simchi-ch03-network planning

8/14/2019 simchi-ch03-Network Planning

1/37

2013-10-16

1

Chapter 3

Network Planning

3.1 Why Network Planning?

Find the right balance between inventory,,

Match supply and demand under uncertainty by

positioning and managing inventory effectively, Utilize resources effectively by sourcing products

from the most appropriate manufacturing facility

3-2


2/37

2013-10-16

2

Three Hierarchical Steps Network design

Number, locations and size of manufacturing plants andwarehouses

Assignment of retail outlets to warehouses Major sourcing decisions Typical planning horizon is a few years.

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

3-3

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?

3.2 Network Design

Physical configuration and infrastructure of the.

A strategic decision with long-lasting effects on

the firm. Decisions relating to plant and warehouse

location as well as distribution and sourcing

3-4


3/37

2013-10-16

3

Reevaluation of Infrastructure

Changes in:

demand patterns

pro uct m x

production processes

sourcing strategies

cost of running facilities.

Mergers and acquisitions may mandate the

3-5

Key Strategic Decisions

Determining the appropriate number of facilities.

Determining the location of each facility.

Determining the size of each facility.

Allocating space for products in each facility.

Determining sourcing requirements.

3-6

, . .,allocation of customers to warehouse


4/37

2013-10-16

4

Objective and Trade-Offs Objective: Design or reconfigure the logistics network in

order to minimize annual system-wide cost subject to avar e y o serv ce eve requ remen s

Increasing the number of warehouses typically yields: An improvement in service level due to the reduction in average

travel time to the customers An increase in inventory costs due to increased safety stocks

required to protect each warehouse against uncertainties incustomer demands.

3-7

An increase in overhead and setup costs A reduction in outbound transportation costs: transportation

costs from the warehouses to the customers An increase in inbound transportation costs: transportation costs

from the suppliers and/or manufacturers to the warehouses.

Data Collection

Locations of customers, retailers, existing warehousesand distribution centers, manufacturing facilities, andsupp ers.

All products, including volumes, and special transportmodes (e.g., refrigerated).

Annual demand for each product by customer location. Transportation rates by mode. Warehousing costs, including labor, inventory carrying

charges, and fixed operating costs.

3-8

Shipment sizes and frequencies for customer delivery. Order processing costs. Customer service requirements and goals. Production and sourcing costs and capacities


5/37


6/37

2013-10-16

6

General Rules for Aggregation

Aggregate demand points into at least 200zones

o s or cases w ere cus omers are c ass e n oclasses according to their service levels or frequencyof delivery

Make sure each zone has approximately anequal amount of total demand

Zones ma be of different eo ra hic sizes.

3-11

Place aggregated points at the center of thezone

Aggregate products into 20 to 50 product groups

Customer AggregationBased on 3-Digit Zip Codes

, ,

Total Customers: 18,000

, ,

Total Customers: 800

3-12

Cost Difference < 0.05%


7/37

2013-10-16

7

Product Aggregation

Total Cost:$104,564,000 Total Cost:$104,599,000

3-13

Cost Dif ference: 0.03%

Transportation Rates

Rates are almost linear with distance but not

Differences between internal rate (owned truck)

and external rate (rented truck)

3-14


8/37

2013-10-16

8

Internal Transportation Rate For company-owned trucks

a a equ re :

Annual costs per truck

Annual mileage per truck

Annual amount delivered

Trucks effective capacity

3-15

a cu a e cos per m e per .

External Transportation Rate forTwo Modes of Transportation

Truckload, TL- .

except for: Big states, such as Florida or New York (two zones)

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

=

3-16

Illinois-Massachusetts cost per mile X Chicago-Boston distance

TL cost structure is not symmetric


9/37

2013-10-16

9

Less-Than-Truck load, LTL Class rates

standard rates for almost all products or commodities shipped.

External Transportation Rate for

Two Modes of Transportation

Classification tariff system that gives each shipment a rating or aclass.

