management support systems. strategic logistics network design modeling
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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?
Network Modeling Basics
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?
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 Process
Procurement CostsProcurement Capacities
BeginActivity
EndActivity
Procurement Activity
Examples of Network Arcs
Production Process (Line)
Production CostsProduction Capacities
BeginProcess
EndProcess
Production Process
Examples of Network Arcs
DC Handling/ Storage Activities
DC CostsDC Handling CapacitiesDC Storage Capacities
Entrance to DC
(Unloading Dock)
Exit from DC
(Loading Dock)
DC Activities
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
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.
Model for the 1980’s
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.
Model for the 1990’s
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
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
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 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
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
Facility Data: Making It Easier
Total Cost
Total Volume
• Use Regression Data
Variable Cost “m”
y = mx + b
Fixed Cost “b”
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 (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
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 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: 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 Solver (Optimization) Exercises
Run Solver (Optimization) Exercises
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
Analyze Solver Results
Analyze Solver Results
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
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: 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
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
Replenishment OutboundInbound
DC TransferInterplant
Raw Materials
Intermediate Products
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
Replenishment OutboundInbound
DC TransferInterplant
Raw Materials
Intermediate Products
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
Inbound cost $570,000
Outbound cost $200,000
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
Inbound cost $120,000
Outbound cost $470,000
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