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Network PlanningK.L.BhaskaranThe Logistics NetworkThe Network consists of:Facilities:Vendors, Manufacturing Centres, Warehouse/ Distribution Centres, Retailers and CustomersRaw materials, components and finished products that flow between the facilities.2Network DesignCosts - Manufacturing Cost - Facility Cost - Logistics Cost - Inventory Cost

Target - Achieve planned Service Levels3Design or configure the network so as to minimize annual system-wide cost subject to a variety of service level requirements Objective of Logistics Networking Why Network Planning?Find the right balance between inventory, logistics and manufacturing costsMatch supply and demand under uncertainty by positioning and managing inventory effectively,Utilize resources effectively by sourcing products from the most appropriate manufacturing facility Network DesignPhysical configuration and infrastructure of the supply chain. A strategic decision with long-lasting effects on the firm. Decisions relating to plant and warehouse location as well as distribution and sourcing Objective and Trade-OffsObjective: Design or reconfigure the logistics network in order to minimize annual system-wide cost subject to a variety of service level requirements

Increasing the number of warehouses typically yields:An improvement in service level due to the reduction in average travel time to the customersAn increase in inventory costs due to increased safety stocks required to protect each warehouse against uncertainties in customer demands.An increase in overhead and setup costsA reduction in outbound transportation costs: transportation costs from the warehouses to the customersAn increase in inbound transportation costs: transportation costs from the suppliers and/or manufacturers to the warehouses.Network Planning Step-1 Network design

Number, locations and size of manufacturing plants warehouses and suppliers Assignment of retail outlets to warehouses

Major sourcing decisions

Typical planning horizon is a few years. Network Planning Step -2 Inventory positioning Identifying stocking points

Selecting facilities that will produce to stock and thus keep inventory Facilities that will produce to order and hence keep no inventory

Related to the inventory management strategies

9Network Planning Step-3 Resource allocation

Determine whether production and packaging of different products is done at the right facility

What should be the plants sourcing strategies?

How much capacity each plant should have to meet seasonal demand?

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INDIAABROADLogistics Network ConfigurationConfiguration of the logistics network may involve the following strategic decisionsDetermining the number of retailers, distribution centers and manufacturing facilitiesDetermining the location of each facilityDetermining the size of each facilityProducts to be manufacture/stored in each manufacturing facilityLocation of suppliersDeciding SKUs in every distribution locationAllocating retailers to different distribution centresDetermining transportation modesDetermining the operation of the network (direct shipments, e.g.)12Roles of different type of facilitiesManufacturing plantsResponsible for manufacturing the goods for distributionSome companies may not own manufacturing plants

Distribution centresReducing lead times, increasing product availability at the retailer level (depot effect)Enabling economies of scale by consolidating shipments from the manufacturing plants. Delaying the allocation of material to retailers (joint ordering effect)Providing a second level of support for emergency orders at retailer levelConsolidation point for reverse logisticsLocalization of goods to different countries

Retailers (stores, bases)Primary access point for customers

13Facility (Manufacturing) DecisionsWhat is the role of every facility? What should it make ?What should be the capacity?Where should it be located?What markets should it cater to?Where should the suppliers be located?

14Factors influencing network design Strategic factors - Cost leadership - Responsiveness/variety Technological factors Macroeconomic factors - Tariffs and taxes - Exchange rate and demand risk - Political factors Infrastructure factors Competitive factors

15Factors influencing network designCustomer response time and local presenceLogistics and facility costsInventory costsTransportation costsInbound versus outboundExternal versus internal fleetTruckload (TL) versus less than truckload (LTL)Facility costsSetup Operating costs

16Open questions in network designDo I need a distribution centre at all?How many levels do I need in distribution?How many distribution centers do I need?What is the impact of competition on facility decisions?How many retail stores do I need?