Factors involved in determining a products specific class include: product density, ease or difficulty of handling and transporting, and liabil ity

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

3-17

, . .,rate table).

Exception rates provides less expensive rates Commodity rates are specialized commodity-specific

rates

Ex) SMC3s CzarLite

Engine to find transportation rates in fragmented

Nationwide LTL zip code-based rate system.

Offers a market-based price list derived fromstudies of LTL pricing on a regional,interregional, and national basis.

3-18

a r pr c ng sys em

Often used as a base for negotiating LTLcontracts between shippers, carriers, and third-party logistics providers


10/37

2013-10-16

10

Transportation Rate for Shipping4,000 lbs.

3-19

FIGURE 3-7: Transportation rates fo r shipping 4,000 lb

Mileage Estimation

Estimate lona and lata, the longitude and latitude

Distance between a and b

For short distances2 2

)69 ( ( )a b a b a blo nD lo n la t la t

3-20

1 2 2) ))) ))2(69) sin (sin( cos( cos( (sin(

2 2

a b a b

ab a X b X

lat lat lon lonD lat lat


11/37

2013-10-16

11

Circuity Factor,

Equations underestimate the actual road.

Multiply Dab by .

Typical values:

= 1.3 in metropolitan areas

= 1.14 for the continental United States

3-21

Chicago-Boston Distance

lonChicago = -87.65 latChica o = 41.85 lonBoston = -71.06 lonBoston = 42.36

DChicago, Boston = 855 miles Multiply by circuity factor = 1.14 Estimated road distance = 974 miles Actual road distance = 965 miles

3-22

GIS systems provide more accuracy Slows down systems Above approximation good enough!


12/37

2013-10-16

12

Warehouse Costs

Handling costs Labor and utility costs

.

Fixed costs All cost components not proportional to the amount of

flow

Typically proportional to warehouse size (capacity)but in a nonlinear way.

3-23

Inventory holding costs

Proportional to average positive inventory levels.

Determining Fixed Costs

3-24

FIGURE 3-8: Warehouse fixed cos ts as a func tion of thewarehouse capacity


13/37

2013-10-16

13

Determining Storage Costs Multiply inventory turnover by holding cost

nven ory urnover =

Annual Sales / Average Inventory Level

3-25

Warehouse Capacity

Estimation of actual space required

Avera e inventor level =

Annual flow through warehouse/Inventory turnover ratio

Space requirement for item = 2*Average Inventory Level

Multiply by factor to account for access and handling

aisles,

picking, sorting and processing facilities

3-26

AGVs

Typical factor value = 3


14/37


15/37

2013-10-16

15

Service Level Requirements Specify a maximum distance between each

Proportion of customers whose distance to theirassigned warehouse is no more than a givendistance

95% of customers be situated within 200 miles of the

3-29

Appropriate for rural or isolated areas

Future Demand

Strategic decisions have to be valid for 3-5 years

ons er scenar o approac an ne presenvalues to factor in expected future demand over

planning horizon

3-30


16/37

2013-10-16

16

$80

$90

Number of Warehouses

OptimalNumber

of Warehouses

$20

$30

$40

$50

$60

$70

Cost(millions$)

Total Cost

Transportation Cost

Fixed Cost

Inventory Cost

3-31

$-

$10

0 2 4 6 8 10

Number of Warehouses

Industry Benchmarks:Number of Distribution Centers

Avg.# ofWH 3 14 25

Pharmaceuticals Food Companies Chemicals

3-32

- High margin product- Service not important (oreasy to ship express)- Inventory expensiverelative to transportation

- Low margin product- Service very important- Outbound transportationexpensive relative to inbound


17/37

2013-10-16

17

Model Validation

Reconstruct the existing network configuration using themodel and collected data

Compare the output of the model to existing data

Often the best way to identify errors in the data, problematicassumptions, modeling flaws.

Make local or small changes in the network configurationto see how the system estimates impact on costs andservice levels. Positing a variety of what-if questions.

