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Network Planning
Outline
What is it?
Methodology
Modeling
Data Aggregation
Validation
Solution Techniques
Sources:
plants
vendors
ports
Regional
Warehouses:
stocking
points
Field
Warehouses:
stocking
points
Customers,
demand
centers
sinks
Supply
Production/
purchase
costs
Inventory &
warehousing
costs
Transportation
costs
Inventory &
warehousing
costs
Transportation
costs
Decision Classifications
Strategic Planning: Decisions that typically inv
olve major capital investments and have a long
term effect
Determination of the number, location and size of n
ew plants, distribution centers and warehouses
Acquisition of new production equipment and the d
esign of working centers within each plant
Design of transportation facilities, communications
equipment, data processing means, etc.
Decision Classifications
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-shipme
nt alternatives
Decision Classifications
Operational Control: Includes day-to-da
y operational decisions
The assignment of customer orders to indivi
dual machines
Dispatching, expediting and processing orde
rs
Vehicle scheduling
Network Planning
The process by which the firms structures and
manages the supply chain in order to:
Find the right balance between inventory, transport
ation and manufacturing cost
Match supply and demand under uncertainty by po
sitioning and managing inventory effectively
Utilize resources effectively by sourcing products fro
m the most appropriate facility
Data
Engine
Optimization Techniques
Aggregating Customers
Customers located in close proximity are
aggregated using a grid network or clust
ering techniques. All customers within a
single cell or a single cluster are replaced
by a single customer located at the centr
oid of the cell or cluster.
We refer to a cell or a cluster as a custo
mer zone.
Why Aggregate?
The
The
The
The
Recommended Approach
Make sure each zone has an equal amou
nt of total demand
Place the aggregated point at the center
of the zone
In this case, the error is typically no m
ore than 1%
Comparing Output
Total Cost:$5,796,000
Total Customers: 18,000
Total Cost:$5,793,000
Total Customers: 800
Product Grouping
Companies may have hundreds to thous
ands of individual items in their producti
on line
Variations in product models and style
Same products are packaged in many sizes
60.0
50.0
40.0
30.0
Rectangles illustrate
how to cluster SKUs.
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
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
Total Cost:$104,564,000
Total Products: 46
Total Cost:$104,599,000
Total Products: 4
Other Issues
Future demand
Facility costs
Fixed costs; not proportional to the amount
of material the flows through the warehouse
Handling costs; labor costs, utility costs
Storage costs; proportional to the inventory
level
Facilities capacities
Sources:
plants
vendors
ports
Regional
Warehouses:
stocking
points
Field
Warehouses:
stocking
points
Customers,
demand
centers
sinks
Supply
Inventory &
warehousing
costs
Production/
purchase
costs
Transportation
costs
Inventory &
warehousing
costs
Transportation
costs
Optimal
Number
of Warehouses
$90
Cost (millions $)
$80
$70
$60
Total Cost
Transportation Cost
Fixed Cost
Inventory Cost
$50
$40
$30
$20
$10
$-
Number of Warehouses
10
Warehousing Cost
Handling Cost: proportional to annual flow trough the
warehouse
Fixed Cost: proportional to warehouse size.
Storage Cost: inventory holding cost, proportional to av
erage inventory
Industry Benchmarks:
Number of Distribution Centers
Pharmaceuticals
Avg.
# of
WH
Food Companies
14
Chemicals
25
- Low margin product
- Service very important
- Outbound transportation
expensive relative to inbound
Set-up costs
Transportation cost is proportional to the distance
Storage and handling costs
Production/supply costs
of customers,
of products,
of potential locations for wareh
of warehouses located.
Solution Techniques
Mathematical optimization techniques:
Exact algorithms: find optimal solutions
Heuristics: find good solutions, not necessa
rily optimal
Inventory Positioning
Answer questions: how much and where
to keep the inventory
Resources Allocations
Answer the Questions: how much capacity each
plants have to meet the demand.
Resource Allocations
Supply Chain Master Planning: process
of coordinating and allocating productio
ns and distibutions strategies and resour
ces to maximize profits or minimize cost
systems-wide.
Thank You