W3-Network Optimization

Rantai Pasok
Lanjut
Case study 1.2
Adji Candra Kurniawan

Network Optimization (NO) for Facility Location Planning:
Comparing Polarbear’s Supply Chain Design Alternatives
After selling the bicycles from the newly • Option 1: DC in Germany and Factory in Germany
established DC according to the GFA results, • Option 2: DC in Germany and Factory in Poland
Polarbear decided to produce their own • Option 3: DC in Czech Republic and Factory in
bicycles. Their production facility has now Poland
been established in Nuremberg and 250 bikes • Option 4: DC in Czech Republic and Factory in
are produced each day. Recently, they have Germany
received an offer from a Polish production
factory to rent a DC in the Czech Republic at a
reasonable price. The same company also
wants to offer them rental of a factory in
Poland, even though they already have one
factory in Germany. Polarbear must now
decide which SC design is more profitable:
The aim of the NO is to determine which
network design is optimal based on
Polarbear’s selected KPIs, e.g., profit.
Therefore, the factory in Poland, the DC in
the Czech Republic, and the DC in
Steimelhagen were added as inputs to the
model along with the Nuremburg factory. To
enable the model’s calculation, the reality
of the case must be simplified: all demand is
assumed to be deterministic without any
uncertain fluctuations. To define the two-
stage NO problem (transport between
factories and DCs and between DCs and
customers) from a mathematical
perspective, several parameters must be
input as data. The costs of the rent for the
factory in Poland and the DC in Czech
Republic are included in “other costs”. For
transport, it is always assumed that each
truckload fits 80 bicycles, and trucks travel
at a speed of 80 km/h.
• The optimization results show that the highest profit can be achieved
in the SC design with a DC in Czech Republic and a factory in Poland.
However, the negotiations with the factory in Poland revealed
another constraint: the Polish factory would only consider annual
quantities of each bicycle type within the range of 10,000 units
(minimum capacity utilization) and 25,000 units (maximum capacity
utilization). Polarbear must now conduction another NO to include
this additional capacity constraint.
Rantai Pasok
Lanjut
Network
Optimization
Adji Candra Kurniawan

