Supply Chain & Logistics Analytics – Session 9

Network and Route Optimization Part I

Study Notes, Cases, Excel Solver Exercises
 Term End Exam
 2 DQ model 15 Marks each.
 Caselet Based or Option to choose your own situation
 Sub Questions with marks breakdown
 Theory plus Application
 Be guided by marks split
 Be objective based on the marks split
 Apply in sufficient level of depth
 Answer specifically, separately, based on situation
 Add examples where needed absolutely needed, but focus on
situation context
 Focus Topics
 AI, ML application in Supply Chain
 Types of Analytics, Data Sources and Application of Analytics
to gain competitive advantage
 Analytics in forecasting, Accuracy Measure, choice of models
 Product Classification, EOQ, MOQ, (Forecastability, Volume)
 Safety Stock, Service, Cost related analytics
 Total Cost of Ownership
 Analytics in Drivers, cost, responsiveness
 Analytics in determining Trade off between cost,
responsiveness
 Network Optimization Models – COG, Factor Rating, Cost
Volume
 Session 9 Topics
 Location Decisions
 Factor Rating
 Cost Volume
 Centre of Gravity
 Importance of Location
When FedEx opened its Asian hub in Guangzhou, China, it set the stage
for “round-the-world” flights linking its Paris and Memphis package
hubs to Asia.

When Mercedes-Benz announced its plans to build its first major

overseas plant in Vance, Alabama, it completed a year of competition
among 170 sites in 30 states and two countries.

When Hard Rock Cafe opened in Moscow, it ended 3 years of advance

preparation of a Russian food-supply chain. The strategic impact, cost,
and international aspect of these decisions indicate how significant
location decisions are.
 Importance of Location
The objective of location strategy is to maximize the benefit of location to the
firm.

Location Options are

1. Expand Existing Ones
2. Maintain Existing and open new facilities
3. Close Existing ones and open new facilities

The location decision often depends on the type of business.

• Industrial location decisions, the strategy is usually minimizing costs
• Retail and professional service organizations, the strategy focuses on
maximizing revenue.
• Warehouse location strategy, however, may be driven by a combination of
cost and speed of delivery.
 Location Decision Case Situations
Cost pressure lead to sourcing out of Far East for UK market
West Europe/American factories were closed
Overtime cost dimensions changed
• Labour rate advantage diminished
• Transportation became costlier
• Exchange rate fluctuation was not always favourable
• Inventory obsolescence issues
• Carbon Footprint
• Quality issues
• Intellectual Property related issues
 Location Decision Case Situations
Manufactures model trains and cars
Long established business
Moved production to china from UK in 2002
UK manufacturing was shut
Changing Dimensions
• Competition
• Customers not willing to wait for lead time
• Production cost advantage was diminishing

2013 Shifted new range toys production to UK from China

 Location Evaluation Methods

• Factor-rating method
• Locational cost–volume analysis
• Center-of-gravity method
• Load-Distance Model
• Facility Allocation
Factors Affecting Location Decisions
A three-tier model for assessing the competitiveness of a location
 Transport Network Optimization

Third-party logistics provider operating their own hubs, distribution centers,

and a fleet of 350 trucks across India. They run an interleaved transportation
network where a truck is loaded and starts from the origin hub, stops at
branches on the way to drop/pick up shipments, and reaches the destination
hub for unloading. During the truck’s return journey back to the origin hub,
the roles of the origin and destination hubs reverse.

Specifically, executives wanted to understand the following:

Is the current fleet size optimal?

Is the distribution of trucks across different hubs optimal?
Are we using suitable capacity trucks on routes?
How many trucks should we add to handle growth over the next five years?
 Transport Network Optimization
Data review of the current network of hubs, branches, and routes.
Actual shipment data for one month used to build the baseline model.
They operated multiple transportation assets – private fleet, dedicated fleet, and for-
hire trucks and also used numerous truck types – from vans to larger capacity
vehicles.
The former is used for local delivery and larger capacity vehicles for long-haul routes.

Truck utilization was enhanced from the existing 65% to 88%, an improvement of
35%, and reduced the unit cost per unit weight shipped, which is an important
metric.

One initial observation was that the truck volume utilization on most routes was low
and there were instances of routes where higher capacity trucks were used, but a
lower capacity truck on those routes would have been more efficient. They also had
a higher proportion of trucks at the main hub, while the number of loads originating
from the main hub was not exceptionally high. There was an opportunity to
reposition some of the trucks from the main hub to other hub locations.
 Transport Network Optimization
Blue Yonder Transportation Modeler software used to build the model.
The different components modeled include the hubs and branch network and fleet
details such as truck types, capacity, business rules, and input costs.