17Data for Network Design 1 A listing of all products 2 Location of customers, stocking points and sources 3 Demand for each product by customer/Retail location 4 Transportation rates 5. Warehousing costs 6 Shipment sizes by product 7 Order patterns by frequency, size, season, content 8 Order processing costs 9 Customer service goals10 Production Costs11 Sourcing Costs18Data AggregationCustomer Zone

Go by Pincode

Product Groups

Distribution patternProducts picked up at the same source and destined to the same customers Logistics characteristics like weight and volume. Product typeproduct models or style differing only in the type of packaging.

Replacing Original Detailed Data with Aggregated DataTechnology exists to solve the logistics network design problem with the original dataData aggregation still useful because forecast demand is significantly more accurate at the aggregated levelAggregating customers into about 150-200 zones usually results in no more than a 1 percent error in the estimation of total transportation costsGeneral Rules for AggregationCustomers can be classified into classes according to their service levels or frequency of delivery Make sure each zone has approximately an equal amount of total demand Zones may be of different geographic sizes. Place aggregated points at the center of the zone

Internal Transportation RateFor company-owned trucks Data Required:Annual costs per truckAnnual mileage per truckAnnual amount deliveredTrucks effective capacityCalculate cost per mile per SKU.External Transportation RateTwo Modes of TransportationTruckload, TLCountry sub-divided into zones. One zone/state except for:

Zone-to-zone costs provides cost per mile per truckload between any two zones.

TL cost from Coimbatore to Mumbai = Coimbatore Mumbai cost per mile X Coimbatore Mumbai distanceTL cost structure is not symmetricLess-Than-Truckload, LTL Class ratesstandard rates for almost all products or commodities shipped. Classification tariff system that gives each shipment a rating or a class. Factors involved in determining a products specific class include: product density, ease or difficulty of handling and transporting, and liability for damage.After establishing rating, identify rate basis number. Approximate distance between the loads origin and destination. With the two, determine the specific rate per hundred pounds (hundred weight, or cwt) from a carrier tariff table (i.e., a freight rate table).Exception rates provides less expensive ratesCommodity rates are specialized commodity-specific ratesExternal Transportation RateTwo Modes of TransportationReevaluation of InfrastructureChanges in: demand patternsproduct mixproduction processessourcing strategies cost of running facilities. Mergers and acquisitions may mandate the integration of different logistics networks26Logistics CostsFixed costsOperational CostsMaintenance Costs

Total Cost Analysis

27Costing SystemDirect LabourDirect MaterialDirect Overhead

Indirect costsDirect MaterialDirect LabourDirectOverheadOther CostsProductCostHow do you allocate these?29Cost CentresParts of the business to which particular costs can be attributed In large businesses this can be a particular location, section of the business, capital asset or human resource/sEnable a business to identify where costs are arising and to manage those costs more effectively

2930Full CostingA method of allocating indirect costs to a range of products produced by the firm.e.g. if a firm produces three products - a, b, and c - and has indirect costs of Rs.1 million, assume proportion of direct costs of 20% for a, 55% for b and 25% for cIndirect costs allocated as 20% of Rs.1 million to a, 55% of Rs.1 million to b and 25% of Rs.1 million to c

3031Logistics CostsAbsorbed in different cost elements.Costing is based traditionally on functional basisCosts are averaged out.

32How can logistics costs be representedProblems with traditional cost accounting as related to logistics The true costs of servicing different customer types, channels and market segments are poorly understood.Costs are captured at too high at a level of aggregation.Costing is functionally oriented at the expense of output.The emphasis on full cost allocation to products ignores customer costs 33

