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Newgistics Case Study

04/19/2006

Lei Deng, Timothy Gumm, Jacqueline Jones, Adam Levin,

Leihong Li, Yang Song

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Agenda

Problem Overview Current vs. Proposed Situation Pre-Modeling Issues The Model Results Analysis

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Problem Statement and Goal

Problem Statement: The postal network accumulates and consolidates the return volumes at Return Delivery Units (RDU) and Return Bulk Mail Centers (RBMC). At some point, it becomes faster and less expensive to pull the consolidated volumes out of the postal stream and ship it directly to Newgistics’ returns centers.

Goal: Develop a model that Newgistics can use under changing conditions to understand where to best extract the returns from the postal network 10, 20, and 30 million volume cases

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Post Office

RBMC (j)

RDU (i)

Return Centers (k)

Pull from BMC: Current State

Cost: by postal zone

Cost: FTL cost

Constraints:

• maximum density

• minimum pick-up frequency

10, 20, or 30 Million Packages

Legendi = 1 to 6115j = 1 to 22k = ATL, CHI, LAX, DFW, PHY

±70%

±30%

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Post Office

RBMC (j)

RDU (i)

Return Centers (k)

Pull from RDU or BMC: Possible Future State

±70%

±30%

Cost: $2/parcel + DDU cost

Constraints:

• Pick up at least 3 times/week

• # items/bag

25%

75%

Cost: by postal zone

Cost: by FTL cost

Constraints:

• truck capacity

• minimum pick-up frequency

10, 20, or 30 Million Packages

Legendi = 1 to 6115j = 1 to 22k = ATL, CHI, LAX, DFW, PHY

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Issues Before Modeling….

SUM(RDU dist) = 70% < 100%, where does the other 30% go? The 30% go directly to BMC from postal office – outside of

our control So the uncontrollable volume at a single BMC is:

30%*annual volume*BMC dist? Any problems? 30% fixed volume does not apply to an individual BMC! The right answer is:

(BMCi dist - Sum(RDUs in BMCi dist))*annual volume

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Issues Before Modeling….

Truckload cost What if < 3 TL/week, do we still pay for 3 FTL cost?

Package and bag weight distribution One bag can contain 1,2,3,4,or 5 packages We are given weight distribution for packages < 10 lbs,

but no distribution for packages >10 lbs What distribution to assume? Exponential or Uniform?

What is the bag weight distribution? Simulation needed!

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DDU Bag Weight Simulation

0 5 10 15 20 25 30 350

0.1

0.2

0.3

0.4

0.5

weight (lbs)

wei

ght

dist

ribtu

ion

the distribtuion of bag weight: 5 packages per bag

0 20 40 60 80 100 120 1400

2000

4000

6000

8000

10000

weight (lbs)

No.

cas

e

simulation of bag weight: 5 packages per bag

0 5 10 15 20 25 30 350

0.2

0.4

weight (lbs)

wei

ght d

istri

btui

on

the distribtuion of bag weight: 5 packages per bag

0 5 10 15 20 25 30 35 40 45 500

5000

10000

weight (lbs)

No.

cas

e

simulation of bag weight: 5 packages per bag

Not realistic! Exponential is better estimate.

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DDU Bag Weight Optimization

Understand optimal bag configuration to determine the financial value in understanding cubic dimensions of packages

Developed optimization model Results indicate that significant savings exist if bag

configurations are optimized Suggestion: Work with vendor to improve pricing

contract for DDU Pickup Cost based on Bag Opt. Conclusions

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The Model

Uses Excel and GAMS (General Algebraic Modeling System)

Computed costs in Excel Formulated problem as an Integer Program in

GAMS

GAMS Model

Transfer solution to

Transfer costs to

Excel Model

Excel Model

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For 75% captured packages: DDU cost for each RDU

Expected DDU cost/bag with i packages (i=1,2,3,4,5)

Cost(i) = sum (cost per pound * weight * P(weight))

