OR/MS Today - April 1999 - Logistical Nightmare

April 1999

By Elise del Rosario With more than 300 products to distribute to every corner of the Philippine archipelago, the San Miguel Corporation (SMC) recognizes logistics as a vital cog in its business. Owing to the complexity and difficulty of delivering finished goods in the Philippine setting, the cost of distribution makes up a large part of the total product cost. Therefore, proper management of the overall logistics function is key to profitability within SMC. The logistics function in SMC starts with the purchase and storage of the raw materials needed for the manufacture of the finished product. Raw materials are then processed and stored with other finished products until delivery to the customers. This is done using the numerous facilities and vehicles located across the Philippines. San Miguel Beer Philippines for example, employs about 300 tractor-trailers and 50 seacraft of various types to move the cases of beer from the breweries to the 140 sales offices. It is then delivered by almost 700 route trucks to supermarkets, groceries and other beer outlets. The beer supply chain is repeated several times over within the San Miguel group, with each business grappling with the following questions: From which supplier should we purchase raw materials and how often should we place orders? How much of it must we keep in inventory? Which products should be produced in each plant and in which warehouses should these products be stored? Which warehouses should be maintained and where should new
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OR/MS Today - April 1999 - Logistical Nightmare

ones be located? When should warehouses be closed or opened? Which demand centers should each warehouse serve? How should cargo be loaded to maximize utilization of a pallet or truck? What minimum number of sales areas in a given territory will balance salesmen workload and satisfy customer requirements? SMC businesses tackle these issues with the help of the company's Operations Research Department, winner of the 1992 ORSA Prize (now known as INFORMS Prize). Raw Materials Management In a typical manufacturing firm, inventories comprise a big part of assets. Raw material inventory in SMC accounts for about 10 percent of total assets. The significant amount of money tied up in inventory offers many opportunities for cost-minimization applications of OR. One such example is determining the optimum safety stock for dairy and cheese curd, malt, hops and chemicals. The manufacture of ice cream uses dairy and cheese curd. All dairy and cheese curd requirements are imported from Australia, New Zealand and Europe. The normal mode of delivery is by sea. Stock outs are avoidable through air-freight expediting. Delivery frequencies are limited by supplier schedules. A minimum load per container is specified. Given these conditions, the OR model balances ordering, carrying and stock-out costs while considering delivery frequency constraints and minimum order quantity. Results show that current safety stocks of 30 to 51 days should be cut by half for dairy and young cheese curd. A 30 percent reduction for matured/semi-matured cheese curd is indicated. While these inventory reductions increase the likelihood of having to ship by air, service level is not significantly decreased from the current 100 percent. An estimated annual saving of $170,000 was realized through this policy. Malt, hops and chemicals are the major ingredients in the production of beer. Since most of these are characterized by low expediting costs, high unit costs, or a combination of both, optimal policies point to a reduction in safety stock levels. In contrast, those with high expediting costs call for safety stock levels higher than the current policy of 60 days. The optimal policies produced total savings of $180,000 in one year. Production Planning SMC production planners for the glass furnaces, the beer, liquor and mineral water lines, corrugators, metal crown lithography lines and feed ingredient conveyors, among others, are very familiar with OR models. These models help them determine which product to produce in a line, to which warehouses to ship the finished product, and to which
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OR/MS Today - April 1999 - Logistical Nightmare

consumers these should be delivered. In the soft drinks business, this application has successfully been used since 1986. Having undergone three major revisions, it has continuously enabled the scheduler to evaluate alternatives and cost out preferred plans effectively and efficiently. The Production Load Allocation System determines the quantity of products to produce per bottling line per period, and the assignment of the bottling line production output to the warehouses. Organizationally, warehouses are assigned to withdraw from specific bottling plants and deliver to a given sales territory. During normal or lean periods of the year, this setup is generally followed. During the peak months of sales, however, transfers of finished goods across organizational boundaries become a practical solution to imbalances in capacity and demand. The model generates the best production-allocation plan on the basis of two criteria: minimize cost or maximize profit. The minimum cost objective is used when total capacity exceeds demand requirements. On the other hand, profit is maximized when capacity of the system is insufficient to meet demand. Warehousing Glass bottles; packaged beer, alcoholic drinks, juices and mineral water; feeds, poultry and other meats; and packaging materials all require warehousing. Concerned with balancing the costs of trucking, routing, inventory and warehousing, planners and regional sales managers look to OR for help in determining the: number of warehouses to maintain; location of these warehouses; type and size of each warehouse; market areas to be served by each warehouse; and type of route to serve each demand center. San Miguel uses three types of warehouses: owned (SMC-owned facility; SMC employees), rented (rented facility; SMC employees) and contracted (third party owns and operates warehouse; paid on a per unit basis or fixed amount). Optimal beer warehouse configurations, when compared with existing configurations on a national level, are found to be $7.5 million cheaper. Analysis for the warehousing of ice cream and other frozen products centers on five general areas: North Luzon, South Luzon, Visayas, Mindanao and the Greater Manila Area. The optimal warehouse configuration recommended for all areas compared against existing setups produced a total saving of $2.17 million. Actual implementation is greatly enhanced by the involvement of people in the line in the data collection and results validation processes. Container Loading

