Network Design
Network design and optimization
Network design overview
Enterprise facility network
Warehouse requirements
Systems concept and analysis
Total cost integration
Formulating
logistical strategy
Strategic Planning Overview
External Environment
Economic Regulatory Technological
Competitive
Corporate Objectives &
Strategy
Internal Factors Strengths Weaknesses Opportunities
Threats
Competitive Strategy
productio n marketin
g
Functional strategic plans
SWO PEST T
PEST Analysis
Political / Legal
Monopolies legislation
Environmental protection laws
Taxation policies
Foreign trade regulations
Employment law
Government stability
Economic
Business cycles
Interest rates
Money supply, inflation
Unemployment
Disposable income
Energy availability costs Socio-cultural
Population demographics
Income distribution
Social mobility
Lifestyle changes
Attitude to work & leisure
Consumerism
Education levels
Technological
Government spending on research
Government & industry focus on technological effort
New discoveries / developments
Speed of technology transfer
Rates of obsolescence
Corporate Objectives &
Strategy
Competitive Strategy
Logistics process
design
Competitive Strategy
Logistics network
design
Logistics informatio n system
design
Logistics organizati
onal structure
Logistics Network Design:
Includes aspects related to the physical flow of the product through a company’s operation, the inventory that should be held, the number and location of
warehouses, the use of stockless
warehouses, and final product delivery.
One key to the determination of an
appropriate physical design is the use of trade-offs between logistics competencies and between the different company
Logistics Network Design
Logistics Network Design
Corporate Objectives &
Strategy
Competitive Strategy
Logistics process
design
Competitive Strategy
Logistics network
design
Logistics informatio n system
design
Logistics organizati
onal structure
Enterprise facility network
Availability of economical transportation provides opportunity for facility networks
Design requirements are
from integrated procurement, manufacturing and customer accommodation strategies
Logistics requirements are
satisfied by achieving total
Spectrum of location decisions
Transportation services link locations into an integrated logistical system
Selection of individual locations represents competitive and cost-
related logistical decisions
Manufacturing plant
locations may require several years to fully deploy
Warehouses can be arranged to use only during specified times
Retail locations are
influenced by marketing and competitive conditions
Local presence: an obsolete paradigm
Local presence paradigm
Transportation
services started out erratic with few
choices
Customers felt that inventory within the local market area was needed to provide
consistent delivery
Contemporary view
Transportation services have expanded
Shipment arrival times are dependable and consistent
Information technology
Provides faster access to customer requirements
Enables tracking of transport vehicles
Warehouse requirements
Warehouses exist to lower total cost or improve customer service
Warehouses specialize in supply or demand facing services
Facilities used for inbound materials are supply facing warehouses
Facilities used for customer accommodation are demand facing warehouses
Functionality and justification are different based on facilities support role
Procurement
Manufacturing
Customer accommodation
Procurement: lowest total inbound cost
Limited number of deeper relationships with suppliers
Life cycle considerations
E.g. material purchase, reclamation, and disposal of unused materials
Debundling of value-added services leading to new structural relationships with suppliers
Seasonality of selected supplies
Opportunities to purchase at reduced prices
Rapid accommodation of manufacturing spikes
Facilities placing more emphasis on sorting and
sequencing materials
Manufacturing drivers:
consolidation
Provide customers full-line product
assortment on a single invoice at truckload transportation rates
Choice of manufacturing strategy is primary driver
Make to plan (MTP)
Requires substantial demand facing warehousing
Make to order (MTO)
Requires supply facing support, but little demand warehousing
Assemble to order (ATO)
Customer accommodation:
inventory
Maximize consolidation and length of haul from plants
Rapid replenishment from wholesalers
E.g. food and mass merchandise industries
Market-based ATO situations using decentralized warehouses
Size of market served by warehouse based on
Number of suppliers
Desired service speed
Size of average order
Cost per unit of local delivery
Warehouse justification
Must achieve freight consolidation with
warehouse positioning
Inventory storage to support customized orders
Mixing facilities to
support flow-through and cross-dock sorting
Based on providing service or cost advantage
Key design questions to ask
How many and what kinds of warehouses should a firm establish?