Learning Objectives
• Understand network and transportation optimization;
• Provide insight into the impact of inventory control and
transportation policies on supply chain and logistics performance;
• Develop the anyLogistix skills you need to create three-stage supply
chain models, perform optimization and simulation experiments and
measure their performance.
Supply chain design and network
optimization
• Supply chain design consists of a location analysis framework for selecting
the locations of source, production, and storage facilities, as well as
incorporating the connections between them into the overall supply chain.
• The supply chain should be designed so that the demand of each individual
market is met by the selected facilities. In management terms, network
optimization seeks to find the most efficient (i.e., optimal) combination of
factories and distribution centers in the supply chain. Since the number of
such possible combinations is very high, this kind of technical optimization
model is used to support management decision-making. More details on
NO (network optimization) can be found in the Introduction.
It is necessary to minimize the total costs for the installation of facilities and transportation links subject to
Eq. (2.1), so that each market is served by exactly one facility (2.2). If we use a facility for supplying a
market, then this facility must be open (2.3). Each available facility is either opened or closed and each
available transportation link is either used or not (2.4).
Combining optimization and simulation in
supply chain design
Network optimization can be used for a number of supply chain design
problems such as:
• Incapacitated and capacitated plant location problem;
• Distribution network design;
• Distribution network design with inventory, lead time, and
transportation mode selection;
• Production-distribution network design;
• Hub location problem;
• Supply network design with operational risks;
• Supply network design with disruption risks.
In a generalized form, supply chain design using network optimization considers such parameters as:
• Alternative facility locations,
• Customers (markets),
• Production, inventory processing, and transportation costs,
• Fixed facility costs and inventory holding costs,
• Minimum and maximum throughputs and capacities in production, transportation, and storage,
• Demand in the markets,
• Number of periods and products,
• Bill of materials.
The variables to be optimized are
• Facilities to be included in the supply chain design, and
• Quantities (flows) to be delivered from sources to destinations in the supply chain.
The solutions are usually constrained by
• Maximum/minimum demand in the markets and
• Minimum and maximum throughputs and capacities in production, transportation, and storage.
The objective function minimizes total Costs.
Inventory control
The role of inventory management is to strike a balance between
inventory investment and customer service. Inventory is one of the
most expensive assets of many companies, representing as much as
50% of total invested capital. In making decisions in the scope of
inventory management, the following two basic questions are put to
the forefront for consideration:
•How much should I replenish?
•When should I replenish?
In calculating inventory amounts, the following costs are typically
considered:
• Holding costs (variable)—the costs of holding inventory over time;
• Ordering costs (fixed)—the costs of placing an order and receiving
goods;
• Stockout costs (variable)—the costs of lost customer orders resulting
from product shortage, loss-of-goodwill costs.
According to inventory functions and types, inventory can be used to
manage:
• Economy of scale—this is cycle inventory;
• Uncertainty—this is safety inventory.
• Cycle inventory exists as a result of producing or purchasing in large
lots or batches. A lot or batch size is the quantity that a stage in the SC
either produces or purchases at a time. The SC can exploit economy
of scale and order in large lots to reduce fixed costs. With the increase
in lot size, however, also comes an increase in carrying costs.
• Safety inventory is carried to satisfy demand subject to unpredictable
demand fluctuations and to reduce product shortages. Safety
inventory can help the SC manager improve product availability in the
presence of uncertainty. In the presence of safety inventory, shortage
costs or overage costs can occur. The calculation of safety inventory is
based on a predetermined service level. Choosing safety inventory
involves making a trade-off between the costs of having too much
inventory and the costs of losing sales due to inventory shortage.
Actual and ideal inventory behavior
ROP with safety stock and backlogs ROP with excessive safety stock and without
backlogs
Inventory control policy
Inventory control policy is a managerial procedure that helps to define
how much and when to order. The review may happen periodically
(e.g., at the end of a month) or continuously (i.e., tracking each item
and updating inventory levels each time an item is removed from
inventory). Four parameters are important in the setting up of
inventory control policies:
• t is replenishment interval;
• q is order quantity;
• s is re-order point;
• S is target inventory level.
Policy 1: t,q
•t: fixed time between two orders
•q: fixed order quantity
In (t,q) policy, a fixed amount (q) is ordered for a
fixed period of time (t). (t,q) is a simple policy for
handling the ordering process. This policy opens
possibilities to further automatic control, which
improves quality and saves resources, such as labor,
energy, or materials. However, the (t,q)-policy is
inflexible and used very seldom in business. Should
uncertainty or fluctuation in demand exist, this
policy can not be adjusted. In addition, shortage or
overstocking make the (t,q)-policy an unattractive
tool for many companies. Thus, it is recommended
to implement this policy under constant demand.
Policy 2: t,S
• T: fixed time between two orders
• Q: variable order quantity to stock up to the target level S
In the (t,S)-policy, the order quantity (q) is variable, and q is
placed at a fixed time (t). We need to order a certain amount of
inventory to reach the desired quantity S subject to lead time
(lt). Order quantity is calculated as the target level S— stock on
hand. This policy avoids excessive inventory, which cannot be
used for any other purpose and thus involves opportunity costs.
The model is easy to use for control of orders. However, the
physical control of the inventory could be so expensive that the
exact count is only performed once a month, for example. In
certain cases the (t,S)-policy can lead to relatively high capital
commitment because of the high average inventory. This policy
also implies high ordering costs because we might not place a
large order on the fixed day. At the same time, we might need to
wait too long to fulfil our target inventory and thus a shortage
can occur. The (t,S)-policy is recommended for use in companies
with cycled replenishment
Policy 3: s,q
•t: variable time between two orders
•q: fixed order quantity
This model operates when order quantity (q) is
fixed and the interval (t) between orders can vary.
In this case, the order point (s) is defined as ROP.
Every order arrives to replenish inventory after a
lead time. The lead time is assumed to be known
and constant. The only uncertainty is associated
with demand. In the following analysis, one should
be most concerned with the possibility of shortage
during an order cycle, that is, when the inventory
level falls below zero. This is also called a stock-out
event. Every time we extract inventory, we
compare what is left with s.
Policy 4: s,S
•t: variable time between two orders
•q: variable order quantity between the order level S and ROP s
This strategy is used to define the drop of order quantity s after every
inventory usage.
This system can handle any level of demand and at any time, and include
demand fluctuations in planning. Order policy (s,S) avoids an excessive
level of inventory and ensures that the business has the right goods on
hand to avoid stock-outs.
However, this policy requires much effort and high control. It is used in
industrial and commercial areas of business, given the fact that flexible
order quantity is possible and a target quantity can be predetermined. In
practice, replenishment interval, order quantity, ROP, and target inventory
levels are not fixed, but change in dynamics subject to changes in
demand, the following changes to the above-mentioned policies must be
considered. We have to take into account demand, current and projected
inventory, and in-transit quantities as well as planned deliveries.
Transportation policies and routing
• LTL (less than truckload) and FTL (full truckload) transportation policies differ
regarding the capacity utilization of trucks. FTL policy presumes waiting for
shipment until the truck is full loaded. LTL policy allows shipment with partial loads.
Aggregations of loads in terms of time (e.g., 5 days) or quantity (e.g., minimum 60%
load) are possible. LTL policy is more responsive but my result in costs increase. FTL
allows for better capacity utilization but the lead time may increase.
• Routing optimization addresses the optimization of travel paths in a network
structure. In particular, we are looking for the shortest (or quickest) connections
between a given start location and a given destination location. These two locations
are both part of a network, but there is no direct connection available between
them. Instead, it is necessary to determine a sequence of concatenated direct
connections between intermediately passed connections/points that connects the
start and terminus locations.

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Rantai Pasok

Adji Candra Kurniawan

Adji Candra Kurniawan

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