Logistics and

Supply Chain
Management
 Logistics
• The process of planning, implementing, and
controlling the efficient, cost-effective flow and
storage of goods, services, and related information,
from point of origin to point of consumption, for the
purpose of conforming to customer requirements.
• Components of an Integrated Logistics System
– Physical Supply: links suppliers to operations process
– Internal Operations: manages in-process material flow
– Physical Distribution: links operations process to
customers
 Transportation and storage of inventory

Coal mining Raw Raw Raw

Raw Material Material Material
Material
Finished
Goods Auto body
Auto assembly
Raw stamping
Material
Limestone
mining Finished Finished
Goods Goods
Raw
Finished Material
Goods Raw
Material
Iron ore mining Steel making Dealers
Chassis building
Finished Finished
Goods Goods
Finished
Customers
Goods
 Supply Chain Management
• A philosophy that describes how organizations
should manage their supply chains to achieve
strategic advantage
• The objective is to synchronize requirements of
the final customer with the flow of materials and
information along the supply chain. The goal is
to eliminate variability and reach a balance
between high customer service and low cost
SCM: the need to reduce variability or the impact
of variability on the supply chain
• Supply network variability
– late deliveries: weather,equipment breakdown
– quality problems
• Manufacturing process variability
– machine reliability and equipment failure
– changeovers / setups / part expediting
– design and quality problems
• Customer network variability
– cancellations and irregular orders Carrying safety
– equipment failure inventories are the
most common
– scheduling
approach to dealing
with variability
Information Technology in SCM
• Seen as the key to variability reduction
• Links the success of independent suppliers,
manufacturers, and customers
• Risks and rewards are shared among supply chain
partners
• Many technologies are accepted among supply
chain managers
– Electronic data interchange (EDI)
– Artificial intelligence / Expert systems
– Bar code and radio frequency systems
– Internet applications
 Environmental Sensitivity
• NOW: Supply chains create tremendous
amounts of waste material to protect goods
in shipment and storage.
• FUTURE: Distribution will use reverse
logistics, the recycling or proper disposal of
cardboard, packing material, strapping,
shrink wrap, pallets, etc...
 Two major problems in supply chain management
1. How to synchronize to eliminate expensive decoupling inventory
2. How to reduce transportation costs.

A study by A.T. Kearney & Company provides the average distribution

cost (as a percentage of sales) across 270 companies.

Functional Activity % of sales

Administration 2.4
Transportation :
Inbound 2.1
Outbound 4.3 6.4
Receiving and shipping 1.7
Packaging 2.6
Warehousing 3.7
Inventory carrying cost:
Interest 2.2
Taxes, insurance, obsolescence 1.6 3.8
Order processing 1.2
Total 21.8%
 Supply Chain Synchronization and Linear Programming

The Transportation Problem: a general formulation of a class of problems

related to the supply and distribution of goods and services across a network.
Generally, the transportation problem is concerned with the most cost effective
(or cost minimizing) way to supply several demand locations (nodes) from more
than one supply location (nodes)

Example

Special transportation concerns:

Route (or arcs) that have a maximum capacity

Routes that cannot be traversed

The Transshipment Problem: a more generalized version of the
transportation problem in which intermediate, transship ment, nodes are added
to the network. Transshipment nodes are often used to model warehouses,
material transfer locations, or junctions for mixed mode delivery of goods and
services.

Example

Special transshipment concerns:

Backwards or sidewards movement in the network

Capacity limitations of the transshipment nodes

 Quaker Oats has begun manufacturing, in two of its plants, a new granola product
made of three parts oats, two parts raisins and one part almonds. Two oat vendors

EX and two almond vendors have been identified, but only one reliable vendor of raisins
could be found. The supply of raw materials and the shipped costs are provided

AM Vendor Supply in Cost to Plant 1 Cost to Plant 2

PL tons

E Oat 1 25,000 $100 $110

Oat 2 30,000 $105 $95

Raisin 50,000 $550 $525

Almond 1 9,000 $1,050 $1,150

Almond 2 10,000 $1,200 $1,100

Quaker ships to three distribution facilities. The shipping cost of completed (6-ton)
pallets of product and the demand at each distribution facility are provided

