Ecom6008 24 L2

Supply Chain &
e-Logistics Management
(2) Designing Supply Chain
Network
Dr. Benjamin Yen
www.fbe.hku.hk
Agenda
Designing Distribution Network
Data Collection and Modeling
Network Design – Example
Appendix - Software and Tools

Reference - An Example - BuyPC.com
Dr. Benjamin Yen SCM LEC-2 2

Key Questions (I)
 How a company can develop a model
representing its logistics network?
 How aggregating customers & products
affects the accuracy of the model?
 How a company knows how many
distribution centers to establish?

Key Questions (II)
 How a company knows where to locate
these distribution centers?
 How a company allocates the output of
each product in its plants among its
distribution centers?
 How a company knows whether, when &
where to expand its production capacity?

Introduction
What is a Logistic Network?
 Parties: suppliers, warehouse, distribution
centers, and retail outlets
 Flows: raw materials, work-in-process

inventory, and finished products that flow
between the facilities.

Customers,
Regional Demand centers sinks
Sources: Field
plants vendors Warehouses: Warehouses:
ports stocking Stocking points
points
The picture can't be displayed.
Supply
Inventory &
warehousing
costs
Production &
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
Why Network Planning?
Find the right balance between inventory,
transportation and manufacturing costs
Match supply and demand under
uncertainty by positioning and managing
inventory effectively
Utilize resources effectively by sourcing
products from the most appropriate
manufacturing facility

Three Hierarchical Steps
Network design
• Number, locations and size of manufacturing plants & warehouses
• Assignment of retail outlets to warehouses
• Major sourcing decisions
• Typical planning horizon is a few years.
Inventory positioning
• Identifying stocking points
• Selecting facilities that will produce to stock & thus keep inventory
• Selecting facilities that will produce to order & hence keep no inventory
• Inventory management strategies
Resource allocation
• Determine whether production and packaging of different products is
done at the right facility
• What should be the plants sourcing strategies?
• How much capacity each plant should have to meet seasonal demand?
Logistic Network Example
Key strategic decisions – warehouse (also
applicable for plant and retailer)
 Determining the appropriate number of
warehouses.
 Determining the location of each warehouse.
 Determining the size of each warehouse.
 Allocating space for products in each
warehouse.
 Determining which products customers will
receive from each warehouse.

Logistic Network Problem
Assuming that plant and retailer locations will
not be changed, the objective is to design or
reconfigure the logistics network so as to:
 minimize annual systemwide costs

• including production & purchasing costs, inventory
holding costs, facility costs (storage, handling, and
fixed costs), and transportation costs,
 subject to a variety of service level requirements
• tactical decision - the selection of transportation
mode (e.g., truck, rail)
Logistic Network Example
Centralized: Reduce inventory cost Distributed: Reduce shipping cost
Manufacturer Manufacturer
Retailer 1 Retailer 3 Retailer 1 Retailer 3
Distributor 1 Distributor 1 Distributor 2
Retailer 2 Retailer 4 Retailer 2 Retailer 4

Trade-offs by Increasing the
Number of Warehouse
 An increase in overhead & setup costs.
 An increase in inbound transportation
costs: transportation costs from the
suppliers and/or manufacturers to the
warehouses.
 An increase in inventory costs due to
increased safety stocks required to protect
each warehouse against uncertainties in
customer demands. (The detail will be discussed in the next
lecture)

Trade-offs by Increasing the
Number of Warehouse
 An improvement in service level due to the
reduction in average travel time to the
customers.
 A reduction in outbound transportation
costs: transportation costs from the
warehouses to the customers.
 Firm must balance the costs of opening new

warehouses with the advantages of being
close to the customer
Decision Classifications -
Strategic Planning
Decisions that typically involve major capital
investments and have a long term effect
 Determination of the number/location/size
of new plants, distribution centers and
warehouses
 Acquisition of new production equipment
and the design of working centers within
each plant
 Design of transportation facilities, comm
equipment, data processing means, etc.
Tactical Planning
Effective allocation of manufacturing and
distribution resources over a period of
several months
 Work-force size
 Inventory policies
 Definition of the distribution channels
 Selection of transportation and trans-
shipment alternatives

Operational Control
Includes day-to-day operational decisions
 The assignment of customer orders to
individual machines
 Dispatching, expediting and processing
orders
 Vehicle scheduling

