Logistics network configuration

(c) 2003. Simchi Levi, Kaminsky, Simchi Levi,

Mc-Graw Hill

Outline
Introduction
2. Data collection
3. Model and data validation
4. Solution techniques
1.

Logistics Network
The Logistics Network consists of:
Facilities:

Vendors, Manufacturing Centers, Warehouse/

Distribution Centers, and Customers
Raw materials and finished products that flow

between the facilities.

Sources:
plants
vendors
ports

Regional
Warehouses:
stocking
points

Field
Warehouses:
stocking
points

Customers,
demand
centers
sinks

This image cannot currently be displayed.

Supply

Production/
purchase
costs

Inventory &
warehousing
costs
Transportation
costs
Inventory &
warehousing
costs

Transportation
costs

Decision Classifications
1.
2.

3.

Strategic Planning: Decisions that typically involve

major capital investments and have a long term effect
Tactical Planning: Effective allocation of manufacturing
and distribution resources over a period of several
months
Operational Control: Includes day-to-day operational
decisions

Optimization Models in Supply Chain

Supplier

Plant

Strategic

DC

Retailer

Logistics Network Design

Resource Allocation

Tactical
Operational

Inventory
Safety stock allocation
Inventory policy
optimization

Production
Lot-sizing
Scheduling

Transportation
Delivery
Vehicle Routing

Network design: key decisions

1.
2.
3.
4.
5.

Determining the appropriate number of warehouse

Determining the location of each warehouse
Determining the size of each warehouse
Allocating space for products in each warehouse
Determining which products customers will receive
from each warehouse

 The objective is to design or reconfigure the logistic

networks so as to minimize annual systemwide

costs:
Production and purchasing costs
Inventory holding costs
Facility costs (storage, handling, and fixed costs)
Transportation costs.

subject to a service level requirement.

Service
level

Network Design Tools:

Major Components
1. Mapping
Mapping allows you to visualize your supply chain and
solutions
Mapping the solutions allows you to better understand
different scenarios
Color coding, sizing, and utilization indicators allow for
further analysis

2. Data
Data specifies the costs of your supply chain
The baseline cost data should match your accounting
data
The output data allows you to quantify changes to the
supply chain
3. Engine
Optimization Techniques

Mapping: the customer

Different color: different customers type

Compare solution alternatives

Data for network configuration

1.
2.
3.
4.
5.
6.
7.
8.

Location of customers, retailers, existing warehouses

and distribution centers, manufacturing facilities, and
suppliers.
All products, including volumes and special
transportation modes
Annual demand for each product by customer location
Transportation rates by mode
Warehousing costs, including labor, inventory carrying
charges, and fixed costs
Shipment sizes and frequencies for customer delivery
Order processing costs
Customer service requirements and goals.

Aggregating customers
Customers located in close proximity are aggregated

using a grid network or clustering techniques.

All customers within a single cell or a single cluster are
replaced by a single customer located at the centroid of
the cell or cluster Customer zone
Customer zone
Loss of accuracy due to over aggregation
Needless complexity

Rules of thumb
Use at least 300 aggregated points
Make sure each zone has an equal amount of total

demand
Place the aggregated point at the center of the zone
In this case, the error is typically no more than 1%

Testing Customer Aggregation

1 Plant; 1 Product
Considering transportation costs only
Customer data
Original Data had 18,000 5-digit zip code ship-to

locations
Aggregated Data had 800 3-digit ship-to locations
Total demand was the same in both cases

Comparing Output
Total Cost:$5,796,000
Total Customers: 18,000

Total Cost:$5,793,000
Total Customers: 800

Cost Difference < 0.05%

Product Aggregation
Companies may have hundreds to thousands of

individual items in their production line.

Collecting all data and analyzing it is impractical for
so many product groups.
Aggregate the SKUs by similar logistics

characteristics:
Weight
Volume
Holding Cost

Within Each Source Group, Aggregate

Products by Similar Characteristics
70.0

60.0

Weight (lbs per case)

50.0

40.0

30.0

Rectangles illustrate how to

cluster SKUs.

20.0

10.0

0.0
0.000

0.010

0.020

0.030

0.040

0.050

0.060

Volume (pallets per case)

0.070

0.080

0.090

0.100

Test Case for Product Aggregation

5 Plants
25 Potential Warehouse Locations
Distance-based Service Constraints
Inventory Holding Costs
Fixed Warehouse Costs
Product Aggregation
46 Original products
4 Aggregated products
Aggregated products were created using weighted
averages

Sample Aggregation Test:

Product Aggregation
Total Cost:$104,564,000
Total Products: 46

Total Cost:$104,599,000
Total Products: 4

Cost Difference: 0.03%

Model and data validation

How do we ensure that the data and model

accurately reflect the network design problem?

