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Network Design for International Supply Chain

Operations

Ronald H. Ballou

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What is Network Design?Positioning of ports, plants, warehouses, terminals, cross docks, consolidation points, etc.

Key questions•How many facilities should there be?

•Where should they be located?

•What size should they be?

•How much inventory should they hold?

•Which customers should be served by each?

•From which plants/vendors/ports should they be served?

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Warehousing

Warehousing

Transportation

Transportation

Vendors/plants/portsTransportation

Factory

Transportation Customers

Informationflows

The Supply Channel

These facilities need to be positioned and sized

Sources:plantsvendorsports

Regionalwarehouses,stockingpoints

Fieldwarehouses,stockingpoints

Customers,demandcenters

Demand

Supply

Supply

Production/purchasecosts

Inventory &warehousingcosts

Inventory &warehousingcosts

Transportationcosts

Transportationcosts

Abstract Network for Location Problem

Return

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Network Design Examples•A retailer locates consolidation points

•A manufacturer reduces the number of its warehouses

•A foreign automaker locates its staging areas

•A retailer positions its serving points for a new market

•A specialty chemical company consolidates its laboratories

•An insurance company locates its claim offices

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Why Location is Important

•A top management concern—absorbs significant capital in facilities and inventory

•Gives cost structure to the network, which is not easily changed

•Significantly effects profit, cash flow, and return on investment—key measures of strategy

•Impacts on the level of customer service that can be achieved

•Good location planning can save annually 5 to 15% of total logistics costs

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7Number of facilities

Co

st

Production/purchaseand order processing

Inventory carryingand warehousing

Facilityfixed

Inbound andoutboundtransportation

Total cost

00

Fa

cilit

y L

oc

ati

on

Pro

ble

m C

os

t T

rad

eo

ffs

Typically, this low point is sought subject to

service considerations

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Network Design in Logistics Strategy

PL

AN

NIN

G

OR

GA

NIZ

ING

CO

NT

RO

LL

ING

Transport Strategy

• Transport fundamentals• Transport decisions

Customer

service goals

• The product• Logistics service• Ord. proc. & info. sys.

Inventory Strategy

• Forecasting• Inventory decisions• Purchasing and supply

scheduling decisions• Storage fundamentals• Storage decisions

Location Strategy

• Location decisions• The network planning process

PL

AN

NIN

G

OR

GA

NIZ

ING

CO

NT

RO

LL

ING

Transport Strategy

• Transport fundamentals• Transport decisions

Customer

service goals

• The product• Logistics service• Ord. proc. & info. sys.

Inventory Strategy

• Forecasting• Inventory decisions• Purchasing and supply

scheduling decisions• Storage fundamentals• Storage decisions

Location Strategy

• Location decisions• The network planning process

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Role of Inventory in Network Design

•Make-to-requirements or make-to-stock

•Inventory control procedures

•Number of inventory locations

The 3 pillars of inventory management

A factor in network design

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Objective of Network Design

Maximize the return on logistics assets (ROLA)

AssetsCostsRevenueROLA −

=

Logistics’ contribution

to sales

Investment in logistics

assets

Costs of logistics

operations

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When to Undertake Redesign?

•Demand/supply locations have changed or shifted

•Cost elements of location have changed disproportionately

•Customer service levels have changed

•There has been a price policy change

•Logistics product characteristics have changed

•Network design has not been evaluated in 5 years or longer

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Getting Started

•Seek top management support

•Organizing a study team

•Selecting the tools for analysis

�Chart, compass, and ruler methods

�Spreadsheets

�Commercial models

•Auditing service levels

•Controlling problem size

�Creating product families

�Aggregating demand/suppliers

�Estimating transportation rates

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Data NeededTypical data elements

•Products in the product line•Coordinate locations of customers, warehouses, and plants•Demand for each customer by location and product•Transportation rates•Transit times (optional)•Warehousing costs (fixed, storage, and handling)•Purchase/production costs•Shipment sizes by product• Inventory levels by location, by product, and control policies•Shipment profiles•Order processing cost•Capital cost•Customer service goals•Available and potential facilities with capacities•Distribution patterns for current product flows

Recall

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Good Data Sources

•Company records and personnel for most

data about existing locations

•Real estate companies for warehouse

costs

•Local Chambers of Commerce for labor

rates, tax rates, available real estate, etc.