Network Design: Key Issues (I)
Pick the optimal number, location and size of
warehouses and/or plants
Determine optimal sourcing strategy
• Which plant/vendor should produce which product
Determine best distribution channels
• Which warehouses should service which customers

Network Design: Key Issues (II)
The objective is to balance service level against
• Production/ purchasing costs
• Inventory carrying costs
• Facility costs (handling & fixed costs)
• Transportation costs
 i.e. we would like to find a minimal-annual-

cost configuration of the distribution network
that satisfies product demands at specified
customer service levels.
Decision Support System for
Network Optimization (Reference)
The DSS screen representing the

optimized logistics network
The DSS screen representing data

prior to optimization

Displaying the Solutions Allows
You To Compare Scenarios (Reference)

Data Collection
Information Required for
Network Configuration Problems
Location - retailers, distribution centers,
manufacturing facilities, suppliers, etc.
All products - volumes, transport modes.
Annual demand - product /customer location.
Transportation rates - mode.
Warehousing costs - labor, inventory carrying
charges, fixed operating costs, etc.
Shipment sizes & frequencies - delivery.
Order processing costs.
Customer service - requirements and goals.
Data Collection Issues
Data Aggregation
Transportation Rates
Mileage Estimation
Warehouse Costs
Warehouse Capacities
Potential Warehouse Locations
Service Level Requirements
Future Demand

Too Much Information?
Sales data is typically collected on a by-
customer basis
Network planning is facilitated if sales data
is in a geographic rather than accounting
database
 Distances and Transportation costs
Customers located in close proximity are
aggregated using a grid network or cluster
 Refer as a customer zone.

Why Aggregate?
The cost of obtaining & processing data
The form in which data is available
The size of the resulting location model
The accuracy of forecast demand
The customer zone balances -

 lossof accuracy (due to over aggregation)
 needless complexity
Factors affect efficiency of aggregation -

• # of aggregated points, i.e. the # of different zones
• distribution of customers in each zone.
Example – Milk Consumption
How to estimate the milk consummation
last week in Hong Kong
 Ask / Call each person
 Ask / Call all retailers
 Ask / Call local agent / distributor
 Ask / Call HK region distributor
 …

Example – Transportation Map
How to “depict” the “transportation map”
of China?
 Regions
 Types – railroad, highway, etc.
 Types – airport, seaport, etc.
 …

Data Aggregation
Customer aggregation
• Grid network, clustering technique
• Zip code
• Service levels, frequency of delivery
Item aggregation - product groups

• Distribution pattern & logistics characteristics
• Product type

Example –
Testing Customer Aggregation
1 Plant, 1 Product
Considering transportation costs only
Customer data
• Original Data had 18,000 5-digit zip code ship-to
locations
 Aggregated Data had 800 3-digit ship-to locations
 Total demand was the same in both cases
20
10
30 20 90
10

Comparing Output
Total Cost:$5,796,000 Total Cost:$5,793,000

Total Customers: 18,000 Total Customers: 800
Cost Difference < 0.05%

Product Grouping
Companies may have thousands of
individual items in their production line
 variations in product models and style

 same products are packaged in many sizes

Product Grouping (cont.)
Within each of the source-groups, aggregate

the SKU’s by similar logistics characteristics
(e.g. weight, volume, holding cost, etc.)
SKU (Stock Keeping Unit) - associated with

any purchasable item in a store or catalog
 e.g. a woman's blouse of a particular style and
size - “3726-8” meaning “Style 3726, size 8”.
 a source group is a group of SKU’s all sourced
from the same place(s)

Within Each Source Group,
Aggregate Products by Similar Characteristics
70.0
60.0
50.0
Weight (lbs per case)
40.0
30.0
20.0
10.0
0.0
0.000 0.010 0.020 0.030 0.040 0.050 0.060 0.070 0.080 0.090 0.100
Volume (pallets per case)
Rectangles are based on the distribution patterns to illustrate how to cluster SKU’s.
Test Case for Product Aggregation
5 Plants
25 Potential Warehouse Locations
• Distance-based Service Constraints
• Inventory Holding Costs
• Fixed Warehouse Costs
Product Aggregation
• 46 original products
 4 aggregated products
 aggregated products were created using weighted
averages