Hannaford Quaker WalMart Plant Capacity

Plant 1 $100 $65 $90 9,500

Plant 2 $95 $70 $90 8,500

Demand 2,500 5,000 10,000

 Formulation
Minimize Z= 100O1Q1+110O1Q2+105O2Q1+95O2Q2+550RQ1+525R
Q2+1050A1Q1+1150A1Q2+1200A2Q1+1100A2Q2+100Q
1H+65Q1D+90Q1W+95Q2H+70Q2D+90Q2W

Subject To: C1 1O1Q1+1O1Q2<=25000

C2 1O2Q1+1O2Q2<=30000
C3 1RQ1+1RQ2<=50000
C4 1A1Q1+1A1Q2<=9000
C5 1A2Q1+1A2Q2<=10000
C6 1Q1H+1Q2H>=2500
C7 1Q1D+1Q2D>=5000
C8 1Q1W+1Q2W>=10000
C9 1O1Q1+1O2Q1-3Q1H-3Q1D-3Q1W=0
C10 1O1Q2+1O2Q2-3Q2H-3Q2D-3Q2W=0
C11 1RQ1-2Q1H-2Q1D-2Q1W=0
C12 1RQ2-2Q2H-2Q2D-2Q2W=0
C13 1A1Q1+1A2Q1-1Q1H-1Q1D-1Q1W=0
C14 1A1Q2+1A2Q2-1Q2H-1Q2D-1Q2W=0
C15 Q1H+Q1D+Q1W<=9500
C16 Q2H+Q2D+Q2W<=8500
 Combined Report for Granola
Decision Solution Unit Cost Total Reduced Basis Allowable Allowable
Variable Value Profit c(j) Contribution Cost Status Min. c(j) Max. c(j)

1 O1Q1 25,000.00 100.0000 2,500,000.00 0 basic -M 105.0000

2 O1Q2 0 110.0000 0 20.0000 at bound 90.00 M
3 O2Q1 2,000.00 105.0000 210,000.00 0 basic 100.00 M
4 O2Q2 25,500.00 95.0000 2,422,500.00 0 basic -M 105.0000
5 RQ1 18,000.00 550.0000 9,900,000.00 0 basic 535.00 M
6 RQ2 17,000.00 525.0000 8,925,000.00 0 basic -M 540.0000
7 A1Q1 9,000.00 1,050.00 9,450,000.00 0 basic 1,020.00 1,200.0000
8 A1Q2 0 1,150.00 0 50.0000 at bound 1,100.00 M
9 A2Q1 0 1,200.00 0 150.0000 at bound 1,050.00 M
10 A2Q2 8,500.00 1,100.00 9,350,000.00 0 basic -M 1,130.0000
11 Q1H 0 100.0000 0 5.0000 at bound 95.00 M
12 Q1D 5,000.00 65.0000 325,000.00 0 basic -2,465.00 70.0000
13 Q1W 4,000.00 90.0000 360,000.00 0 basic 85.0000 95.0000
14 Q2H 2,500.00 95.0000 237,500.00 0 basic -2,465.00 100.0000
15 Q2D 0 70.0000 0 5.0000 at bound 65.00 M
16 Q2W 6,000.00 90.0000 540,000.00 0 basic 85.00 95.0000

