1. Network Design
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Network design overview
Enterprise facility network
Warehouse requirements
Systems concept and analysis
Total cost integration
Formulating logistical strategy

3. Enterprise facility network
Availability of economical transportation provides opportunity for facility networks
Design requirements are from integrated procurement, manufacturing and customer accommodation strategies
Logistics requirements are satisfied by achieving total cost and service trade-offs

4. Spectrum of location decisions exists but chapter focus is on selecting warehouse locations
Transportation services link locations into an integrated logistical system
Selection of individual locations represents competitive and cost-related logistical decisions
Manufacturing plant locations may require several years to fully deploy
Warehouses can be arranged to be used only during specified times
Retail locations are influenced by marketing and competitive conditions

5. Local presence: an obsolete paradigm
Local presence paradigm
Transportation services started out erratic with few choices
Customers felt that inventory within the local market area was needed to provide consistent delivery
Contemporary view
Transportation services have expanded
Shipment arrival times are dependable and consistent
Information technology
Provides faster access to customer requirements
Enables tracking of transport vehicles

6. Warehouse requirements
Warehouses exist to lower total cost or improve customer service
Warehouses specialize in supply or demand facing services
Facilities used for inbound materials are supply facing warehouses
Facilities used for customer accommodation are demand facing warehouses
Functionality and justification are different based on facilities support role
Procurement
Manufacturing
Customer accommodation

7. Procurement drivers help purchase materials and components at the lowest total inbound cost
Limited number of deeper relationships with suppliers
Life cycle considerations
E.g. material purchase, reclamation, and disposal of unused materials
Debundling of value-added services leading to new structural relationships with suppliers
Seasonality of selected supplies
Opportunities to purchase at reduced prices
Rapid accommodation of manufacturing spikes
Facilities placing more emphasis on sorting and sequencing materials

8. Manufacturing drivers help consolidate finished product for outbound customer shipment
Provide customers full-line product assortment on a single invoice at truckload transportation rates
Choice of manufacturing strategy is primary driver
Make to plan (MTP)
Requires substantial demand facing warehousing
Make to order (MTO)
Requires supply facing support, but little demand warehousing
Assemble to order (ATO)

9. Customer accommodation drivers provide custom inventory assortments to wholesalers/retailers
Maximize consolidation and length of haul from plants
Rapid replenishment from wholesalers
E.g. food and mass merchandise industries
Market-based ATO situations using decentralized warehouses
Size of market served by warehouse based on
Number of suppliers
Desired service speed
Size of average order
Cost per unit of local delivery

10. Warehouse justification is based on providing a service or cost advantage from their location
Must achieve freight consolidation with warehouse positioning
Inventory storage to support customized orders
Mixing facilities to support flow-through and cross-dock sorting

11. Key design questions to ask when developing a logistics network
How many and what kinds of warehouses should a firm establish?
Where should they be located?
What services should they provide?
What inventories should they stock?
Which customers should they service?

12. The “Systems” Concept
Systems concept is an analytical framework that seeks total integration of components essential to achieving stated objectives
Components of logistical system are its functions
Order processing
Inventory
Transportation
Warehousing
Materials handling and packaging
Facility network design

13. Systems analysis seeks to quantify trade-offs between logistics functions
Goal of system analysis is to create an integrated effort (i.e., a whole) which is greater than its individual parts
Goal from a process perspective is balanced performance between functional areas both within the enterprise and across its supply chain
Functional excellence is the contribution a function makes to the success of the overall system (or process)
Focus of system analysis is on interactions (i.e., relationships) between components

14. Principles of general systems theory
Total system performance is singularly important
Individual components don’t need to be optimized
Emphasis is on the integrated relationship between components
A functional relationship exists between components called a trade-off
May enhance or hinder total system performance
Components linked together in a balanced system will produce greater end results than possible through individual performance, i.e., synergy!

15. A systems concept example
Customer service is an integral part of total system performance
However,
Customer service must also be balanced against other components
Accommodating the customer to the extent that you put yourself out of business is not serving the customer!
There must be a balance between cost and customer service
Building relationships with customers is key to this balance
i.e., customers become a component of the supply chain system

16. Total cost integration
Initial network of facilities are driven by economic factors
Transportation economics
Inventory economics
Cost trade-offs of these individual functions are identified, but
A system analysis approach (i.e. total cost integration) is used to identify the least-total-cost for the combined facility network

17. Transportation economics
Two basic principles for economical transportation
Quantity principle is that individual shipments should be as large as the carrier can legally transport in vehicle
Tapering principle is that large shipments should be transported distances as long as possible
Cost-based warehouse justification
Based on transportation consolidation
Network transportation cost minimization

18. Example of cost-based warehouse justification using transportation consolidation
Assumptions
Average shipment = 500 lbs
Freight rate to customer = $7.28 per cwt
Volume transport rate = $2.40 per cwt
For shipments 20,000+ lbs
Local delivery within market = $1.35 per cwt
Options
Direct ship to customer = $36.40 per average shipment
Ship to market at volume rate and distribute locally
Total rate = $3.75 per cwt
$18.75 per average shipment
Can you justify the use of a warehouse in this situation?