3PL stipulated some business constraints while building the model. They did not
want the ratio of dedicated fleet to private fleet to exceed 15%. A vehicle allocated
to a hub should always return to the hub. The hub and branches on an existing route
would remain the same and shipments destined to a specific branch would be part
of an existing route. The routes serviced by for-hire trucks had to be serviced by for-
hire trucks and could not shift to fleet.

Three key unconstrained scenarios with different weight tonnages were developed –
current, growth projection for the next two years, and growth projection for the next
five years.
All scenarios focused on the optimal selection of trucks of different capacities on
routes and optimal allocation of trucks to hubs.
 Transport Network Optimization

The product shipped tended to “cube out.” Hence the cubic volume was the critical
measure to optimize. The modeling recommended improved truck cubic utilization.
Truck utilization was enhanced from the existing 65% to 88%, an improvement of
35%. The model recommended the optimal equipment usage on routes while
ensuring allocation of larger-size trucks as the weight tonnage increased. This
specific optimization reduced the unit cost per unit weight shipped, which is an
important metric. The truck profile showed a decrease in the required number of 10-
ton trucks and an increase in 16-ton trucks with increased weight tonnage.

For future road map of their business, 3PL could chart the future roadmap that
included investing in higher capacity 16-ton trucks, reallocation of trucks across
hubs, and retiring trucks near end of life. The benefits realized included improving
truck utilization by selecting the right weight capacity truck on each route, thereby
lowering the unit cost per unit weight
 Location Evaluation Methods
• Factor-rating method is location method that instills
objectivity into the process of identifying hard-to-evaluate
costs.
• Locational cost–volume analysis is a method for making an
economic comparison of location alternatives.
• Center-of-gravity method is a mathematical technique used
for finding the best location for a single distribution point that
services several stores or areas.
• Transportation model is a technique for solving a class of
linear programming problems.
 Factor Rating Method
• There are many factors, both qualitative and quantitative, to consider in
choosing a location. Some of these factors are more important than
others, hence weights can make the decision process more objective.
• The factor-rating method is popular because a wide variety of factors,
from education to recreation to labor skills, can be objectively included.
1. Develop a list of relevant factors called key success factors
2. Assign a weight to each factor to reflect its relative importance in the
company’s objectives.
3. Develop a scale for each factor (for example, 1 to 10 or 1 to 100
points).
4. Have management score each location for each factor, using the
scale in Step 3.
5. Multiply the score by the weights for each factor and total the score
for each location.
6. Make a recommendation based on the maximum point score,
considering the results of other quantitative approaches as well.
Factor Rating Method Example
 Locational Cost-Volume Analysis
• Locational cost–volume analysis is a technique for making an economic
comparison of location alternatives.
• By identifying fixed and variable costs and graphing them for each
location, we can determine which one provides the lowest cost. Locational
cost–volume analysis can be done mathematically or graphically.
• The graphic approach has the advantage of providing the range of volume
over which each location is preferable.
• The three steps to locational cost–volume analysis are as follows:
1. Determine the fixed and variable cost for each location.
2. Plot the costs for each location, with costs on the vertical axis of the
graph and annual volume on the horizontal axis.
3. Select the location that has the lowest total cost for the expected
production volume.
Locational Cost-Volume Analysis
 Centre of Gravity Method
• The center-of-gravity method is a mathematical technique used for
finding the location of a distribution center that will minimize
distribution costs.
• The method takes into account the location of markets, the volume
of goods shipped to those markets, and shipping costs in finding the
best location for a distribution center.
• The first step in the center-of-gravity method is to place the
locations on a coordinate system.
• The center-of-gravity method assumes that cost is directly
proportional to both distance and volume shipped.
• The ideal location is that which minimizes the weighted distance
between sources and destinations, where the distance is weighted
by the number of containers shipped.
Centre of Gravity Method
Location Decision Case Study

Saudi Arabia gets shipment from Jebel Ali

Jebel Ali gets shipment from Europe, USA,
Far East Countries..
Jebel Ali to Dammam = 900 Kms
Jebel Ali to Riyadh = 900 Kms
Jebel Ali to Jeddah = 2000 Kms
Location Decision Case Study

North Africa Countries Served

from Germany, France
Tangier is a FTZ in Morocco
500 pallet spaces needed
Objective to serves North Africa
countries
 Distribution Network Case Study

The strategic business challenge

As one of the most rapidly changing industries, retail is in an era of

significant transformation. Storied and successful retailers discover
their business models challenged like never before, with many of
the top players suffering significant losses as they struggle to adapt.
Include a generation raised on the internet and social media not
conforming to retail buying habits of prior generations, combined
with a pace of change faster than most analysts predicted, and the
scramble to keep up proves even more difficult.
 Distribution Network Case Study
In the context of this challenging environment, a leading retailer
recently undertook the daunting task of transforming its business.
They required a clear-eyed look at how the business had evolved
over the decades, where the market stood, emerging trends, and
where current and future gaps existed.