Answer the following questions:

3-33

Does the model make sense? Are the data consistent? Can the model results be fully explained? Did you perform sensitivity analysis?

Solution Techniques

Mathematical optimization techniques:

1. Exact algorithms: find optimal solutions

2. Heuristics: find good solutions, notnecessarily optimal

Simulation models: rovide a mechanism to

3-34

evaluate specified design alternatives created bythe designer.


18/37

2013-10-16

18

Example Single product

Plant p2 has an annual capacity of 60,000 units.

The two plants have the same production costs.

There are two warehouses w1 and w2 withidentical warehouse handling costs.

3-35

There are three markets areas c1,c2 and c3 withdemands of 50,000, 100,000 and 50,000,respectively.

Unit Distribution Costs

Facility p1 p2 c1 c2 c3warehouse

w1 0 4 3 4 5

w2 5 2 2 1 2

3-36


19/37

2013-10-16

19

Heuristic #1:

Choose the Cheapest Warehouse to SourceDemand

D1 = 50,000

D2 = 100,000$5 x 140,000

$2 x 60,000

$2 x 50,000

$1 x 100,000

W1P1

3-37

D3 = 50,000ap = ,

$2 x 50,000

Total Costs = $1,120,000

P2W2

Heuristic #2:Choose the warehouse where the total deliverycosts to and from the warehouse are the lowest

[Consider inbound and outbound distribution costs]

D = 50,000

D = 100,000$4

$5

$2

$3

$4$5

$2

$1

$0

P1 to WH1 $3P1 to WH2 $7

P2 to WH1 $7P2 to WH 2 $4

P1 to WH1 $4P1 to WH2 $6P2 to WH1 $8P2 to WH 2 $3

3-38

D = 50,000

ap = ,$2


Market #1 is served by WH1, Markets 2 and 3are served by WH2


20/37

2013-10-16

20

Heuristic #2:Choose the warehouse where the total delivery

costs to and from the warehouse are the lowest[Consider inbound and outbound distribution

costs]

D = 50,000

D = 100,000

Cap = 200,000

$5 x 90,000

$2 x 60,000

$3 x 50,000

$1 x 100,000

$0 x 50,000



3-39

D = 50,000ap = , $2 x 50,000


Total Cost = $920,000

The Optimization Model

The problem described earlier can be framed as thefollowin linear ro rammin roblem.

Let

x(p1,w1), x(p1,w2), x(p2,w1) and x(p2,w2) be the flows

from the plants to the warehouses. x(w1,c1), x(w1,c2), x(w1,c3) be the flows from the

warehouse w1 to customer zones c1, c2 and c3.

3-40

x(w2,c1), x(w2,c2), x(w2,c3) be the flows fromwarehouse w2 to customer zones c1, c2 and c3


21/37

2013-10-16

21

The problem we want to solve is:min 0x(p1,w1) + 5x(p1,w2) + 4x(p2,w1)

+ 2x 2 w2 + 3x w1 c1 + 4x w1 c2

The Optimization Model

+ 5x(w1,c3) + 2x(w2,c1) + 2x(w2,c3)

subject to the following constraints:x(p2,w1) + x(p2,w2) 60000

x(p1,w1) + x(p2,w1) = x(w1,c1) + x(w1,c2) + x(w1,c3)

x(p1,w2) + x(p2,w2) = x(w2,c1) + x(w2,c2) + x(w2,c3)

x(w1,c1) + x(w2,c1) = 50000

3-41

x(w1,c2) + x(w2,c2) = 100000x(w1,c3) + x(w2,c3) = 50000

all flows greater than or equal to zero.

Optimal Solution

Facility

warehouse

p1 p2 c1 c2 c3

w1 140,000 0 50,000 40,000 50,000

w2 0 60,000 0 60,000 0

Total cos t for the optimal strategy is $740,000

3-42


22/37

2013-10-16

22

Simulation Models

Useful for a given design and a micro-levelanalysis. Examine:

n v ua or er ng pa ern.