Where should they be located?
What services should they provide?
What inventories should they stock?
Which customers should they service?
The “Systems” Concept
Systems concept is an analytical framework that seeks total integration of components
essential to achieving stated objectives
Components of logistical system are its functions
Order processing
Inventory
Transportation
Warehousing
Materials handling and packaging
Facility network design
Systems analysis
Focus on process perspective
balancing performance between functional areas both within the enterprise and across its supply chain
Components linked together in a balanced system will produce
greater end results than possible through individual performance
seeks to quantify trade-
A systems concept example
Customer service is an integral part of total system performance
However,
Customer service must also be balanced against other components
Accommodating the customer to the extent that you put yourself out of business is not serving the
customer!
There must be a balance between cost and customer service
Building relationships with customers is key to this balance
i.e. customers become a component of the supply chain system
Total cost integration
Initial network of facilities are driven by economic factors
Transportation economics
Inventory economics
Cost trade-offs of these individual functions are identified, but
A system analysis approach (i.e. total cost
integration) is used to identify the least-total-cost for the combined facility network
Transportation economics
Two basic principles for economical transportation
Quantity principle is that individual shipments should be as large as the carrier can legally
transport in vehicle
Tapering principle is that large shipments should be transported distances as long as possible
cost-based warehouse justification using transportation consolidation
Assumptions
Average shipment = 500 lbs
Freight rate to
customer = $7.28 per cwt
Volume transport rate
= $2.40 per cwt
For shipments 20,000+
lbs
Local delivery within market = $1.35 per cwt
Options
Direct ship to
customer = $36.40 per average shipment
Ship to market at volume rate and distribute locally
Total rate = $3.75 per cwt
$18.75 per average shipment
Network transportation cost
minimization
Inventory economics is driven by service response time
Performance cycle is key driver
Forward
deployment of inventory
potentially
improves service response time, but
Increases overall
system inventory
Service-based warehouse justification
Inventory consists of
Base stock
Safety stock
In-transit stock
What is the impact of adding warehouses to each of these inventories?
Base stock is independent of number of market facing warehouses
What about in-transit stock?
Additional warehouses typically reduce total in-transit inventory
Figure 13.3 Logistical Network:
Two Markets, One Warehouse Figure 13.4 Logistical Network:
Two Markets, Two Warehouses
Table 13.1 Transit Inventory under Different
Logistical Networks Results
6 day
s
10 day s
6 day
s 4
day s
Inventory summary
Base stock determination is independent of number of market facing warehouses
In-transit stock will typically decrease with the addition of warehouses to the network
Safety stock increases with number of warehouses added to the network
New performance cycle requires additional safety stock
Network Modeling Steps
Strategic importance of network design
Critical variables in network design:
Changing Customer Service Requirements
Shifting Locations of Customer and/or Supply Markets
Change in Corporate Ownership
Cost Pressures
Competitive Capabilities
Corporate Organizational Change
High-level Modeling Steps
Network design process
Analysis (example)
Recommendations and
Implement
Network Design: Step 1
Step 1: Define Network Strategy &
Requirements
Form a design team
Includes the overall system including business strategy requirements and relevant constraints, such as planning and environmental issues.
Also includes approaches described in business and supply chain strategy literature, such as on competitive advantage and consumer value and the use of scenario planning
Network Design: Step 2 & 3
Step 2: Perform a Logistics Audit & Collect Data
Forces a comprehensive perspective
Develops essential information
These include product details, order profiles,
shipping patterns, cost data and site information
Step 3: Examine the Logistics Network Alternatives
Use modeling to provide additional insights
Develop preliminary designs
Test model for sensitivity to key variables
Logistics Audit
Network Design: Steps 4 & 5
Step 4: Conduct a Facility Location Analysis
Analyze attributes of candidate sites
Apply screening to reduce alternative sites
Step 5: Make Decisions regarding Network and Facility Location
Evaluate sites for consistency with design criteria.
