network design for international supply chain operations
TRANSCRIPT
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Network Design for International Supply Chain
Operations
Ronald H. Ballou
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What is Network Design?Positioning of ports, plants, warehouses, terminals, cross docks, consolidation points, etc.
Key questions•How many facilities should there be?
•Where should they be located?
•What size should they be?
•How much inventory should they hold?
•Which customers should be served by each?
•From which plants/vendors/ports should they be served?
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Warehousing
Warehousing
Transportation
Transportation
Vendors/plants/portsTransportation
Factory
Transportation Customers
Informationflows
The Supply Channel
These facilities need to be positioned and sized
Sources:plantsvendorsports
Regionalwarehouses,stockingpoints
Fieldwarehouses,stockingpoints
Customers,demandcenters
Demand
Supply
Supply
Production/purchasecosts
Inventory &warehousingcosts
Inventory &warehousingcosts
Transportationcosts
Transportationcosts
Abstract Network for Location Problem
Return
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Network Design Examples•A retailer locates consolidation points
•A manufacturer reduces the number of its warehouses
•A foreign automaker locates its staging areas
•A retailer positions its serving points for a new market
•A specialty chemical company consolidates its laboratories
•An insurance company locates its claim offices
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Why Location is Important
•A top management concern—absorbs significant capital in facilities and inventory
•Gives cost structure to the network, which is not easily changed
•Significantly effects profit, cash flow, and return on investment—key measures of strategy
•Impacts on the level of customer service that can be achieved
•Good location planning can save annually 5 to 15% of total logistics costs
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7Number of facilities
Co
st
Production/purchaseand order processing
Inventory carryingand warehousing
Facilityfixed
Inbound andoutboundtransportation
Total cost
00
Fa
cilit
y L
oc
ati
on
Pro
ble
m C
os
t T
rad
eo
ffs
Typically, this low point is sought subject to
service considerations
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Network Design in Logistics Strategy
PL
AN
NIN
G
OR
GA
NIZ
ING
CO
NT
RO
LL
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Transport Strategy
• Transport fundamentals• Transport decisions
Customer
service goals
• The product• Logistics service• Ord. proc. & info. sys.
Inventory Strategy
• Forecasting• Inventory decisions• Purchasing and supply
scheduling decisions• Storage fundamentals• Storage decisions
Location Strategy
• Location decisions• The network planning process
PL
AN
NIN
G
OR
GA
NIZ
ING
CO
NT
RO
LL
ING
Transport Strategy
• Transport fundamentals• Transport decisions
Customer
service goals
• The product• Logistics service• Ord. proc. & info. sys.
Inventory Strategy
• Forecasting• Inventory decisions• Purchasing and supply
scheduling decisions• Storage fundamentals• Storage decisions
Location Strategy
• Location decisions• The network planning process
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Role of Inventory in Network Design
•Make-to-requirements or make-to-stock
•Inventory control procedures
•Number of inventory locations
The 3 pillars of inventory management
A factor in network design
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Objective of Network Design
Maximize the return on logistics assets (ROLA)
AssetsCostsRevenueROLA −
=
Logistics’ contribution
to sales
Investment in logistics
assets
Costs of logistics
operations
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When to Undertake Redesign?
•Demand/supply locations have changed or shifted
•Cost elements of location have changed disproportionately
•Customer service levels have changed
•There has been a price policy change
•Logistics product characteristics have changed
•Network design has not been evaluated in 5 years or longer
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Getting Started
•Seek top management support
•Organizing a study team
•Selecting the tools for analysis
�Chart, compass, and ruler methods
�Spreadsheets
�Commercial models
•Auditing service levels
•Controlling problem size
�Creating product families
�Aggregating demand/suppliers
�Estimating transportation rates
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Data NeededTypical data elements
•Products in the product line•Coordinate locations of customers, warehouses, and plants•Demand for each customer by location and product•Transportation rates•Transit times (optional)•Warehousing costs (fixed, storage, and handling)•Purchase/production costs•Shipment sizes by product• Inventory levels by location, by product, and control policies•Shipment profiles•Order processing cost•Capital cost•Customer service goals•Available and potential facilities with capacities•Distribution patterns for current product flows
Recall
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Good Data Sources
•Company records and personnel for most
data about existing locations
•Real estate companies for warehouse
costs
•Local Chambers of Commerce for labor
rates, tax rates, available real estate, etc.