•Maps such as Google Earth and other

Internet sources

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Data about Inventory Levels

0

500

1000

1500

2000

2500

3000

0 10000 20000 30000 40000 50000

Annual warehouse throughput, D i ($000s)

Wa

reh

ou

se

av

era

ge

in

ve

nto

ry,

I i (

$0

00

s)

Shows inventory practices

by location

Data about Inventory Levels

0

500

1000

1500

2000

2500

3000

0 10000 20000 30000 40000 50000

Annual warehouse throughput, D i ($000s)

Wa

reh

ou

se

av

era

ge

in

ve

nto

ry,

I i (

$0

00

s)

Inventory practices

need to be improved

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Conducting the Analysis

•Analytical approach

�Benchmarking

�Improving on the benchmark

�Searching for the least-cost design

�Seeking an implementable design

•Value of modeling

�Visualizing demand and locations

�Selecting candidate sites

�Fast searching to configure network

�Easy to evaluate “what if” questions

Table

Demand map

Demonstration

Model Run Typea

Cost Type

Benchmark

Improved Benchmarkb

Max. Savings Networkc

Implementable Networkd

Inventory and warehousing Capital $103,110 $87,008 $87,626 $100,737 Tax and insurance 38,756 47,957 19,037 34,002

Order processing 284,366 223,820 198,210 262,413 Storage 165,788 138,412 119,749 119,293 Handling 299,863 265,252 329,385 253,479 Subtotal $891,883 $762,449 $754,007 $769,944 Transportation Plant to warehouse $261,853 $213,567 $0 $206,542 Warehouse to customer 1,041,661 1,113,978 1,453,812 925,043 Subtotal $1,303,514 $1,327,545 $1,453,812 $1,131,585 Production @Atlanta $3,861,765 $3,906,037 $832,112 $3,404,139 @Indianapolis 607,057 593,876 770,427 906,619 @Houston 587,140 498,835 2,408,764 692,441 Subtotal $5,115,962 $4,998,748 $4,001,303 $5,003,198 Total $7,311,359 $7,088,742 $6,219,122 $6,904,727 Customer Service Percentage of demand < 300 miles 65% 63% 30% 68% < 500 miles 85% 82% 45% 98% No. of warehouses 9 9 3 10 Savings vs. benchmark 0 $222,617 $1,092,237 $406,632e

At current capacities

No servicerestriction

aCosts are totals for three product groups.

bPlant capacity restrictions are at current levels but with no service restrictions. The result is direct shipments from plants.

cNo plant capacity or customer service restrictions. The result is direct shipments from plants.

dCurrent plant capacities are in effect and the desired service level is set at 500 miles.

eEssentially no investment in plant or warehousing is required to realize these savings.

No capacityrestrictions

Desig

n A

ltern

ati

ve

s

Closely matched

Return

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Demand Profile

Return

A Selected Location

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Presenting the Design to Management

•Strategy metrics

�Saving or profit improvement

�Cash flow

�Return-on-investment

•A company example

�About $2 billion in sales

�A reduction of 19 warehouses to 4

�Savings of $20 million per year

�Cash flow increased by $59 million

from inventory reduction

�ROI was projected at 374%

Want all to be positive

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Implementation Considerations

•Benefits may not accrue to all parties

•Risk of change may not be easily

accepted

•Timing of changes to network

•Sensitivity analysis should be

performed to check design stability

•Data should be maintained to answer

future “what if” questions

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What to Take Away

•Network design is probably the most important strategy issue you will face

•Significant benefits can be realized in as short a time as one year when “change” in the business has been significant

•Your company is likely to benefit significantly from network design/redesign

•Designs should to be customized within companies and within product families

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Questions?