Is it correct ?34Logistics costsHow do you find out if it is profitable to do business with a customer?The costing system should mirror the material flow.The costing system should be capable of enabling separate cost and revenue analyses to be made by customer type, market segment or distribution channel. 35Logistics CostsDefine the desired outputs of the logistics systemIdentify the costs associated with providing these outputs.Conventional CostingTotal Cost = Material + Labour+ OverheadsOverheads are allocated to the products on volume based measures e.g. labour hours, machine hours, units producedWill this not distort the costing in the new environment?ABC provides an Alternative.Activity-based costing37Activity-based costingAllocation of indirect costs based on activitiesResults in better allocationDoes provide true costABC Purpose38Criticisms of Traditional Cost AllocationAssumes all cost is volume-relatedDepartmental focus, not process focusFocus on costs incurred, not cause of costsActivity-based costingTodays businesses are working in an increasingly complex environment.Use of Advanced TechnologyProduct Life CycleProduct ComplexityChannels of DistributionQuality RequirementsProduct DiversityActivity-based costing40Traditional allocation method

Activity-based allocation methodCostsProductsCosts

CustomersActivitiesFirst stageSecond stageActivity-based costing41When is ABC Most Useful?High OverheadsProduct Diversity or Multiple ProductsCustomer DiversityService DiversityActivity-based costing Customer 1 Customer 2 Customer 3InboundStorage Picking &PackingOutbound20 1005020206010027013023037040 907017080210180400How do you capture data?

I.T System

Time Sheets44Attributable CostThis is a cost per unit that could be avoided if a product or function were to be discontinued entirely without changing the support organization structure.You supply from Chennai to a customer in Pune and another customer in Mumbai What are the cost implications, a. If you decide not to supply to Pune Customer? b. If you decide not to supply to Mumbai customer? Channel StructureDepends on - Length. How many intermediaries/ distributor, wholesaler, retailer, sub retailers? - Breadth : How many wholesalers, distributors etc? - How many different types of channels?45Design Options for a Distribution NetworkManufacturer Storage with Direct ShippingManufacturer Storage with Direct Shipping and In-Transit MergeDistributor Storage with Carrier DeliveryDistributor Storage with Last Mile DeliveryManufacturer or Distributor Storage with Consumer PickupRetail Storage with Consumer PickupSelecting a Distribution Network Design46Mfr.DistributorWholesaler LengthRetailerDistributor WholesalerRetailerBreadthLength and Breadth48Some Distribution ChoicesDirect ship to customerFrom factoryDirect ship to customer via in-transit mergei.e., have product elements merged at one site before going to the customerDirect ship to customer via retailerDirect ship to retailerWarehouse/Distribution Center shipping to retail storeRetail store to customerLast mile issue

48Manufacturer Storage withDirect ShippingManufacturerRetailerCustomersProduct FlowInformation FlowIn-Transit Merge NetworkFactoriesRetailerProduct FlowInformation FlowIn-Transit Merge by CarrierCustomersDistributor Storage withCarrier Delivery FactoriesCustomersProduct FlowInformation FlowWarehouse Storage by Distributor/RetailerDistributor Storage withLast Mile Delivery FactoriesCustomersProduct FlowInformation FlowDistributor/Retailer Warehouse Direct to RetailManufacturerRetailer53 Milk Run 54WarehouseManufacturerRetailerAll Shipments via DCWarehouse

55WarehouseManufacturerRetailerMilk Run from DCWarehouse

56BEAGFCDPoint to Point SystemHub and Spoke System5758ComparisonNetwork StructureProsConsDirect Shipping-No intermediate warehouse-Simple to Coordinate-High Inventories (Due to large lot size )- Significant receiving expenseDirect Shipping with milk runs-Lower transportation cost for small lots- Lower inventoriesIncreased coordination complexitiesAll shipments via central DC-Lower inbound transportation costs through consolidation

-Increased inventory cost- Increased handling at DC5859Comparison ( continued )Network StructureProsConsAll shipments through central DC with cross docking-Very low inventory requirement- Lower transportation cost through consolidationIncreased coordination complexityShipping via DC using milk runs- Lower inbound transportation cost for small lots- Further increase in coordination complexityTailored network-Transportation choice best matches needs of individual product and storeHighest coordination complexity59