Objective Function (Min.) = 44,220,000.0000

Left Hand Right Hand Slack Shadow Allowable Allowable

Const Side Direction Side Surplus Price Min. RHS Max. RHS

1 C1 25,000.00 <= 25,000.00 0 -5.00 22,500.0000 27,000.0000

2 C2 27,500.00 <= 30,000.00 2,500.00 0 27,500.0000 M
3 C3 35,000.00 <= 50,000.00 15,000.00 0 35,000.0000 M
4 C4 9,000.00 <= 9,000.00 0 0 9,000.0000 M
5 C5 8,500.00 <= 10,000.00 1,500.00 0 8,500.0000 M
6 C6 2,500.00 >= 2,500.00 0 2,560.00 1,833.3330 2,500.0000
7 C7 5,000.00 >= 5,000.00 0 2,530.00 4,333.3340 5,000.0000
8 C8 10,000.00 >= 10,000.00 0 2,555.00 9,333.3330 10,000.0000
9 C9 0 = 0 0 105.00 -2,000.0000 2,500.0000
10 C10 0 = 0 0 95.00 -25,500.0000 2,500.0000
11 C11 0 = 0 0 550.00 -18,000.0000 15,000.0000
12 C12 0 = 0 0 525.00 -17,000.0000 15,000.0000
13 C13 0 = 0 0 1,050.00 -9,000.0000 0
14 C14 0 = 0 0 1,100.00 -8,500.0000 1,500.0000
15 C15 9,000.00 <= 9,500.00 500.00 0 9,000.0000 M
16 C16 8,500.00 <= 8,500.00 0 -30.00 8,500.0000 9,166.6670
 Bullwhip Effect
The magnification of variability in orders in the supply-chain.

Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

Quantity

Quantity

Quantity
Order

Order

Order
Time Time Time

A lot of retailers …can lead to …can lead to even

each with little greater variability for greater variability
variability in their a fewer number of for a single
orders…. wholesalers, and… manufacturer.
The Assignment Problem: deals with a managerial decision to assign
resources (or agents) to specific customers (or tasks). Normally, the assignment
problemis structured toassign one andonlyone agent to one and only one
task.

Example of an assignment problem

Ag e nt Tas k
50
1 1
60
90 Special assignment concerns:
40
2 80 2 Multiple assignments
100

30 50 The number of agents not equal

60 to the number of tasks
3 3
 The Marathon Oil Company operates two refineries, two distribution centers and
three tankwaggon shipping points to service its customers in the southeast. Refined
EX crude is shipped from a refinery to a distribution center and finally to a tankwaggon
shipping point for final sale to oil distributors. Plant capacities and shipping costs (in
A M
$ per gallon) from each refinery to each distribution center (DC) are given below:

PL Refinery Columbia DC Macon DC Capacity

E Miami Refinery .004 .006 125,000 gals
Springfield Refinery .003 .008 95,000 gals

Estimated customer demand and per unit shipping costs (in $ per gallon) from each
DC to each tankwaggon shipping point (TWSP) are as follows:

Distribution Center Charleston Durham Carver

TWSP TWSP TWSP

Columbia .0016 .0021 .0031

Macon .0024 .0035 .0022

Monthly Demand:
Grade I Oil 20,000 gals 25,000 gals 45,000 gals
Grade II Oil 40,000 gals 35,000 gals 20,000 gals

Grade I and II oil consume the same amount of capacity to refine, however; only the
Miami refinery is capable of refining Grade I oil.
Network
C1 Ch1

M1 Ch2

C2
D1
M2
M1 D2

Ca1
S2
M2
Ca2
 Formulation
Minimize 0.004MC1+0.006MC2+0.004MM1+0.006MM2+0.003SC
2+0.008SM2+0.0016C1CH1+0.0021C1D1+0.0031C1CA
1+0.0016C2CH2+0.0021C2D2+0.0031C2CA2+0.0024M
1CH1+0.0035M1D1+0.0022M1CA1+0.0024M2CH2+0.0
035M2D2+0.0022M2CA2

Subject To: C1 MC1+MC2+MM1+MM2<125,000

C2 SC2+SM2<95,000
C3 -MC1+C1CH1+C1D1+C1CA1=0
C4 -MC2-SC2+C2CH2+C2D2+C2CA2=0
C5 -MM1+M1CH1+M1D1+M1CA1=0
C6 -MM2-SM2+M2CH2+M2D2+M2CA2=0
C7 C1CH1+M1CH1=20000
C8 C2CH2+M2CH2=40000
C9 C1D1+M1D1=25000
C10 C2D2+M2D2=35000
C11 C1CA1+M1CA1=45000
C12 C2CA2+M2CA2=20000
 Solution.
Decision Solution Unit Cost Total Reduced Basis Allowable Allowable
Variable Value Profit c(j) Contri Cost Status Min. c(j) Max. c(j)