•Maps such as Google Earth and other
Internet sources
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Data about Inventory Levels
0
500
1000
1500
2000
2500
3000
0 10000 20000 30000 40000 50000
Annual warehouse throughput, D i ($000s)
Wa
reh
ou
se
av
era
ge
in
ve
nto
ry,
I i (
$0
00
s)
Shows inventory practices
by location
Data about Inventory Levels
0
500
1000
1500
2000
2500
3000
0 10000 20000 30000 40000 50000
Annual warehouse throughput, D i ($000s)
Wa
reh
ou
se
av
era
ge
in
ve
nto
ry,
I i (
$0
00
s)
Inventory practices
need to be improved
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Conducting the Analysis
•Analytical approach
�Benchmarking
�Improving on the benchmark
�Searching for the least-cost design
�Seeking an implementable design
•Value of modeling
�Visualizing demand and locations
�Selecting candidate sites
�Fast searching to configure network
�Easy to evaluate “what if” questions
Table
Demand map
Demonstration
Model Run Typea
Cost Type
Benchmark
Improved Benchmarkb
Max. Savings Networkc
Implementable Networkd
Inventory and warehousing Capital $103,110 $87,008 $87,626 $100,737 Tax and insurance 38,756 47,957 19,037 34,002
Order processing 284,366 223,820 198,210 262,413 Storage 165,788 138,412 119,749 119,293 Handling 299,863 265,252 329,385 253,479 Subtotal $891,883 $762,449 $754,007 $769,944 Transportation Plant to warehouse $261,853 $213,567 $0 $206,542 Warehouse to customer 1,041,661 1,113,978 1,453,812 925,043 Subtotal $1,303,514 $1,327,545 $1,453,812 $1,131,585 Production @Atlanta $3,861,765 $3,906,037 $832,112 $3,404,139 @Indianapolis 607,057 593,876 770,427 906,619 @Houston 587,140 498,835 2,408,764 692,441 Subtotal $5,115,962 $4,998,748 $4,001,303 $5,003,198 Total $7,311,359 $7,088,742 $6,219,122 $6,904,727 Customer Service Percentage of demand < 300 miles 65% 63% 30% 68% < 500 miles 85% 82% 45% 98% No. of warehouses 9 9 3 10 Savings vs. benchmark 0 $222,617 $1,092,237 $406,632e
At current capacities
No servicerestriction
aCosts are totals for three product groups.
bPlant capacity restrictions are at current levels but with no service restrictions. The result is direct shipments from plants.
cNo plant capacity or customer service restrictions. The result is direct shipments from plants.
dCurrent plant capacities are in effect and the desired service level is set at 500 miles.
eEssentially no investment in plant or warehousing is required to realize these savings.
No capacityrestrictions
Desig
n A
ltern
ati
ve
s
Closely matched
Return
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Presenting the Design to Management
•Strategy metrics
�Saving or profit improvement
�Cash flow
�Return-on-investment
•A company example
�About $2 billion in sales
�A reduction of 19 warehouses to 4
�Savings of $20 million per year
�Cash flow increased by $59 million
from inventory reduction
�ROI was projected at 374%
Want all to be positive
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Implementation Considerations
•Benefits may not accrue to all parties
•Risk of change may not be easily
accepted
•Timing of changes to network
•Sensitivity analysis should be
performed to check design stability
•Data should be maintained to answer
future “what if” questions
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What to Take Away
•Network design is probably the most important strategy issue you will face
•Significant benefits can be realized in as short a time as one year when “change” in the business has been significant
•Your company is likely to benefit significantly from network design/redesign
•Designs should to be customized within companies and within product families
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Questions?