scm part 2 logistics network

7/31/2019 SCM Part 2 Logistics Network

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Logistics Network-issues involved in the designand configuration of the logisticsnetwork

1. Determining the appropriatenumber of warehouses.

2. Determining the location of each warehouse.

3. Determining the size of eachwarehouse.

4. Allocating space for productsin each warehouse.

5. Determining which products

customers will receive fromeach warehouse.


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Increasing the number of warehousestypically yields:

1. An improvement in service leveldue to the reduction in averagetravel time to the customers.

2. An increase in inventory costsdue to increased safety stocksrequired to protect eachwarehouse against uncertainties incustomer demands.

3. An increase in overhead andsetup costs.

4. A reduction in outboundtransportation costs: transportationcosts from the warehouses to thecustomers.


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5. An increase in inboundtransportation costs: transportation

costs from the suppliers and/ormanufacturers to the warehouses.

Data Collection

- Involves large amounts of data

including information on:1. Location of customers, retailers,

existing warehouses anddistribution centers, manufacturingfacilities, and suppliers.

2. All products, including volumes,and special transport modes

3. Annual demand for eachproduct by customer location.

4. Transportation rates by mode.


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5. Warehousing costs, includinglabor, inventory carrying charges,

and fixed operating costs.6. Shipment sizes and frequencies

for customer delivery

7. Order processing costs

8. Customer service requirementsand goals.

Transporting Rates

- Next step in constructing an

effective distribution networkdesign model is to estimatetransportation costs.

- Company-owned trucks estimatedcosts to be used to calculate costper mile per SKU:


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o Annual costs per truck

o Annual mileage per truck

o Annual amount delivered

o Trucks effective capacity

Mileage Estimation/Determination- The cost of transporting products

from a specific source to a specificdestination is a function of thedistance between these two points.

Warehouse Costs

1. Handling Costs. These includelabor and utility costs that areproportional to annual flowthrough the warehouse.

2. Fixed Costs. These capture allcost components that are not


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proportional to the amount of material that flows through the

warehouse. The fixed cost istypically proportional towarehouse size (capacity) but in anonlinear way. This cost is fixedin certain ranges of thewarehouse size.

3. Storage Costs. These representinventory holding costs, which areproportional to average positive

inventory levels.

Inventory Turnover Ratio

= Annual Sales / Average Inventory

LevelAnnual storage costs = ?


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Annual storage cost = Averageinventory level * Annual Handlingcosts

Warehouse Capacities

- The question is how to estimate theactual space required, given thespecific annual flow of material

through the warehouse.

Potential Warehouse Locations

- It is also important to effectively

identify potential locations for newwarehouses. Typically, these


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locations must satisfy a variety of conditions:

o Geographical and infrastructureconditions

o Natural resources and laboravailability

o Local industry and taxregulations

o Public interest

Service Level Requirements

- Service level is the proportion of customers whose distance to theirassigned warehouse is no more

than a given distance.o Ex. We require that 95% of the

customers be situated within


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200 miles of the warehousesserving them.

Future Demand

- Changes in customer demand overthe next few years should be taken

into account when designing thenetwork.

Model and Data Validation

- How do we ensure that the dataand model accurately reflect thenetwork design problem?

- This is typically done by

reconstructing the existing networkconfiguration using the model andcollected data, and comparing the


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output of the model to existingdata.

- The data can be compared with theaccounting information. This isoften the best way to identifyerrors in the data, problematicassumptions, modeling flaws, andso forth.

o Does the model make sense?

o Are the data consistent?

o Can the model results be fullyexplained?

o Did you perform sensitivityanalysis?

Solution Techniques


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- Once data are collected, tabulated,and verified, the next step is to

optimize the configuration of thelogistics network.

o Mathematical Optimization thatincludes:

Exact algorithms that areguaranteed to find optimalsolutions

Heuristic algorithms that findgood solutions, notnecessarily optimal solutions.

o Simulation models that providea mechanism to evaluatespecified design alternatives

created by the designer.


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Key Features of a NetworkConfiguration Decision-Support

System- Flexibility, the ability of the system

to incorporate a large set of preexisting network characteristics.

- Customer-specific service levelrequirements

- Existing warehouse.

- Expansion of existing warehouses

- Specific flow pattern- Warehouse-to-warehouse flow

- Bill of materials

scm part 2 logistics network

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