Total cost for each RDU = M*cost(5)+cost(N) + 2(5M+N),

M = # full bags

[rounddown( # packages at RDU /5)]

N = # packages in last bag

[# packages at RDU – 5*M]

BagWeight Cost per lbs 1 32 1.53 14 0.755 0.656 0.557 0.58 0.459 0.4

10 0.3811 0.3512 0.3413 0.32

Costs of Pulling from RDU

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Costs of Pulling from RDU

25% Non-captured Packages: Expected postal cost for each RDU

= Expected postal cost by zone * # non-captured pkgs. at each RDU

Expected postal cost for each zone= sum over all weights (weight distribution * the postal cost for each weight)

# Non-captured pkgs. at each RDU = ROUND (RDU distribution * total

annual volume * 0.25 / 52 / 3)

Weight Distribution1 50%2 20%3 10%4 5%5 4%6 3%7 2%8 1%9 1%10 1%

>10 3%

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Expected postal cost for each RDU = Expected postal cost by zone * # pkgs. at

each RDU

Truckload cost Includes pkgs. that go from post office BMC

and those that go from RDU BMC = Max (3, total weekly volume at BMC / max

density of truck) * FTL cost * 52

Costs of Pulling from BMC

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Model Formulation

binaryx

FTLeqnumtFTLCosttruckload

numsenteqnumt

numtruckeqnumtMaxDensity

totPackBMC

totalBMCeqtotPackBMCPxPxP

toSubject

truckloadCxCxCxCostTotalWeeklyMin

i

n

iBRi

n

iBNRiBMC

n

iRCRi

n

iBNRi

n

iBRi

ii

iii

"".

"".3

"".

"".1

:

1

12

122

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12

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Results

Total RDUs pulled: 10 million: 5276, or 86.3% 20 million: 5574, or 91.2% 30 million: 5625, or 92%

Savings from proposed solution: 10 million: $8,294,499 20 million: $17,800,244 30 million: $29,618,935

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DDU Cost Sensitivity Analysis: Detroit and Springfield

Scenario RDUs Pulled Fraction of Total RDUs Pulled Fraction of Total

1 * Cost 206 93.63% 319 82.64%1.2 * Cost 206 93.63% 319 82.64%1.5 * Cost 206 93.63% 270 69.95%2 * Cost 187 85.00% 245 63.47%

1 * Cost 216 98.18% 326 84.46%1.2 * Cost 216 98.18% 326 84.46%1.5 * Cost 216 98.18% 326 84.46%2 * Cost 198 90.00% 277 71.76%

1 * Cost 216 98.18% 331 85.75%1.2 * Cost 216 98.18% 331 85.75%1.5 * Cost 216 98.18% 331 85.75%2 * Cost 200 90.91% 303 78.50%

30 million

DETROIT SPRINGFIELD

10 million

20 million

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Postal Cost Sensitivity Analysis: Detroit

Scenario RDUs Pulled Fraction of Total

1 * Cost 206 93.64%0.9 * Cost 206 93.64%0.8 * Cost 206 93.64%0.7 * Cost 183 83.18%0.6 * Cost 36 16.36%

1 * Cost 216 98.18%0.9 * Cost 216 98.18%0.8 * Cost 216 98.18%0.7 * Cost 189 85.91%0.6 * Cost 39 17.73%

1 * Cost 216 98.18%0.9 * Cost 216 98.18%0.8 * Cost 216 98.18%0.7 * Cost 190 86.36%0.6 * Cost 73 33.18%

30 million

10 million

20 million

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Overall Results

Pull from RDU except when volumes are very low Very low volumes increase DDU cost cheaper to go

through BMC

As annual volume increases, pull from more RDUs Solution is not very sensitive to small changes in

DDU cost Solution can change when postal costs decrease by

at least 20%

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Recommendations

Start pulling packages from specified RDUs Understand better cubic dimensions of

packages reduce DDU cost Explore possibility of paying LTL instead of

FTL: may change optimal solution

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Questions?