Sample Aggregation Test:
Product Aggregation
Total Cost:$104,564,000 Total Cost:$104,599,000
Total Products: 46 Total Products: 4
Cost Difference: 0.03%

Data Aggregation - Guideline
Aggregate demand points for 300 zones.
Make sure each zone has approximately an
equal amount of total demand.
Place the aggregated points at the center of
the zone.
Aggregate the products into 20 to 50 product
groups
 the error is typically no more than 1%

Transportation Rates
Huge # of rates representing all combinations
of product flow
Rates: linear with distance and volume (e.g.
truck, rail, UPS)
Transportation costs associated with an
internal and an external fleet
• Internal - estimating transportation costs for
company owned trucks
• External - Truckload (TL) mode and Less Than
Truckload (LTL) mode
• ex. CZAR (Complete Zip Auditing & Rating) 
Example – Shipping Cost / Time
Send Swatch watches to Seoul and New
York.

Transport Rate Estimation
Rate Transport Estimating Curve for

Selected Distances from Chicago UPS 2-Day Rates for 150 lb.
Source: Ballou, R. H. Business Logistics Management

Mileage Estimation (for your reference)
Estimate the distance between a and b

 lona and lata, the longitude and latitude of point a
(similarly for point b)
 straight-line distance in miles from a to b, Dab
Dab = 69 (lona − lonb ) + (lat a − latb )

2 2
 lat a − latb   lona − lonb 

2 2
Dab = 2(69 )sin −1 sin   + cos(lat a )× cos(latb )× sin  

 2   2 
 estimate actual road distance, multiply Dab by a
circuity factor ρ.
• ρ = 1.3 for metropolitan area; ρ = 1.14 for the US
Warehouse Costs
Fixed costs
• proportional to warehouse size (capacity) but
in a nonlinear way; this cost is fixed in certain
ranges of the warehouse size.
Handling costs
• labour & utility costs which are proportional to
annual flow through the warehouse.
Storage costs
• inventory holding costs, which are
proportional to average inventory levels.
Warehouse Capacity
Amount of space is proportional to peak inventory, not annual flow
annual storage costs = average inventory level × inventory holding cost
Assume a regular shipment and delivery schedule
Required storage space is approximately 2λ
Annual sales ( flow)
Inventory turover ratio (λ ) =
Order size
Average inventory level
Inventory
Order size
Average λ
Inventory
λ
Time
Average
Time
 Space for access & handling pallet; for aisles,
picking, sorting, and processing facilities
 Multiply by a factor (typical 3)
Warehouse with AS/RS

(Automated Storage and
Retrieval System)
AGV
(Automatic
Guided
Vehicles)
moves
according to
the magnetic
trail on floor
Reference: http://library.csun.edu/asrs.html 
Example – New Warehouse
How to design the right layout for a new
warehouse of motors?

Other Issues
Warehouse Location
• geographical & infrastructure conditions;
natural resources & labour availability; local
industry & tax regulations; public interest
Service Level Requirement
• maximum distance between each customer and
the warehouse serving it; proportion of
customers (demand) within a given distance
Future Demand
• changes in customer demand over the next few
years - possible scenarios
Example – Warehouse Location
What is the relationship between warehouse
location and ser ice level?

A Typical Network Design Model
Several products are produced at several
plants.
Each plant has a known production capacity.
There is a known demand for each product at
each customer zone.
The demand is satisfied by shipping the
products via regional distribution centers.
There may be an upper bound on total
throughput at each distribution center.

A Typical Location Model
There may be an upper bound on the distance
between a distribution center and a market
area served by it
A set of potential location sites for the new
facilities was identified
 Costs
• Set-up costs
• Transportation cost is proportional to the distance
• Storage and handling costs
• Production/supply costs
Complexity of Network Design
Location problems are, in general, very
difficult problems.
The complexity increases with
• the # of customers,
• the # of products,
• the # of potential locations for warehouses,
• the # of warehouses located.

