Supply Chain Logistics Management Chapter 16: Design Process and Techniques

LOGISTICAL REDESIGN PROCESS Phase I Phase II Phase III Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

LOGISTICAL REDESIGN PROCESS Phase I: Problem Definition and Planning Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Feasibility Assessment Situation Analysis Internal assessment External assessment Technology assessment Supporting logic development Opportunity assessment Factual assessment of current procedures and practices Identify potential alternatives Definition of current operations Identify likely alternatives Creative alternatives Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Feasibility Assessment Cost-Benefit estimate Service Cost reduction Cost prevention Competitive Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Project Planning Statement of Objectives Inventory availability Desired delivery within x hours Minimize shipments from alternative sources Fill orders without backorders Maximum hold time for backorders Provide high volume customers with minimum performance standards Offer distribution within mileage radius Minimize transportation cost Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Project Planning Statement of Constraints Facility constraints Alliance constraints Resource constraints System constraints Channel constraints Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Project Planning Analysis Techniques Ad-Hoc techniques Profitability Inventory Lane Network analysis Graphical Optimization Heuristic or simulation Simulation Transportation Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Improving Profitability and Competitiveness in the Supply Chain Strategic Network Design Pick the optimal number, location, and size of warehouses Optimize the trade-offs between number of facilities and service levels Optimize the trade-offs between transportation and warehousing costs Determine optimal sourcing strategy Determine best distribution channels Tactical Planning Develop an optimal supply chain plan for the next 3-12 months Optimize the trade-offs between production, inventory and warehousing Identify potential supply chain bottlenecks early to avoid disruptions and costs Share supply chain plan with geographically dispersed managers Share supply chain production plan with each of the plant mangers Provide warehouse managers with shipping and storage requirements Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Typical Tactical/Operational Issues Inventory/customer service trade-offs Production/distribution coordination Inventory/forecasting management Transportation consolidation Routing and scheduling Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Project Plan Project Workplan Schedule Resource requirements Personnel Data collection and analysis Analysis tools Meeting schedules Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

LOGISTICAL REDESIGN PROCESS Phase II: Data Collection and Analysis Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Assumptions and Data Collection Define analysis approach and obtain technique Define and review assumptions Identify data sources Collect data Collect validation data Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Logistics Analysis Methodologies Analytical Optimization Heuristics Simulation Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Analytical Methodology Using standard numerical/statistical methods, such as those available through spreadsheets or statistical software to evaluate each logistical alternative Examples Determine the inventory/service trade-offs using safety stock and fill rate formulae Determine the order cycle time that currently would be required to deliver 95% of customer orders Determine the transportation dollar benefits for consolidating LTL orders into TL orders Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Optimization Determine the best answer to problems where objective functions and constraints can be expressed in mathematical terms Appropriate for applications involving sweeping changes to the logistics systems Limitations include computing time/capacity and utility of generalized mathematical expressions Example Determine the best location for distribution facilities subject to meeting supply, demand, and delivery time constraints Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Heuristics Using “rules of thumb” to direct the analytical process toward the best solution Appropriate for both large scale optimization and simulation models Advantages include speed and understanding compared to optimization techniques Limitation is that “optimal” solution may not be found Example Locate distribution centers only where demand exceeds a given threashold Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Benefits of Heuristics Exploit the experience of management and analysts Warehouses should be located near centers of greatest demand TL shipments should be made to consumers directly from manufacturing locations Only warehouse those items with a substantial differential between inbound and outbound transportation costs The next warehouse to add to a distribution system is the one that shows the greatest cost savings Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Simulation Conducting experiments using a precise representation of a real system to understand its behavior or to evaluate strategies for its operation (“What if” analysis) Appropriate when: Studying impact of change to a limited number of variables A more exact representation of the process is needed Customer order/stock keeping unit level of detail is needed Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Optimization ? Simulator Solver Business Optimization LP/MILP/GA etc. search based solve. Conditions of certainty with some probability Execution of a calculation Ideal (single) answer to the formulated problem. Mathematical/Heuristics execution based run. Process flow and logic Conditions of uncertainty, randomness and variability Execution of a process Realistic (95%) answer to the modeled problem. A solver searches for the exact inputs for the adjustable variables and sets them in the formulated model to calculate the best result after numerous iterations. Optimization, in solver terms is the process of trying to find the best solution to a problem that may have many possible outcomes. If the world were simple and the future were predictable, all data in an optimization model would be constant (making the model deterministic) , and you could use techniques such as linear and non-linear programming to find optimal solutions. A simulator responds to the changing inputs and outputs of an interdependent dynamic process, and reports the process’ performance under those varying conditions. Optimization, in dynamic simulation terms is the process of predicting the targeted solution’s performance under conditions of variability and uncertainty after a number of replications. Often, Optimization is assumed to be synonymous with solver technology. Each technique is particularly strong at solving different types of problems, and therefore should not be seen as competing Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Assumptions and Data Collection Define Analysis Approach and Technique Heuristic (Spatial) Optimization (Spatial, Temporal) Simulation (Temporal) Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Range of Planning Requirements Network optimization Supply chain dynamics Demand planning Supply planning Transportation planning Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Network Optimization Determine the appropriate network of the supply chain by addressing strategic questions such as the following: Where should plants and DCs be located? Which plants or DCs should be shut down? Which market areas should be served by each DC? Which DCs should stock each product? Which vendors should be used for long-term contracts? Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Cost Analysis Approach Expense Components Handling + Inbound Transport DC Handling Inventory Customer Transport ____________ Total Cost Dealers Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Location Problem Types Plant vs. distribution center location Static vs. dynamic time horizon Stochastic vs. deterministic data Single vs. multiple products Continuous vs. discrete approaches Spatial vs. temporal dimensions Profit vs. cost optimization Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Operating Policies Products “bundled” for sourcing. All LTL and UPS shipments are sourced from a common DC based on the lowest inbound + outbound transportation cost. Premium shipments have a different source. Supplier locations held constant. Market assignments for all DCs are based on minimizing combined inbound and outbound transportation. Location impact of inventory is projected using the “square root of N” rule with a 20% annual inventory carrying cost Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Supply Chain Dynamics Exploring the relationship and operating dynamics between supply chain operations and partners. Specific questions include: What are the relevant trade-offs between service objectives, uncertainty, and inventory level? How does forecast, demand, and lead time uncertainty impact supply chain inventory and performance? Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Analysis Complete Sensitivity Analysis Determine responsiveness to changes Demand Transport cost Competitive/environmental issues Costs Test sensitivity Assess probability and identify best options Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Develop Recommendations Identify best alternative Perform cost-benefit evaluation Develop risk appraisal Develop presentation Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

LOGISTICAL REDESIGN PROCESS Phase III: Recommendations and Implementation Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Recommendations Identify best alternatives Cost/best evaluation Risk appraisal Develop report and presentation Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Implementation Define implementation plan Schedule implementation Define acceptance criteria Implement Supply Chain Logistics Management, First Edition , Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.