Network Planning

Network PlanningA process by which the firm structures and manages

the supply chain, in order to:• Find the right balance between inventory,

transportation and manufacturing costs, • Match supply and demand under uncertainty by

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

from the most appropriate manufacturing facility

Three Hierarchical Steps• Network design

– Number, locations and size of manufacturing plants and warehouses– 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– Related to the inventory management strategies

• 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?

Network Design

• Physical 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

Reevaluation of Infrastructure

• Supply chain infrastructure needs to be reevaluated due to Changes in: – demand patterns– product mix– production processes– sourcing strategies – cost of running facilities.

• Mergers and acquisitions may mandate the integration of different logistics networks

Key Strategic Decisions

• Determining the appropriate number of facilities such as plants and warehouses.

• Determining the location of each facility.• Determining the size of each facility.• Allocating space for products in each facility.• Determining sourcing requirements.• Determining distribution strategies, i.e., the

allocation of customers to warehouse

Objective and Trade-Offs• Objective: 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 customers– An 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 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

Firm must balance costs of opening new warehouses with the advantages of being close to the customer

Data Collection

• Locations of customers, retailers, existing warehouses and distribution centers, manufacturing facilities, and suppliers.

• All products, including volumes, and special transport modes (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.• Shipment sizes and frequencies for customer delivery.• Order processing costs.• Customer service requirements and goals.• Production and sourcing costs and capacities

Data Aggregation• Customer Zone

– Aggregate using a grid network or other clustering technique for those in close proximity.

– Replace all customers within a single cluster by a single customer located at the center of the cluster (referred to as customer zone)

– Five-digit or three-digit zip code based clustering.

• Product Groups – Distribution pattern

• All Products picked up at the same source and destined to the same customers

• Sometimes by Logistics characteristics like weight and volume. – Product type

• product models or style or differing only in the type of packaging.

Transportation Rates• Rates are almost linear with distance but not with

volume • Differences between internal rate and external

rate

Internal Transportation Rate

• For company-owned trucks • Data Required:– Annual costs per truck– Annual mileage per truck– Annual amount delivered– Truck’s effective capacity

• Calculate cost per mile per SKU

External Transportation RateTwo Modes of Transportation

• Truckload, TL• Country sub-divided into zones. One zone/state

except for:– Big states, such as U.P , Rajasthan(two zones)

• Zone-to-zone costs provides cost per mile per truckload between any two zones. – TL cost from Jaipur to Patiala =

Jaipur-Patiala cost per mile X Jaipur-Patiala distance• TL cost structure is not symmetric (its not same for

Jaipur-Patiala and Patiala-Jaipur)

• Less-Than-Truckload, LTL • Three Basic type of freight rates:1. Class rates

– standard rates for almost all products or commodities shipped. – Found with help of Classification tariff system that gives each

shipment a rating or a class. – Higher the rating/class greater relative charge for transporting the

commodity– Factors involved in determining a product’s 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 load’s 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).

2. Exception rates provides less expensive rates3. Commodity rates are specialized commodity-specific rates

Warehouse Costs

• Handling costs – Labor and utility costs– Proportional to annual flow through the warehouse.

• Fixed costs– All cost components not proportional to the amount of

flow – Typically proportional to warehouse size (capacity) but in a

nonlinear way (cost is fixed in certain ranges of warehouse size)

• Storage costs – Inventory holding costs– Proportional to average positive inventory levels

Determining Storage Costs

• Inventory Turnover Ratio=Annual Sales / Average Inventory Level

(Annual Sales or Annual OutFlow)• Annual Storage Costs= Multiply average

inventory level by inventory holding cost

Determining Fixed Costs

Warehouse fixed costs as a function of the warehouse capacity

Calculating Fixed Cost(By calculating Warehouse Capacity

• Estimation of actual space required• Average inventory level =

Annual flow through warehouse/Inventory turnover ratio• Space requirement for item = 2*Average Inventory Level• Every pallet stored in the warehouse requires an empty space to

allow for access and handling • So, Multiply required storage space by a factor to account for

– access and handling – aisles, – picking, sorting and processing facilities– AGVs (automatic guided vehicles)

• Typically multiply required storage space by a factor (>1)• Typical factor value = 3

Warehouse Capacity Example

• Annual flow = 1,000 units • Inventory turnover ratio = 10.0• So, Average inventory level = 100 units • Assume each unit takes 10 sqft. of space • Required space for products = 2,000 sqft. • Total space required for the warehouse is

about 6,000 square feet

Potential Warehouse Locations

Locations must satisfy these conditions:

• Geographical and infrastructure conditions.• Natural resources and labor availability.• Local industry and tax regulations.• Public interest.

• Not many will qualify based on all the above conditions

Service Level Requirements

Various ways to define service levels:

• Specify a maximum distance between each customer and the warehouse serving it

• Proportion of customers whose distance to their assigned warehouse is no more than a given distance – 95% of customers be situated within 200 miles of the

warehouses serving them – Appropriate for rural or isolated areas

Inventory Positioning and Logistics Coordination

Strategic Safety Stock• Multi-facility supply chain that belongs to a single firm• Manage inventory so as to reduce system wide cost• Consider the interaction of the various facilities and the impact of

this interaction on the inventory policy of each facility• Ways to manage:

– Wait for specific orders to arrive before starting to manufacture them [make-to-order facility]

– Otherwise, decide on where to keep safety stock? – Which facilities should produce to stock and which should produce to order?

Resource AllocationWith a fixed logistics network, firm needs to decide how to

utilize resources effectively

• Supply chain master planning The process of coordinating and allocating production, and distribution strategies and resources to maximize profit or minimize system-wide cost

• Process takes into account: – interaction between the various levels of the supply chain– identifies a strategy that maximizes supply chain performance

This is known as Global Optimization

Global Optimization and DSS(decision support system)FACTORS TO CONSIDER

• Facility locations: plants, distribution centers and demand points

• Transportation resources including internal fleet and common carriers

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

costs, etc.• Warehouse capacities and other information such as certain

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

• Demand forecast by location, product and time.

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? • Should the firm ship by sea or by air. Shipping by sea implies long

lead times and therefore requires high inventory levels. On the other hand, using air carriers reduces lead times and hence inventory levels but significantly increases transportation cost.

• Should we rebalance inventory between warehouses or replenish from the plants to meet unexpected regional changes in demand?