1. 1 Newgistics Case Study 04/19/2006 Lei Deng, Timothy Gumm, Jacqueline Jones, Adam Levin, Leihong Li, Yang Song

2. 2 Agenda Problem Overview Current vs. Proposed Situation Pre-Modeling Issues The Model Results Analysis

3. 3 Problem Statement and Goal Problem Statement: The postal network accumulates and consolidates the return volumes at Return Delivery Units (RDU) and Return Bulk Mail Centers (RBMC). At some point, it becomes faster and less expensive to pull the consolidated volumes out of the postal stream and ship it directly to Newgistics’ returns centers. Goal: Develop a model that Newgistics can use under changing conditions to understand where to best extract the returns from the postal network 10, 20, and 30 million volume cases

4. 4 Post Office RBMC (j) RDU (i) Return Centers (k) Pull from BMC: Current State Cost: by postal zone Cost: FTL cost Constraints: maximum density minimum pick-up frequency 10, 20, or 30 Million Packages Legend i = 1 to 6115 j = 1 to 22 k = ATL, CHI, LAX, DFW, PHY ±70% ±30%

5. 5 Post Office RBMC (j) RDU (i) Return Centers (k) Pull from RDU or BMC: Possible Future State ±70% ±30% Cost: $2/parcel + DDU cost Constraints: Pick up at least 3 times/week # items/bag 25% 75% Cost: by postal zone Cost: by FTL cost Constraints: truck capacity minimum pick-up frequency 10, 20, or 30 Million Packages Legend i = 1 to 6115 j = 1 to 22 k = ATL, CHI, LAX, DFW, PHY

6. 6 Issues Before Modeling…. SUM(RDU dist) = 70% < 100%, where does the other 30% go? The 30% go directly to BMC from postal office – outside of our control So the uncontrollable volume at a single BMC is: 30%*annual volume*BMC dist? Any problems? 30% fixed volume does not apply to an individual BMC! The right answer is: (BMC i dist - Sum(RDUs in BMC i dist))*annual volume

7. 7 Issues Before Modeling…. Truckload cost What if < 3 TL/week, do we still pay for 3 FTL cost? Package and bag weight distribution One bag can contain 1,2,3,4,or 5 packages We are given weight distribution for packages 10 lbs What distribution to assume? Exponential or Uniform? What is the bag weight distribution? Simulation needed!

8. 8 DDU Bag Weight Simulation Not realistic! Exponential is better estimate.

9. 9 DDU Bag Weight Optimization Understand optimal bag configuration to determine the financial value in understanding cubic dimensions of packages Developed optimization model Results indicate that significant savings exist if bag configurations are optimized Suggestion: Work with vendor to improve pricing contract for DDU Pickup Cost based on Bag Opt. Conclusions

10. 10 The Model Uses Excel and GAMS (General Algebraic Modeling System) Computed costs in Excel Formulated problem as an Integer Program in GAMS GAMS Model Transfer solution to Transfer costs to Excel Model

11. 11 For 75% captured packages: DDU cost for each RDU Expected DDU cost/bag with i packages (i=1,2,3,4,5) Cost(i) = sum (cost per pound * weight * P(weight)) Total cost for each RDU = M*cost(5)+cost(N) + 2(5M+N), M = # full bags [rounddown( # packages at RDU /5)] N = # packages in last bag [# packages at RDU – 5*M] Costs of Pulling from RDU

12. 12 Costs of Pulling from RDU 25% Non-captured Packages: Expected postal cost for each RDU = Expected postal cost by zone * # non- captured pkgs. at each RDU Expected postal cost for each zone = sum over all weights (weight distribution * the postal cost for each weight) # Non-captured pkgs. at each RDU = ROUND (RDU distribution * total annual volume * 0.25 / 52 / 3)

13. 13 Expected postal cost for each RDU = Expected postal cost by zone * # pkgs. at each RDU Truckload cost Includes pkgs. that go from post office  BMC and those that go from RDU  BMC = Max (3, total weekly volume at BMC / max density of truck) * FTL cost * 52 Costs of Pulling from BMC

14. 14 Model Formulation

15. 15 Results Total RDUs pulled: 10 million: 5276, or 86.3% 20 million: 5574, or 91.2% 30 million: 5625, or 92% Savings from proposed solution: 10 million: $8,294,499 20 million: $17,800,244 30 million: $29,618,935

16. 16 DDU Cost Sensitivity Analysis: Detroit and Springfield

17. 17 Postal Cost Sensitivity Analysis: Detroit

18. 18 Overall Results Pull from RDU except when volumes are very low Very low volumes increase DDU cost  cheaper to go through BMC As annual volume increases, pull from more RDUs Solution is not very sensitive to small changes in DDU cost Solution can change when postal costs decrease by at least 20%

19. 19 Recommendations Start pulling packages from specified RDUs Understand better cubic dimensions of packages reduce DDU cost Explore possibility of paying LTL instead of FTL: may change optimal solution

20. 20 Questions?