Industry Benchmarks:
Number of Distribution Centers (Reference)
Pharmaceuticals Food Companies Chemicals
Avg.
# of
WH 3 14 25
- High margin product - Low margin product
- Service not important (or easy to - Service very important
ship express) - Outbound transportation
- Inventory expensive relative to expensive relative to inbound
transportation
Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

Network Design – Example
P1 P2
Heuristics & the Need for W1 W2
Exact Algorithms – Example C1 C2 C3
Single product.
Two plants, plant p1 and plant p2.
Plant p2 has an annual capacity of 60K units.
The 2 plants have the same production costs.
2 existing warehouses, w1 and warehouse w2,
have identical warehouse handling costs.
3 markets areas, c1, c2, & c3, with demands of
50K,100K & 50K, respectively.

P1 P2
Heuristics & the Need for W1 W2
Exact Algorithms – Example C1 C2 C3
Distribution costs per unit

Plant Market
p1 (∞) p2 (60K) c1 (50K) c2 (100K) c3 (50K)
Warehouse Warehouse
w1 0 4 w1 3 4 5
w2 5 2 w2 2 1 2
For instance, distributing one unit from

plant p1 to warehouse w2 costs $5.

Question: What is the Minimum
Total Shipping Cost ?
P1 P2
Plant 5 4
0 2
Capacity= ∞ Capacity=60K
Warehouse W1 W2
3 2
4 1
2 5
Market C1 C2 C3
Demand=50K Demand=100K Demand=50K

P1 P2
Heuristic 1
W1 W2
C1 C2 C3
 For each market, choose the cheapest warehouse to

source demand
 cl, c2, and c3 would be supplied by w2
 For this warehouse choose the cheapest plant
 distribute 60,000 units from p2 and the remaining 140,000 from p1.
Facility
p1 (∞) p2 (60K) c1 (50K) c2 (100K) c3 (50K)
Warehouse
w1 0 4 3 4 5
200K 50K 100K 50K
w2 5 140K 2 60K 2 1 2
 The total cost is:
2 x 50,000 + 1 x 100,000 + 2 x 50,000
+ 2 x 60,000 + 5 x 140,000 = 1,120, 000
P1 P2
Heuristic 2
W1 W2
C1 C2 C3
For each market area, choose the warehouse where the

total delivery costs to and from the warehouse are the
lowest (inbound and outbound distribution costs).
Thus, for market area c1,
p1→w1→c1 p1→w2→c1
p2→w1→c1 p2→w2→c1
Among all these alternatives, the cheapest is p1→w1→c1, so
choose w1 for c1. Using a similar analysis, we choose w2 for c2
and w2 for c3.
Facility
p1 p2 c1 c2 c3
Warehouse
w1 0 4 3 4 5
w2 5 2 2 1 2

P1 P2
Heuristic 2 (cont’)
W1 W2
C1 C2 C3
Warehouse w1 delivers a total of 50,000 units while

warehouse w2 delivers a total of 150,000 units.
The best inbound flow pattern is to
• supply 50,000 units p1→w1
• supply 60,000 units p2→w2
• supply 90,000 units p1→w2.
 The total cost is:
3 x 50,000 + 1 x 100,000 + 2 x 50,000
+ 2 x 60,000 + 0 x 50,000 + 5 x 90,000 = 920, 000
Facility
p1 p2 c1 c2 c3
Warehouse
w1 0/50,000 4 3/50,000 4 5
w2 5/90,000 2/60,000 2 1/100,000 2/50,000
P1 P2
Optimization Model
W1 W2
C1 C2 C3
x(p1,w1), x(p1,w2), x(p2,w1) and x(p2,w2) be the flows

(variables) from the plants to the warehouses.
x(w1,c1), x(w1,c2), x(w1,c3) be the flows from warehouse
w1 to customer zones c1, c2, and c3.
x(w2,c1), x(w2,c2), x(w2,c3) be the flows from warehouse
w2 to customer zones c1, c2, and c3.
 The linear programming problem we need to solve is
Minimize {0×x(p1,w1) + 5×x(p1,w2) + 4×x(p2,w1) + 2×x(p2,w2)

+ 3×x(w1,c1) + 4×x(w1,c2) + 5×x(w1,c3)
+ 2×x(w2,c1) + 1×x(w2,c2) + 2×x(w2,c3)}
P1 P2
Optimization Model (cont’)

W1 W2
C1 C2 C3
Subject to the following constraints:

x(p2, w1) + x(p2, w2) ≤ 60,000
x(p1, w1) + x(p2, w1) = x(w1, c1) + x(w1, c2) + x(w1, c3)
x(p1, w2) + x(p2, w2) = x(w2, c1) + x{w2, c2) + x(w2, c3)
x(w1, c1) + x(w2, c1) = 50,000
x(w1, c2) + x(w2, c2) = 100,000
x(w1, c3) + x(w2, c3) = 50,000
All flows are greater than or equal to zero.