Does the model make sense?

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

Data can be compared to companys accounting

information.
To calibrate some of the parameters used in the
model and to suggest improvements in the utilization
of the existing network.

Minimize the cost of your logistics network

without compromising service levels
Optimal
Number
of Warehouses

$90

Cost (millions $)

$80
$70
$60

Total Cost
Transportation Cost
Fixed Cost
Inventory Cost

$50
$40
$30
$20
$10
$-

Number of Warehouses

10

A Typical Network Design Model

Several products are produced at several plants

(capacitated)
There is a known demand for each product at each
customer zone, satisfied by shipping the products via
regional distribution centers.
There may be an upper bound on total throughput at each
distribution center and on the distance between a
distribution center and a market area served by it.

 A set of potential location sites for the new

facilities was identified

Costs:

Set-up costs
Transportation cost is proportional to the distance
Storage and handling costs
Production/supply costs

Solution Techniques
Mathematical optimization techniques:
Exact algorithms: find optimal solutions
Heuristics: find good solutions, not necessarily

optimal
Simulation models: provide a mechanism to evaluate

specified design alternatives created by the designer.

Heuristics and
the Need for Exact Algorithms
Single product
Two plants p1 and p2 with the same production cost
Plant p1 has an annual capacity of 200,000 units.
Plant p2 has an annual capacity of 60,000 units.
There are two warehouses w1 and w2 with identical

warehouse handling costs.

There are three markets areas c1,c2 and c3 with demands
of 50,000, 100,000 and 50,000, respectively.
Facility
Warehouse
W1
W2

P1

P2

C1

C2

C3

0
5

4
2

3
2

4
1

5
2

Distribution costs per unit

Why Optimization Matters?

$0

Cap = 200,000

$4
$5

$5

D = 100,000
$2

$4

Cap = 60,000

D = 50,000

$3

$2

$1
$2

D = 50,000

Production costs are the same, warehousing costs are the same

Traditional Approach #1:

Assign each market to closest WH. Then assign each plant
based on cost.

D = 50,000
Cap = 200,000
$5 x 140,000

D = 100,000
$2 x 50,000

Cap = 60,000

$2 x 60,000

$1 x 100,000
$2 x 50,000

Total Costs = $1,120,000

D = 50,000

Traditional Approach #2:

Assign each market based on total landed cost

$0

Cap = 200,000

P1 to WH1
P1 to WH2
P2 to WH1
P2 to WH 2

$4
$5

$5

$2

$3
$7
$7
$4

D = 100,000
$2

$4

Cap = 60,000

D = 50,000

$3

$1
$2

P1 to WH1
P1 to WH2
P2 to WH1
P2 to WH 2

$4
$6
$8
$3

D = 50,000
P1 to WH1
P1 to WH2
P2 to WH1
P2 to WH 2

$5
$7
$9
$4

Traditional Approach #2:

Assign each market based on total landed cost

$0 x 50,000

D = 50,000

$3 x 50,000

Cap = 200,000

P1 to WH1
P1 to WH2
P2 to WH1
P2 to WH 2

$5 x 90,000

Cap = 60,000

$2 x 60,000

D = 100,000
$1 x 100,000
$2 x 50,000

P1 to WH1
P1 to WH2
P2 to WH1
P2 to WH 2

$4
$6
$8
$3

D = 50,000
P1 to WH1
P1 to WH2
P2 to WH1
P2 to WH 2

Total Cost = $920,000

$3
$7
$7
$4

$5
$7
$9
$4

What is the LP?

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Let :
pw
ij

= the flow from plant i to warehouse j

x wm
jk = the flow from warehouse j to market k

What is the LP?

pw
pw
pw
wm
wm
min : 0 x1pw
5
4
2
3
4
+
x
+
x
+
x
+
x
+
x
,1
1, 2
2 ,1
2, 2
1,1
1, 2
wm
wm
+ 5 x1wm
, 3 + 2 x2 ,1 + 2 x2 , 3

This image cannot currently be displayed.

s.t.
pw
x2pw
+
x
,1
2 , 2 60,000
pw
wm
wm
wm
x1pw
,1 + x2 ,1 = x1,1 + x1, 2 + x1, 3
pw
wm
wm
wm
x1pw
, 2 + x2 , 2 = x2 ,1 + x2 , 2 + x2 , 3
wm
x1wm
+
x
,1
2 ,1 = 50,000
wm
x1wm
, 2 + x2 , 2 = 100,000
wm
x1wm
, 3 + x2 , 2 = 50,000

All flows non - negative

The Optimal Strategy

Table 2
Distribution strategy
Facility
Warehouse
W1
W2

P1

P2

C1

C2

C3

140000
0

0
60000

50000
0

40000
60000

50000
0

The total cost for the optimal strategy is 740,000.