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OR/MS Today - April 1999 - Logistical Nightmare

SMC's thrust to compete in the global market started with a 30 percent increase in exports to Japan, Singapore, Malaysia, Brunei, Hong Kong, China and other Asian countries. Since all of these products are loaded in container vans before being transported by sea, loading cargoes into container vans becomes a daily activity. Such is the situation for the ice cream business. Ice cream, milk-based products, puree and fruit juices are exported to Japan and Hong Kong. The export group tried to load ordered goods into a container van through a trial-and-error process, complicated by the fact that one shipment is always composed of several box types with different dimensions. Simultaneously, stacking height and weight balancing factors have to be considered. Constrained by shipping deadlines, loading decisions need to be made quickly. An OR response to this problem is the Container Loading System. It generates loading schemes that maximize container utilization given stacking height and container van weight capacity constraints. The system accepts a list of box types to be packed and systematically loads the boxes in the specified container van. The system determines the number of each box type to be loaded and graphically displays the generated loading scheme. System use has resulted in a 20 percent increase in container van utilization. Quick customer feedback becomes possible, while ensuring that the loading plan is feasible. Vehicle Routing For beer products, finished goods are transported from three plants to 14 warehouses and are distributed to retailers using approximately 200 route trucks. Distribution from warehouses is done using conventional routes, distributors and pre-sell/delivery routes. For conventional routes, sales for each customer are not known in advance and therefore, the truck may return almost as full as it left, or return to the warehouse for a reload shortly after it is dispatched. Distributors, on the other hand, pick up the products directly from the warehouse in exchange for a price rebate. Distributors often move in on territories covered by routes. Thirdly, in the preselling system, sales and actual deliveries are done separately. Account specialists or pre-sellers sell, while third party logistics providers deliver and get paid for it on a per case basis. In line with the thrust to move away from conventional to the preselling mode, sales management was asked to answer the following: How many account specialist and delivery teams must be formed to serve customer requirements? Into how many territories must the area be divided? What are the boundaries of these territories?
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OR/MS Today - April 1999 - Logistical Nightmare

If needed, to what areas should current distributors be assigned to ensure they at least maintain their current incomes? The project was initially done for sales districts in Metro Manila and eventually ran for all the districts throughout the country. For the pilot run, the number of routes required to serve the area was decreased by at least 43 percent. Looking Ahead The logistics environment within San Miguel Corp. is changing rapidly. Distribution options such as third party logistics and partnerships with dealers are now being actively pursued. Distribution facilities of the different businesses, which until now operate independently, are also being examined to determine possible synergies. Operations research is thus continuously challenged to look for costeffective ways of implementing company thrusts. Currently, third-party delivery services are working hand-in-hand with the Department in coming up with an expert system-based delivery system. OR is also deeply involved as an objective facilitator of inter-business plans that involve, for example, putting together business operations that promise corporate wealth maximization. As questions asked of logistics decision-makers change and become more complex, application of OR in the logistics function within SMC becomes more and more relevant. Note: References used for this article are mainly study reports and internal company publications.
Elise del Rosario is vice president for operations research at the San Miguel Corporation, headquartered at Mandaluyong Metro Manila, Philippines.

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OR/MS Today - April 1999 - Logistical Nightmare

Table of Contents OR/MS Today Home Page OR/MS Today copyright 1999 by the Institute for Operations Research and the Management Sciences. All rights reserved. Lionheart Publishing, Inc. 506 Roswell Street, Suite 220, Marietta, GA 30060, USA Phone: 770-431-0867 | Fax: 770-432-6969 E-mail: lpi@lionhrtpub.com URL: http://www.lionhrtpub.com Web Site Copyright 1999 by Lionheart Publishing, Inc. All rights reserved.

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