P1 P2
Optimization Model (cont’)

W1 W2
C1 C2 C3
Facility
p1 p2 c1 c2 c3
Warehouse
w1 0 4 3 4 5
Cost
w2 5 2 2 1 2
Facility
p1 p2 c1 c2 c3
Warehouse
w1 14,000 0 50,000 40,000 50,000
Quantity
w2 0 60,000 0 60,000 0
 The total cost is:

3 x 50,000 + 4 x 40,000 + 1 x 60,000 + 5 x 50,000
+ 0 x 140,000 + 2 x 60,000 = 740, 000

P1 P2
Comparison
W1 W2
C1 C2 C3
Heuristic 1 – minimization on links

2 x 50,000 + 1 x 100,000 + 2 x 50,000
+ 2 x 60,000 + 5 x 140,000 = 1,120, 000
Heuristic 2 – minimization on paths

3 x 50,000 + 1 x 100,000 + 2 x 50,000
+ 2 x 60,000 + 0 x 50,000 + 5 x 90,000 = 920, 000
Optimization Model – minimization on network

3 x 50,000 + 4 x 40,000 + 1 x 60,000 + 5 x 50,000
+ 0 x 140,000 + 2 x 60,000 = 740, 000
Optimize the Configuration
of the Logistics Network 
Mathematical optimization techniques

• Exact algorithms that are guaranteed to find
optimal solutions (i.e. least-cost solutions);
mathematical programming.
• Heuristic algorithms that find good solutions,
not necessarily optimal solutions.
Simulation models
• Provide a mechanism to evaluate specified
design alternatives created by the designer.

Example – Network Configuration
How to decide the optimal network
configuration for Walmart?

Example – Flight Scheduling
How to get an “optimal” (best) daily flight
schedule for HK international airport?

Example – Subway Gate Setting
How to decide the gate direction of MTR
for rush hour?

Heuristics & Exact Algorithms
These tools can determine strategies that
will significantly reduce the total system
cost.
 Program complexity
 Integer Programming (IP) vs. Linear
Programming (LP)

Simulation Models &
Optimization Techniques
Limitation of optimization techniques
• characterizing performance for a given design –
sometimes it is not realistic
• static models / system dynamics – sometimes it is
not meaningful
Micro-level Analysis
• e.g. individual ordering pattern, specific inventory
policies, inventory movements inside the warehouse
 characterizing the performance of a particular
configuration but not in determining an effective
configuration from a large set of potential configurations
“What-If” Question - Examples
 The impact of closing an existing warehouse
on system performance
 Allows the user to change the flow of

material through the existing network and
see the changes in the costs

Hybrid Model
 Use an optimization model to generate a
number of least-cost solutions at the
macrolevel, taking into account the most
important cost components.
 Use a simulation model to evaluate the

solutions generated in the first phase.

Key Features of a
Network Configuration DSS
Flexibility
• The ability of the system to incorporate a large
set of preexisting network characteristics
• Customer-specific service level; existing
warehouse; expansion of existing warehouse;
warehouse-to-warehouse flow; bill of material.
Effectiveness
Robustness
Reasonable running time

Appendix - Software and Tools
Examples – Software and Tools
Optimization Tools
• LINDO™ Software for Integer Programming, Linear
Programming, Nonlinear Programming, Stochastic
Programming, Global Optimization
• Maximal Software, Inc.
• List of Optimization Software (Wiki)
Simulation Tools
• Arena discrete event simulation software
• ProModel - Technology Enabled Predictive Analytics
• List of Computer Simulation Software (Wiki)

Visualization Tools
Alteryx Designer (https://www.alteryx.com/)
ArcGIS (https://www.esri.com/en-us/home)
The 7 Best Data Visualization Tools In 2017,

