management support systems. strategic logistics network design modeling

Management Support Systems

Strategic Logistics Network Design Modeling

Strategic Logistics Network Design Modeling

WhatPlanning HorizonsTarget IssuesNetwork Modeling Basics

Building BlocksStructuresApplications to Logistics Networks

Modeling TargetsValidity of Integrated Logistics

WhyContemporary RequirementsImpediments

HowTen Steps To SuccessExample AnalysisChoosing 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?


Structures

Network Example 1

Source Node Destination Node

Arc

Two Echelons

Network Example 2

Source Node Transshipment Node Destination Node

Three Echelons

Network Example 3

Source Node Transshipment Node Destination Node

Three Echelons + Bypass Arc

Network Example 4

Source Node

Entry Exit

Transshipment Node Destination Node

Three Echelons + Activity or Process

What?


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 Process

Procurement CostsProcurement Capacities

BeginActivity

EndActivity

Procurement Activity


Production Process (Line)

Production CostsProduction Capacities

BeginProcess

EndProcess

Production Process


DC Handling/ Storage Activities

DC CostsDC Handling CapacitiesDC Storage Capacities

Entrance to DC

(Unloading Dock)

Exit from DC

(Loading Dock)

DC Activities

What?

Modeling Targets

Question: What are we going to model?

Top Level Answer:• a finished goods (“physical distribution”) network

• an integrated logistics network

supply• a demand chain

value??????

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)

•Raw materials•Sub-assemblies•Manufactured parts•Packing materials

Fieldinventory

Customer or User

Goods inprocess

inventory

Finishedgoods

inventory

Company

Customer

Materials Management Physical Distribution Management

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’sFinished Products

Replenishment Outbound

CZ1DC1

DC2

DC3

DC4

DC5

P1

P2

P3 CZ5

CZ6

CZ2

CZ3

CZ4

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.


FW1

FW2

FW3

FW4

FW5

P1

P2

P3

PW1

PW2

PW3

S1

S2

CZ1

CZ5

CZ6

CZ2

CZ3

CZ4

Replenishment OutboundInbound

DC TransferInterplant

Raw Materials

Intermediate Products

Finished Products

Multiple Stages of Production

Raw Materials In

Production Line 1

Production Line 2

Process 1

Production Line 1

Production Line 2

Process 2

Finished Products

Out

Intermediate Product Production Lines

Finished Product Production Lines

The 1990’s

Era of the chain

supplydemand

value??????

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.


FW1

FW2

FW3

FW4

FW5

P1

P2

P3

PW1

PW2

PW3

S1

S2

CZ1

CZ5

CZ6

CZ2

CZ3

CZ4



Raw Materials


Finished Products

Multiple Stages of Production

Raw Materials In

Production Line 1

Production Line 2

Process 1

Production Line 1

Production Line 2

Process 2

Finished Products

Out

Intermediate Product Production Lines

Finished Product Production Lines

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

Demand Creation(Sales)

Resource Allocation(Capital)

Financial Control(Costs)

Customer Service(Sales)

Inventories EquipmentFacilities(Capital)

Procurement ProductionTransportation Warehousing

(Costs)

ROI

CORPORATECORPORATEMANAGEMENTMANAGEMENT

OBJECTIVESOBJECTIVES

LOGISTICSLOGISTICSMANAGEMENTMANAGEMENT

RESPONSIBILITIESRESPONSIBILITIES

Return on Investment

Return on Investment = Profits Total Assets

Profit Margin = Profits Sales

Capital Turnover = Sales Total Assets

Return on Investment

Profits = Profits x SalesTotal Assets Sales Total Assets

Return on = Profit x CapitalInvestment Margin Turnover

Return on Investment Matrix

9 18 27 36 45 54 637.5 15 22.5 30 37.5 45 52.56.0 12 18 24 30 36 424.5 9 13.5 18 22.5 27 31.53.0 6 9 12 15 18 211.5 3 4.5 6 7.5 9 10.5

PROFIT MARGIN: % BEFORE TAXESCAPITAL

TURNS 3 6 9 12 15 18 21

3.0

2.5

2.0

1.5

1.0

0.5

Return on Investment Matrix

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

PROFIT MARGIN: % BEFORE TAXESCAPITAL

TURNS 3 6 9 12 15 18 21

THE 20% ROI FRONTIER

3.0

2.5

2.0

1.5

1.0

0.5

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

TIMES ...............................................................................“RETURN ON

ASSETS” %

The DuPont Model

PROFITMARGIN

SALES

COST OFGOODS SOLD

VARIABLEEXPENSES

FIXEDEXPENSES

GROSSMARGIN

TOTAL EXPENSES

OPERATINGPROFIT

$ SALES

$

$

$

$

$

$

$

% -

-

+

Income Statement

CAPITALTURNOVER

OTHERCURRENTASSETS

INVENTORY

ACCOUNTSRECEIVABLE

CURRENTASSETS

FIXEDASSETS

SALES

TOTALASSETS

$

$

$

$

$

$

$

+

+

+Balance Sheet

The DuPont Model

PROFITMARGIN

SALES

COST OFGOODS SOLD

VARIABLEEXPENSES

FIXEDEXPENSES

GROSSMARGIN

TOTAL EXPENSES

OPERATINGPROFIT

$ SALES

$

$

$

$

$

$

$

% -

-

+

Income Statement

“RETURN ONASSETS” %

CAPITALTURNOVER

OTHERCURRENTASSETS

INVENTORY

ACCOUNTSRECEIVABLE

CURRENTASSETS

FIXEDASSETS

SALES

TOTALASSETS

$

$

$

$

$

$

$

+

+

+Balance Sheet

Logistics Affects All ROI Components

Why Not?