Confirm types of change needed
Logistics Network Design
Step 6: Develop an Implementation Plan
Plan serves as a road map in moving from current system to the desired logistics network.
Firm must commit funds to implement the
changes recommended by the re-engineering process.
Major Locational Determinants
Regional Determinants Site-Specific Determinants Labor climate Transportation access
Availability of transportation
● TruckProximity to markets
● AirQuality of life
● RailTaxes & other incentives
● WaterSupplier networks Inside/outside metro area
Land costs and utilities Availability of workforce
Company preference Utilities
Major Locational Determinants: Current Trends Governing Site Selection
Strategic positioning of inventories, with faster moving items located at “market-facing”
logistics facilities, and slower moving items at national or regional sites.
Direct plant-to-customer shipments which can reduce or eliminate the need for company-
owned supply or distribution facilities.
Growing need and use of “cross-docking”
facilities.
Use of third party logistics companies which
negate the need for the firm to maintain or
establish its own distribution facilities.
Supply Chain Scenario for Network Analysis
Raw
Materials Warehouse Manufacture Warehouse Distribution
Center Retail
Modeling Approaches:
Optimization Models
Based on precise mathematical procedures guaranteed to find the “best” solution from among a number of feasible solutions.
One approach is Linear Programming (LP).
Useful in linking facilities in a network.
Defines optimum distribution patterns.
Modern computers facilitate LP modeling.
Modeling Approaches:
Simulation Models
Based on developing a model of a real system and conducting experiments with this model.
In location theory, a firm can test the effect of various locations on costs and profitability.
Does not guarantee an optimum solution but evaluates through the iterative process.
Simulations are either static or dynamic
depending upon how whether they incorporate
data from each run into the next run.
Modeling Approaches:
Heuristic Models
Based upon developing a model that can provide a good approximation to the least- cost location in a complex decision problem.
Can reduce a problem to a manageable size.
This approach can be as sophisticated as mathematical optimization approaches.
The “Grid Technique” is an example of a
heuristic approach and will be demonstrated
in the next few slides.
Heuristic Modeling Approach:
The Grid Technique
The Grid Technique attempts to locate a fixed
facility such that the location represents the least- cost center for moving inbound materials and
outbound product within a geographic grid.
It finds the ton-mile center of mass; that is, the geographic point where transportation costs are minimized (as discussed in class)
This simple approach works where all transportation rates are the same.
However, we know that freight rates for raw
materials are generally lower than those for
finished goods.
Example of:
The Grid Technique
When we use different freight rates, the grid model will tend to pull the location of our
fixed facility toward the higher rated areas.
Thus, the location of a production plant will tend to be nearer the market, reducing the overall transportation of the higher rated finished goods in favor of increasing
transportation of lower rated raw materials.
Heuristic Modeling Approach:
The Grid Technique
Advantages
Simple to use
Provides a starting point for further analysis
Can accommodate “what if” questions
Limitations
Static approach
Linear rates
No consideration of topography
Does not consider direction of movement
Total cost of the network
Figure 13.6 combines cost curves from Figure 13.2 and 13.5
Lowest cost points on each curve
For total transportation cost between 7 and 8 facilities
For inventory cost it would be a single warehouse
For total cost of network it is 6 locations
Trade-off relationships
Minimal total cost point for the system is not at the point of least cost for either transportation or inventory
Total cost concept
Limitations to accurate total cost analysis
Many important costs are not specifically
measured or reported
Need to consider a wide variety of
network design alternatives
Alternative shipment sizes
Alternative modes of shipment
Range of available warehouse locations
Evaluating alternative
customer service levels and costs
General approach to finalizing a logistical strategy
Determine a least-total-cost network
Measure service availability and capability for this network
Conduct sensitivity analysis for incremental service options
Use cost and revenue associated with each option
Finalize the plan