(Bernard Marr, Forbes, July 20, 2017)
 Tableau
 Qlikview
 FusionCharts
 Highcharts
 Datawrapper
 Plotly
 Sisense https://www.forbes.com/sites/bernardmarr/2017/07/20/the-7-best-data-
visualization-tools-in-2017/#6feaa4656c30)

Visualization Tools (Cont.)
The Best Data Visualization The Best Data Visualization
Tools In 2020, (Pam Baker, Tools In 2022, (Kathy Haan
Updated March 15, 2019) and Rob Watts, 2022)
 Zoho Reports  Microsoft Power BI
 Sisense  Tableau
 Domo  Qlik Sense
 Microsoft Power BI  Klipfolio
 Tableau Desktop  Looker
 Google Analytics  Zoho Analytics
 Chartio  Domo
 SAP Analytics Cloud
 Salesforce Einstein
https://www.forbes.com/advisor/business/software/best-data-visualization-tools/
Analytics Platform
https://www.pcmag.com/picks/the-best-data-visualization-tools

Visualization Tools (Cont.)
The Best Data Visualization Software of 2024
 Microsoft Power BI: Best for business intelligence (BI)
 Tableau: Best for interactive charts
 Qlik Sense: Best for artificial intelligence (AI)
 Klipfolio: Best for custom dashboards
 Looker: Best for visualization options
 Zoho Analytics: Best for Zoho users
 Domo: Best for custom apps
https://www.forbes.com/advisor/business/software/best-data-visualization-tools/

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Supply Chain &

Appendix - Software and Tools

Dr. Benjamin Yen SCM LEC-2 2

Dr. Benjamin Yen SCM LEC-2 3

Dr. Benjamin Yen SCM LEC-2 4

 Flows: raw materials, work-in-process

Dr. Benjamin Yen SCM LEC-2 6

Dr. Benjamin Yen SCM LEC-2 8

Dr. Benjamin Yen SCM LEC-2 10

 minimize annual systemwide costs

Retailer 1 Retailer 3 Retailer 1 Retailer 3

Distributor 1 Distributor 1 Distributor 2

Retailer 2 Retailer 4 Retailer 2 Retailer 4

Dr. Benjamin Yen SCM LEC-2 13

 Firm must balance the costs of opening new

Dr. Benjamin Yen SCM LEC-2 16

Dr. Benjamin Yen SCM LEC-2 17

Dr. Benjamin Yen SCM LEC-2 18

 i.e. we would like to find a minimal-annual-

The DSS screen representing the

The DSS screen representing data

Dr. Benjamin Yen SCM LEC-2 20

Dr. Benjamin Yen SCM LEC-2 21

Dr. Benjamin Yen SCM LEC-2 24

Dr. Benjamin Yen SCM LEC-2 25

The customer zone balances -

Factors affect efficiency of aggregation -

Dr. Benjamin Yen SCM LEC-2 27

Dr. Benjamin Yen SCM LEC-2 28

Item aggregation - product groups

Dr. Benjamin Yen SCM LEC-2 29

Dr. Benjamin Yen SCM LEC-2 30

Total Cost:$5,796,000 Total Cost:$5,793,000

Cost Difference < 0.05%

 variations in product models and style

Dr. Benjamin Yen SCM LEC-2 32

Within each of the source-groups, aggregate

SKU (Stock Keeping Unit) - associated with

Dr. Benjamin Yen SCM LEC-2 33

Volume (pallets per case)

Dr. Benjamin Yen SCM LEC-2 35

Cost Difference: 0.03%

Dr. Benjamin Yen SCM LEC-2 36

 the error is typically no more than 1%

Dr. Benjamin Yen SCM LEC-2 37

Dr. Benjamin Yen SCM LEC-2 39

Rate Transport Estimating Curve for

Source: Ballou, R. H. Business Logistics Management

Dr. Benjamin Yen SCM LEC-2 40

Estimate the distance between a and b

Dab = 69 (lona − lonb ) + (lat a − latb )

 lat a − latb   lona − lonb 

Dab = 2(69 )sin −1 sin   + cos(lat a )× cos(latb )× sin  

Warehouse with AS/RS

Dr. Benjamin Yen SCM LEC-2 45

Dr. Benjamin Yen SCM LEC-2 47

Dr. Benjamin Yen SCM LEC-2 48

Dr. Benjamin Yen SCM LEC-2 50

Pharmaceuticals Food Companies Chemicals