Specific inventory policies.

Inventory movements inside the warehouse.

Not an optimization model

Can only consider very few alternate models

3-43

Which One to Use?

Use mathematical optimization for static analysis

Use a 2-step approach when dynamics insys em as o e ana yze :1) Use an optimization model to generate a number of

least-cost solutions at the macro level, taking intoaccount the most important cost components.

2) Use a simulation model to evaluate the solutionsgenerated in the first phase.

3-44


23/37


24/37

2013-10-16

24

Single Product, Single FacilityPeriodic Review Inventory Model

Assume -

until the facility receives a shipment (IncomingService Time)

S: Committed Service Time made by the facility to itsown customers.

T: Processing Time at the facility.

3-47

Net Lead Time = SI + T - S

Safety stock at the facility:

STSI

STSIzh

2-Stage System

Reducin committed service time from facilit 2to facility 1 impacts required inventory at bothfacilities

Inventory at facility 1 is reduced

Inventory at facility 2 is increased

3-48

the committed service time at each facility

the location and amount of inventory

minimize total or system wide safety stock cost.


25/37

2013-10-16

25

Consider a two-tier supply chain

3.3.2 Integrating Inventory Positioning

and Network Design

warehouses

From there, they are shipped to secondarywarehouses and finally to retail outlets

How to optimally position inventory in the supplychain?

3-49

and secondary warehouses?, OR

Some SKU be positioned only at the primary whileothers only at the secondary?

Integrating Inventory Positioning andNetwork Design

EX 3-4 (P103)

3-50

FIGURE 3-18: Sample plot of each SKU by volume and demand


26/37

2013-10-16

26

Three Different Product Categories High variability - low volume products

ow var a y - g vo ume pro uc s, an

Low variability - low volume products.

3-51

Supply Chain Strategy Different forthe Different Categories

High variability low volume products Inventory risk is the main challenge for this products Position them mainly at the primary warehouses demand from many retail outlets can be aggregated

reducing inventory costs.

Low variability high volume products Position close to the retail outlets at the secondary

warehouses

3-52

customers reducing transportation costs.

Low variability low volume products Require more analysis since other characteristics are

important, such as profit margins, etc.


27/37

2013-10-16

27

3.4 Resource Allocation

Supply chain master planningThe process of coordinating and allocatingproduction, and distribution strategies andresources o max m ze pro or m n m zesystem-wide cost

Process takes into account: interaction between the various levels of the supply

chain

3-53

performance

Global Optimization and DSSFACTORS TO CONSIDER

Facility locations: plants, distribution centers anddemand points

Transportation resources including internal fleet andcommon carriers

Products and product information Production line information such as min lot size, capacity,

costs, etc.

Warehouse capacities and other information such as

3-54

certain technology (refrigerators) that a specificwarehouse has and hence can store certain products

Demand forecast by location, product and time.


28/37

2013-10-16

28

Focus of the Output

Sourcing Strategies:

where should each product be produced during the,

Supply Chain Master Plan:

production quantities, shipment size and storagerequirements by product, location and time period.

3-55

The Extended Supply Chain: FromManufacturing to Order Fulfillment

FIGURE 3-19: The extended supply chain: from manufacturing to o rder fulfillment

3-56


29/37

2013-10-16

29

Questions to Ask During the

Planning Process Will leased warehouse space alleviate capacity problems? When and where should the inventory for seasonal or

promotional demand be built and stored? Can capacity problems be alleviated by re-arranging

warehouse territories? What impact do changes in the forecast have on the supply

chain? What will be the impact of running overtime at the plants or

out-sourcing production? What plant should replenish each warehouse?

3-57

.long lead times and therefore requires high inventory levels.On the other hand, using air carriers reduces lead times andhence inventory levels but significantly increasestransportation cost.

Should we rebalance inventory between warehouses orreplenish from the plants to meet unexpected regionalchanges in demand?