The organization realized they would lose its competitive foothold

without transforming its supply chain. Its very survival depended
upon creating a distribution network that was responsive to shifting
customer demographics and buying patterns (particularly e-
commerce) and supporting rapidly growing strategic partnerships.
Designing a responsive and efficient supply chain was a key
component of the transformation the company undertook.
 Distribution Network Case Study
The supply chain design challenge

Prior to the analysis, the organization’s complex retail and e-commerce supply
chain network had over 1,000 stores spanning 49 states and Puerto Rico, and it
needed a significant network redesign in order to effectively compete in the
evolving retail environment.

The company distributed products through several area logistics hubs (ALHs) and
11 store management facilities (SMFs). The question was, “Does this distribution
model fit the emerging retail distribution requirements?”

The distribution network had a number of characteristics which defined their

operational landscape:
 Distribution Network Case Study
Some distribution centers were constructed several decades earlier and sat on
prime real estate, yet lacked adequate throughput capacity or, in some cases, the
sufficient volume to justify the DC size.

Some DCs had inadequate capabilities for picking, packing and shipping to meet
evolving store requirements and required large capital investments to reach
required threshold capabilities.

Store replenishment schedule was set to bi-weekly, regardless of size.

Some stores lacked “back-room” storage and required off-site warehouses.

The ALHs processed imports as well as domestic shipments from vendor

warehouses.

ALHs shipped to both the smaller store management facilities (SMFs) and to
some stores after cross-docking inbound products.
 Distribution Network Case Study
Supply chain design analysis
The retailer took large-scale supply chain design. Analyzed over 200 scenarios
and sensitivity tests to model the best approaches for meeting store service
requirements, realizing savings, and determining the best consolidation
opportunities.

The supply chain design effort evaluated:

Supplier-to-store inbound costs

The cost of transferring product from ALHs to SMFs
All fixed costs for maintaining ALHs and SMFs (including real estate, utilities,
management, and insurance)
Costs for processing, handling, shipping, receiving, and picking and packing
products
Last mile delivery costs required by the client’s private fleet to ship product from
SMFs to stores (based on the store routing guide during both peak and non-peak
season schedules)
E-commerce storage capacity demands and related costs
 Distribution Network Case Study
The ongoing “composite team”
Evaluation of strategic models were done to determine the most effective model.
The team evaluated several strategic models, with each offering operational
advantages and disadvantages, and narrowed it down to a model that would
position the organization to compete more effectively within the retail industry.

The team identified five outdated or geographically irrelevant facilities, as well as

an opportunity for additional cost savings and performance improvements. To
improve speed of delivery and reduce costs, the company shifted the main U.S.
port of entry for foreign suppliers to an updated distribution center on the West
Coast. This DC assumed a pivotal role in handling outbound West Coast deliveries
for increased efficiency and savings over time.

The supply chain design initiative proved so successful that the client asked
Chainalytics to provide managed analytics services to dynamically update its
supply chain models with data and to design new models for emerging product
lines which promote a “store within a store” presence at many of its retail
locations.
 Distribution Network Case Study
Additional analytics were performed to determine the most effective
reconfiguration of a distribution of a specialty product line of balance lower
transportation costs against the increased inventory in the pipeline. Over 30
scenarios were evaluated to assist in identifying the most effective mode for
distribution.

Chainalytics’ managed analytics services enables the client to proactively and

continuously model and manage its supply chain as well as utilize industrial
strength analytics to help make key supply chain decisions.

The organization recognizes the enormous challenges of effectively competing in

retail in the 21st century and has made strategic moves such as incorporating
cosmetics, coffee shops, salons, optical centers, portrait studios, and major
appliances in its stores and online. But a well-run business must also possess an
underlying distribution infrastructure that continually meets market demands.
The client’s strategic moves ensure a high caliber distribution network defined by
investment-grade analytics.