Impediments

The “Corporate Silos”

Procurement

Production

Marketing Finance

Distribution

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

Product

demandsSeasonal

fluctuationsScale

economies

ProcurementcostsProduction\DC

costs

DC costs &

inventoriesFacility

capacities Transportation

costs

Customer

service

CONFLICTINGOBJECTIVES

ENVIRONMENTALUNCERTAINTY INTERRELATED

DATA INTENSIVE COMPLEX TRADEOFFS

How?

Ten Steps to Success


Step 1: Establish Project ScopeStep 2: Describe the NetworkStep 3: Obtain Customer Demand DataStep 4: Obtain Freight CostsStep 5: Obtain Facility DataStep 6: Prepare Scenario Generation DataStep 7: Validate the ModelStep 8: Run Solver (Optimization) ExercisesStep 9: Analyze Solver ResultsStep 10: Implement the Results

Step 1

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 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

CQ 491-79

3. Mechanical

TR 968-14

TR 472-10

TR 784-16

EL 497-23

2. Electronics

Geographic Aggregation:1-Digit Zip Zone

9988 66

55

77 3322

1100

44

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

1 2 3 4 5 … N12 X345:M

Finished ProductsCustomer

Classes(Channels)

Base Period Demand in• Weight• Cube• Units

– cases– gallons or liters– pallets– and so on...

For Each Customer Region:

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 numberdocument numbercustomer accountcustomer accountship-to addressship-to addressshipment originshipment originitem codeitem codequantityquantitydatedate

Step 4

Obtain Freight Costs

Transportation Data: Target

1 2 3 4 5 … N12 X345:M

Origins

Destinations

Average Cost /unit of flow

Weighted Average Freight Cost

Mode WeightBreak (in

CWT)

Rate(¢/CWT)

ProfileFraction

Rate XProfile

LTL 0-5 3187 .03 95.61LTL 5-10 2695 .07 188.65LTL 10-20 2240 .15 336.00LTL 20-50 1983 .25 495.75LTL 50-100 1626 .10 162.60LTL 100-200 1279 .15 191.85LTL 200-300 877 .10 87.70LTL 300-400 746 .05 37.30LTL 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


Total Cost

Total Volume

• Use Regression Data

Variable Cost “m”

y = mx + b

Fixed Cost “b”


• 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 (on-the-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

Step 1



• 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 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


• Plant Locations Jersey City Atlanta Indianapolis Phoenix Portland

Plant 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


• 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



• Full year Invoice File

• Product (SKU) Master File

• Units of Measure Cases Weight Cube

Customer Demand Data

Step 4



• Inbound: Distance-Based Equation• Interplant: Distance-Based Equation• Replenishment: Distance-Based Equation• DC Transfer: Distance-Based Equation• Outbound: 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: variable• capacities: none

• Plant Locations Overall Plant

• costs: fixed• capacities none

Overall Production Line• costs: fixed• capacities: hours

Product-Specific• costs: variable• capacities: none

DC Locations• costs: fixed and variable by facility• capacities: none

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 DC Fixed Cost Customer ServiceLimit

1 25,000 None

2 100,000 None

3 250,000 None

4 100,000 500 mi (retail)

Step 9



Run DC FixedCost

Cust ServiceLimit

# of OpenDC's

Total Cost

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





Total Cost 84,860





Total Cost 85,325

Run 4: Service Sensitivity


Customer Service Limit: 500 miles


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

How?

Choosing the Right Solver

Solver Technology: Terminology Problems

Heuristic

Static simulation

Static heuristicCost calculator

Transshipment algorithm

Dynamic simulationOptimization

Center of gravityNumerical computation

Expert system

Integrated Logistics System Design ModelPotential Network Schematic

FW1

FW2

FW3

FW4

FW5

P1

P2

P3

PW1

PW2

PW3

S1

S2

CZ1

CZ5

CZ6

CZ2

CZ3

CZ4



Raw Materials


Finished Products

Integrated Logistics System Design ModelActual Network Design

FW1

FW2

FW3

FW4

FW5

P1

P2

P3

PW1

PW2

PW3

S1

S2

CZ1

CZ5

CZ6

CZ2

CZ3

CZ4



Raw Materials


Finished Products

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 network design

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

DC2

0

5

4

2

3

3

4

2

0

1

CZ1

CZ2

CZ3

50,000

100,000

50,000

PLANT 1

PLANT 2

Capacity: 60,000

Capacity:

Heuristic Solution 1“Least Outbound Cost”

DC1

DC2

PLANT 1

PLANT 2

CZ1

CZ2

CZ3

50,000

100,000

50,000

0

5

4

2

140,000

60,000

3

3

4

2

0

1

Inbound cost $820,000

Outbound cost $150,000

Total $970,000

Heuristic Solution 2“Least Total Flow Cost”

DC1

DC2

PLANT 1

PLANT 2

CZ1

CZ2

CZ3

50,000

100,000

50,000

3

3

4

2

0

1



Total $770,000

0

5

42

50,000

60,000

90,000

Optimal SolutionTrue Least Cost

DC1

DC2

PLANT 1

PLANT 2

CZ1

CZ2

CZ3

50,000

100,000

50,000

0

5

42

140,000

60,000



Total $590,000

3

3

4

2

0

1

40,000

60,000

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

management support systems. strategic logistics network design modeling

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