
-
detailed emulation of activities over time
evaluates (not finds) a solution from the user
difficult to validate
expensive to develop, maintain, and run
run-to-run comparisons dicey
cannot deal properly with
•
•
•
•
•
fixed costs
capacities
economies of scale
sole sourcing requirements
open/close decisions
• Bottom line: Poor choice for strategic logistics
Heuristics and Expert Systems
• Characteristics
-
common sense consideration of limited alternatives
not guaranteed to find best solution
solution dependent upon quality of decision rules
run-to-run comparisons unreliable
beware the expert selected
- cannot deal properly with
•
•
•
•
•
fixed costs
capacities
economies of scale
sole sourcing requirements
open/close decisions
• Bottom line: Poor choice for strategic logistics
network design
Mathematical Optimization
• Characteristics
- evaluates all possible alternatives
- guaranteed to find best solution within specified
tolerance
- run-to-run comparisons reliable
- not always applicable
Question: Does it make a difference?
You decide...
Sample Problem
DC1
PLANT 1
Capacity: 
CZ2
100,000
CZ3
50,000
3
5
4
DC2
4
2
Capacity: 60,000
50,000
3
0
PLANT 2
CZ1
2
0
1
Heuristic Solution 1
“Least Outbound Cost”
DC1
PLANT 1
CZ1
50,000
CZ2
100,000
CZ3
50,000
3
0
3
140,000
PLANT 2
5
4
DC2
4
2
2
0
60,000
1
Inbound cost
Outbound cost
Total
$820,000
$150,000
$970,000
Heuristic Solution 2
“Least Total Flow Cost”
DC1
PLANT 1
50,000
CZ2
100,000
CZ3
50,000
3
0
3
50,000
5
PLANT 2
CZ1
4
DC2
90,000
4
2
2
0
60,000
1
Inbound cost
Outbound cost
Total
$570,000
$200,000
$770,000
Optimal Solution
True Least Cost
DC1
PLANT 1
CZ1
3
0
3
140,000
5
PLANT 2
40,000
4
DC2
4
50,000
2
CZ2
2
100,000
60,000
0
60,000
1
Inbound cost
Outbound cost
Total
$120,000
$470,000
$590,000
CZ3
50,000
The Bottom Line
A Strategic Logistics Network Design
Model Can Help You...
•
•
•
•
•
Identify Service Improvements
Manage Capital
Reduce Costs / Increase Profit
Balance Service, Capital and Costs
Enhance Shareholder Value
In Today’s Environment….Enough Said
Management Support Systems