19. Network transportation cost minimization
Figure 12.2 Transportation Cost as a Function of the Number of Warehouse Locations

20. Inventory economics is driven by service response time
Performance cycle is key driver
Forward deployment of inventory potentially improves service response time, but
Increases overall system inventory

21. Service-based warehouse justification
Inventory consists of
Base stock
Safety stock
In-transit stock
What is the impact of adding warehouses to each of these inventories?
Base stock is independent of number of market facing warehouses
What about in-transit stock?
Although available to promise, it cannot be physically accessed!

22. Additional warehouses typically reduce total in-transit inventory
Results
Figure 12.3 Logistical Network: Two Markets, One Warehouse
Figure 12.4 Logistical Network: Two Markets, Two Warehouses
Table 12.1 Transit Inventory under Different Logistical Networks

23. What about the impact on safety stock?
Safety stock is needed to protect against unplanned stockouts during inventory replenishment
Uncertainty in network is impacted by adding warehouses
Performance cycle days are reduced
Number of performance cycles increases
Prevents aggregation of uncertainty across market areas
Serving the same market area by adding warehouses will increase uncertainty since each facility has its own replenishment cycle
Therefore, more safety stock is needed

24. Combining demand into one warehouse averages demand variability
Table 12.4 Summary of Sales in One Combined and Three Separate Markets
More safety stock is required if markets served from ‘local’ warehouse

25. Inventory summary
Base stock determination is independent of number of market facing warehouses
In-transit stock will typically decrease with the addition of warehouses to the network
Safety stock increases with number of warehouses added to the network
New performance cycle requires additional safety stock

26. Network inventory cost minimization
Figure 12.5 Average Inventory as a Function of Number of Warehouse Locations

27. Total cost of the network is illustrated in Figure 12.6
Figure 12.6 combines cost curves from Figure 12.2 and 12.5
Lowest cost points on each curve
For total transportation cost between 7 and 8 facilities
For inventory cost it would be a single warehouse
For total cost of network it is 6 locations
Trade-off relationships
Minimal total cost point for the system is not at the point of least cost for either transportation or inventory

28. Illustration of total cost concept for the overall logistical system
Figure 12.6 Least-Total-Cost Network

29. Analysis summarized in Figure 12.6 does not include all relevant costs
Assumptions are important to understand for their impact on finalizing a strategy
Analysis summarized in Figure 12.6 does not include all relevant costs
Projected sales based on a single planning period
Transportation costs based on a single average-size shipment
Desired inventory availability and fill rate assumptions impact the solution

30. Limitations to accurate total cost analysis
Many important costs are not specifically measured or reported
Need to consider a wide variety of network design alternatives
Alternative shipment sizes
Alternative modes of shipment
Range of available warehouse locations

31. Figure 12.x Three-Dimensional Total Cost Curve
Visualization of solution adding variables shipment size, transportation mode and location
Figure 12.x Three-Dimensional Total Cost Curve

32. General approach to finalizing a logistical strategy
Formulating logistical strategy requires evaluating alternative customer service levels and costs
General approach to finalizing a logistical strategy
Determine a least-total-cost network
Measure service availability and capability for this network
Conduct sensitivity analysis for incremental service options
Use cost and revenue associated with each option
Finalize the plan

33. Threshold service level is customer service associated with the least-total-cost-system
Existing policies of availability and capability are often assumed as the threshold service level
Current performance provides starting point for potential service improvements
Result of a customer service availability analysis is shown in Figure 12.7 for warehouses X, Y and Z
Based on distribution of an average order
Delivery time is estimated on the basis of distance
Transit inventory estimated based on delivery time
Management can make basic customer delivery commitments of the basic service platform
Use an estimate of expected order cycle time

34. Illustration of total logistics cost for three warehouse locations
Figure 12.7 Determination of Service Territories: Three-Point, Least-Cost System

35. Basic service capabilities of a network change with variations in
Service sensitivity analysis uses the threshold service level to evaluate potential changes
Basic service capabilities of a network change with variations in
Number of warehouses
Adding warehouses increases fixed costs
Performance cycles
E.g., web-based ordering, premium transportation
Typically increases variable costs
Safety stock policy
Increase in SS will shift average inventory cost curve upward

36. Variations in the number of warehouse locations is illustrated in Table 12.5 in the text
Key points from this table
Incremental service is a diminishing function
High degrees of service are achieved much faster for longer performance intervals than for shorter intervals
Total cost increases dramatically with each location added to the logistical network
Portfolio effect is the relationship between uncertainty and required inventory
Portfolio effect can be estimate using the square root rule

37. Finalizing strategy requires evaluating the incremental service cost vs. incremental revenue
Figure 12.8 illustrates an example
Marketing proposes
2% improvement in inventory availability
36-hour improvement in delivery capability
Design analysis determines a 12 warehouse lowest-cost network is needed
Incremental total cost to achieve proposed option = $400k per year
Incremental revenue needed to break even = $4million per year
Assumes 10% profit margin

38. Figure 12-8 Comparative Total Cost for 5- and 12- Distribution Point Systems