2/6/18

Workshop: Quantitative Logistics

Strategic issues – supply chain design

Renzo Akkerman
Operations Research and Logistics group, Wageningen University

Outline

§ Basics of supply chain design

§ Model development
§ Dairy supply chain example

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Network Design – 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.

Network Design – Development of decision

support models

§ Data collection and aggregation

● Locations
● Demand
● Capacities
● Cost parameters
§ Model validation
§ Modelling techniques

§ Examples

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Network Design – 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

Network Design – Data Aggregation

§ Customer Zone
● Aggregate using a grid network or other clustering
technique
● Replace all customers within a single cluster by a
single customer located at the center of the cluster
● Zip code based clustering.

§ Product Groups
● Distribution pattern
● Products picked up at the same source and destined to the
same customers
● Logistics characteristics like weight and volume.
● Product type
● product models or style differing only in the type of
packaging.

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Network Design – Replacing Data with

Aggregated Data

§ Technology exists to solve the logistics network design

problem with the original data
§ Data aggregation still useful because forecast demand is
significantly more accurate at the aggregated level
§ Aggregating customers into about 150-200 zones usually
results in no more than a 1 percent error in the
estimation of total transportation costs

Network Design – General Rules for

Aggregation

§ Aggregate demand points into at least 200 zones

● Holds for cases where customers are classified into
classes according to their service levels or
frequency of delivery
§ Make sure each zone has approximately an equal
amount of total demand
● Zones may be of different geographic sizes.
§ Place aggregated points at the center of the zone
§ Aggregate products into 20 to 50 product groups

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Network Design – Customer Aggregation

by Zip Codes

Total Cost:$5,796,000 Total Cost:$5,793,000

Total Customers: 18,000 Total Customers: 800

Cost Difference < 0.05%

Network Design – Product Aggregation

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

Total Products: 46 Total Products: 4

Cost Difference: 0.03%

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Network Design – 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
● External Transportation Rate: Truckload, TL
● zone-to-zone costs
● TL cost structure is not symmetric
● External Transportation Rate: Less-Than-Truckload,
LTL
● standard rates for almost all products or
commodities shipped.
● Classification tariff system that gives each
shipment a rating or a class.

Network Design – 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.
§ Storage costs
● Inventory holding costs
● Proportional to average positive inventory levels.

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Network Design – Potential Locations

§ 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

Network Design – Service Level

Requirements

§ 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

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Network Design – Model Validation

§ Reconstruct the existing network configuration using the model and

collected data
§ Compare the output of the model to existing data
§ Compare to the company’s accounting information
● Often the best way to identify errors in the data, problematic
assumptions, modeling flaws.
§ Make local or small changes in the network configuration to see
how the system estimates impact on costs and service levels.
● Positing a variety of what-if questions.
§ Answer the following questions:
● Does the model make sense?
● Are the data consistent?
● Can the model results be fully explained?
● Did you perform sensitivity analysis?

Network Design – Modelling Techniques

§ Model?
● Mathematical optimization techniques:
● Exact algorithms: find optimal solution

● Heuristics: find “good” solutions, not necessarily optimal

● Simulation models:
● provide a mechanism to evaluate specified design
alternatives created by the designer.

● Easier to evaluate uncertainty

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Dairy supply chain design – Example

(conceptual model)

DC customers
farmers

Transport finished products

Production
customers
Transport cream etc. DC
farmers

Transport raw milk Production customers

farmers customers
DC

400 dairy farms,

9 production plants,
17 DCs, 17,000
retailers, 300 products
(Wouda et al., 2002)

Dairy supply chain design – Modelling

(conceptual model à scientific model)
Modelling material flows and
associated decision variables

PROD jp Z jkp
YPROD jp
X ij
YMILK j k
i PROD jp
YPROD jp

WHEY hj
i BUT hj Z jkp
X ij CREAM hj k
PROD jp
i YPROD jp
X ij YMILK j PROD jp k
YPROD jp Z jkp

(Wouda et al., 2002)

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Dairy supply chain design – Cost factors

(scientific model)

Set-up cost milk reception Set-up cost production product p

Variable cost milk reception

ì ü
ïsmrc × å YMILK j + åå (mcci + mrc + tcmij ) × X ij + å spc p × å YPRODjp +ï
ï j i j p j ï
ï ï
miníå pc p × å PROD jp + åå tcihj × (CREAMhj + WHEYhj + PERhj + BUThj ) + ý
ïp j h j ï
ï ï
ïîåå
tcf jk × å Z jkp
j k p Transportation cost by-products ï þ
Variable cost production product p
Transportation cost final products

(Wouda et al., 2002)

Dairy supply chain design – Scenarios

(scientific model à solution)

§ Scenario 0: Current situation.

§ Scenario 1: Running the model with 9 potential locations.
§ Scenario 2: Scenario 1 with 4 additional (potential) locations
(potential regionalization)
§ Scenario 3: Run model with one opened location (scenario 1)
removed (to show second best option and cost effects)
§ Scenario 4: run model with specific product groups forced at a
specific location (product/process specialization)
§ Scenario 5: Limit the number of locations (centralization)
§ Scenario 6: Run model closing one plant of scenario 0 (to
show cost effects).

(Wouda et al., 2002)

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Dairy supply chain design – Scenarios

(solution)

§ Network designs and resulting costs

g milk
Decreasin sts
co
reception g milk
sin
but increa
costs
collection

Mai
n
prod ly decre
uctio as
n co ing
sts

(Wouda et al., 2002)

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