SUMMARYNetwork Planning Characteristics

Network Design Inventory Positioning

and Management

Resource Allocation

Decision focus Infrastructure Safety stock Production Distribution

Planning Horizon Years Months Months

Aggregation Level Family Item Classes

3-58

Frequency Yearly Monthly/Weekly Monthly/Weekly

ROI High Medium Medium

Implementation Very Short Short Short

Users Very Few Few Few


30/37


31/37

2013-10-16

31

HW #3 (all) Answer and solve problems in page 108-109:

~

Present CASE studies:

- ElecComp (in page 97~102) (2 people)

- H. C. Starck, Inc. (in page 109~121) (2 people)

3-61

ElecComp Case

Large contract manufacturer of circuit boards and otherhigh tech parts.

About 27,000 high value products with short life cycles

Fierce competition => Low customer promise times

< Manufacturing Lead Times High inventory of SKUs based on long-term forecasts =>

Classic PUSH STRATEGY High shortages

3-62

Huge risk

PULL STRATEGY not feasible because of long leadtimes


32/37

2013-10-16

32

New Supply Chain Strategy OBJECTIVES:

Reduce inventory and financial risks Provide customers with competitive response times.

ACHIEVE THE FOLLOWING: e erm n ng e op ma oca on o nven ory across e var ous

stages Calculating the optimal quantity of safety stock for each component at

each stage

Hybrid strategy of Push and Pull Push Stages produce to stock where the company keeps safety stock Pull stages keep no stock at all.

Challenge: Identif the location where the strate switched from Push-based to

3-63

Pull-based Identify the Push-Pull boundary

Benefits: For same lead times, safety stock reduced by 40 to 60% Company could cut lead times to customers by 50% and still reduce

safety stocks by 30%

Notations Used

3-64

FIGURE 3-11: How to read the diagrams


33/37

2013-10-16

33

Trade-Offs If Montgomery facility reduces committed lead time to 13

days assembly facility does not need any inventory of finished goods

An customer order will tri er an order for arts 2 and 3. . Part 2 will be available immediately, since it is held in inventory

Part 3 will be available in 15 days 13 days committed response time by the manufacturing facility

2 days transportation lead time.

Another 15 days to process the order at the assembly facility

Order is delivered within the committed service time.

Assembly facility produces to order, i.e., a Pull based

3-65

strategy Montgomery facility keeps inventory and hence is

managed with a Push or Make-to-Stock strategy.

Current Safety Stock Location

3-66

FIGURE 3-12: Current safety stock location


34/37

2013-10-16

34

Optimized Safety Stock Location

3-67

FIGURE 3-13: Optimized safety stock

Current Safety Stock with LesserLead Time

3-68

FIGURE 3-14: Optimized safety stock w ith reduced lead time


35/37

2013-10-16

35

Supply Chain with

More Complex Product Structure

3-69FIGURE 3-15: Current supply chain

Optimized Supply Chain withMore Complex Product Structure

3-70FIGURE 3-16: Optimized supply chain


36/37

2013-10-16

36

Key Points

Identifying the Push-Pull boundary

Taking advantage of the risk pooling concept

Demand for components used by a number offinished products has smaller variability anduncertainty than that of the finished goods.

Replacing traditional supply chain strategiesthat are typically referred to as sequential, or

3-71

,

supply chain strategy.

Local vs. Global Optimization

3-72FIGURE 3-17: Trade-off between quoted lead time and safety stock


37/37

2013-10-16

Global Optimization For the same lead time, cost is reduced

For the same cost, lead time is reducedsignificantly

Trade-off curve has jumps in various places

Represents situations in which the location of the

3-73

- Significant cost savings are achieved.

Problems with Local Optimization

Prevalent strategy for many companies:

hold some inventory at every location

hold as much raw material as possible. This typically yields leads to:

Low inventory turns

3-74

products, and

The need to expedite shipments, with resultingincreased transportation costs

simchi-ch03-network planning

Documents