1 MC1 45,000.00 0.0040 180.0000 0 basic 0.0031 0.0048

2 MC2 0 0.0060 0 0.0030 at bound 0.0030 M
3 MM1 45,000.00 0.0040 180.0000 0 basic 0.0032 0.0049
4 MM2 0 0.0060 0 0.0021 at bound 0.0039 M
5 SC2 95,000.00 0.0030 285.0000 0 basic -M 0.0051
6 SM2 0 0.0080 0 0.0041 at bound 0.0039 M
7 C1CH1 20,000.00 0.0016 32.0000 0 basic -M 0.0024
8 C1D1 25,000.00 0.0021 52.5000 0 basic -M 0.0035
9 C1CA1 0 0.0031 0 0.0009 at bound 0.0022 M
10 C2CH2 40,000.00 0.0016 64.0000 0 basic -M 0.0033
11 C2D2 35,000.00 0.0021 73.5000 0 basic -M 0.0044
12 C2CA2 20,000.00 0.0031 62.0000 0 basic 0.0014 0.0052
13 M1CH1 0 0.0024 0 0.0008 at bound 0.0016 M
14 M1D1 0 0.0035 0 0.0014 at bound 0.0021 M
15 M1CA1 45,000.00 0.0022 99.0000 0 basic -M 0.0031
16 M2CH2 0 0.0024 0 0.0017 at bound 0.0007 M
17 M2D2 0 0.0035 0 0.0023 at bound 0.0012 M
18 M2CA2 0 0.0022 0 0 basic 0.0001 0.0039

Objective Function (Min.) = 1,028.0000

Left Hand Right Hand Slack Shadow Allowable Allowable

Constrnt Side Direction Side or Surplus Price Min. RHS Max. RHS

1 C1 90,000.00 <= 125,000.0000 35,000.00 0 90,000.00 M

2 C2 95,000.00 <= 95,000.0000 0 0 95,000.00 M
3 C3 0 = 0 0 -0.0040 -35,000.0 45,000.0000
4 C4 0 = 0 0 -0.0030 0 95,000.0000
5 C5 0 = 0 0 -0.0040 -35,000.0 45,000.0000
6 C6 0 = 0 0 -0.0039 0 20,000.0000
7 C7 20,000.00 = 20,000.0000 0 0.0056 0 55,000.0000
8 C8 40,000.00 = 40,000.0000 0 0.0046 0 40,000.0000
9 C9 25,000.00 = 25,000.0000 0 0.0061 0 60,000.0000
10 C10 35,000.00 = 35,000.0000 0 0.0051 0 35,000.0000
11 C11 45,000.00 = 45,000.0000 0 0.0062 0 80,000.0000
12 C12 20,000.00 = 20,000.0000 0 0.0061 0 20,000.0000
 1
A Multi-Period
2 8
6
Monday

Transshipment
3 Problem
7
4 9
1. Inventories and multi-period planning
5 2.
3.
Limitations on shipping quantities
Changes in demand
4. Multimode shipping
5. Returns
6. Reverse logistics
1
2 8
6
Tuesday

3
7
4 9
5
 Transportation and the Traveling Salesman Problem

The traveling salesman problem is a special network formulations

that requires a heuristic solution for all but the smallest problems.
The object of the TSP is to find a network cycle that minimizes
the total distance required to visit all nodes once.

The nearest neighbor procedure (heuristic)

1. Start with a node (location to be visited) at the beginning

of the tour (the depot node).
2. Find the closest to the last node added to the tour.
3. Go back to step 2 until all nodes have been added.
4. Connect the first and last nodes to complete the tour.
Example Use the following symmetric distance matrix to design a
tour that minimizes total distance traveled.

From To Node (in miles)

Node 1 2 3 4 5 6
1 - 5.4 2.8 10.5 8.2 4.1
2 5.4 - 5.0 9.5 5.0 8.5
3 2.8 5.0 - 7.8 6.0 3.6
4 10.5 9.5 7.8 - 5.0 9.5
5 8.2 5.0 6.0 5.0 - 9.2
6 4.1 8.5 3.6 9.5 9.2 -
 The Clark and Wright Savings Heuristic
1. Select any node as the depot node (node 1)
2. Compute the savings, Sij , for linking nodes i and j:
S ij = c1i + c1j - cij for i and j nodes 2,3,...,n
where cij = the cost of traveling from node i to node j
3. Rank the savings from largest to smallest
4. Start at the top of the list, form larger subtours by
linking appropriate nodes i and j. Stop when complete
tour is formed.

Example
4

1 2
10 miles