Supply Chain Logistics Management

Chapter 16: Design Process and Techniques

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

LOGISTICAL REDESIGN PROCESS

FeasibilityAssessment

ProjectPlanning

Assumptions andData Collection

Analysis

Implementations

Development ofRecommendations

Phase I

Phase II

Phase III

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

LOGISTICAL REDESIGN PROCESSPhase I: Problem Definition and Planning

Situational Analysis Supporting Logic Development Cost-Benefit Estimate

Statement of Objectives Statement of Constraints Measurement Standards Analysis Technique Project Workplan

FeasibilityAssessment

ProjectPlanning

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Feasibility Assessment

• Situation Analysis– Internal assessment– External assessment– Technology assessment

• Supporting logic development– Opportunity assessment– Factual assessment of current procedures and practices– Identify potential alternatives

• Definition of current operations• Identify likely alternatives• Creative alternatives

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Feasibility Assessment

• Cost-Benefit estimate– Service

– Cost reduction

– Cost prevention

– Competitive

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Project PlanningStatement of Objectives

• Inventory availability

• Desired delivery within x hours

• Minimize shipments from alternative sources

• Fill orders without backorders

• Maximum hold time for backorders

• Provide high volume customers with minimum performance standards

• Offer distribution within mileage radius

• Minimize transportation cost

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Project PlanningStatement of Constraints

• Facility constraints• Alliance constraints• Resource constraints• System constraints• Channel constraints

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Project PlanningAnalysis Techniques

• Ad-Hoc techniques– Profitability– Inventory– Lane

• Network analysis– Graphical– Optimization– Heuristic or simulation

• Simulation• Transportation

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Improving Profitability and Competitiveness in the Supply Chain

• Strategic Network Design– Pick the optimal number, location, and size of warehouses – Optimize the trade-offs between number of facilities and service levels– Optimize the trade-offs between transportation and warehousing costs – Determine optimal sourcing strategy– Determine best distribution channels

• Tactical Planning– Develop an optimal supply chain plan for the next 3-12 months

• Optimize the trade-offs between production, inventory and warehousing• Identify potential supply chain bottlenecks early to avoid disruptions and costs

– Share supply chain plan with geographically dispersed managers• Share supply chain production plan with each of the plant mangers• Provide warehouse managers with shipping and storage requirements

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Typical Tactical/Operational Issues

• Inventory/customer service trade-offs• Production/distribution coordination• Inventory/forecasting management• Transportation consolidation• Routing and scheduling

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Project PlanProject Workplan

• Schedule

• Resource requirements– Personnel

– Data collection and analysis

– Analysis tools

• Meeting schedules

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

LOGISTICAL REDESIGN PROCESSPhase II: Data Collection and Analysis

Define Analysis Approach and Obtain TechniqueDefine and Review AssumptionsIdentify Data SourcesCollect DataCollect Validation Data

Define Analysis QuestionsComplete and Validate Baseline AnalysisComplete Alternative AnalysisComplete Sensitivity Analysis

Assumptionsand

Data Collection

Analysis

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Assumptions and Data Collection

• Define analysis approach and obtain technique• Define and review assumptions• Identify data sources• Collect data• Collect validation data

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Logistics Analysis Methodologies

• Analytical

• Optimization

• Heuristics

• Simulation

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Analytical Methodology

• Using standard numerical/statistical methods, such as those available through spreadsheets or statistical software to evaluate each logistical alternative

• Examples– Determine the inventory/service trade-offs using safety stock and fill

rate formulae

– Determine the order cycle time that currently would be required to deliver 95% of customer orders

– Determine the transportation dollar benefits for consolidating LTL orders into TL orders

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Optimization

• Determine the best answer to problems where objective functions and constraints can be expressed in mathematical terms

• Appropriate for applications involving sweeping changes to the logistics systems

• Limitations include computing time/capacity and utility of generalized mathematical expressions

• Example– Determine the best location for distribution facilities subject to

meeting supply, demand, and delivery time constraints

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Heuristics

• Using “rules of thumb” to direct the analytical process toward the best solution

• Appropriate for both large scale optimization and simulation models

• Advantages include speed and understanding compared to optimization techniques

• Limitation is that “optimal” solution may not be found

• Example– Locate distribution centers only where demand exceeds a given

threashold

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Benefits of Heuristics

• Exploit the experience of management and analysts– Warehouses should be located near centers of greatest

demand– TL shipments should be made to consumers directly from

manufacturing locations– Only warehouse those items with a substantial differential

between inbound and outbound transportation costs– The next warehouse to add to a distribution system is the

one that shows the greatest cost savings

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Simulation

• Conducting experiments using a precise representation of a real system to understand its behavior or to evaluate strategies for its operation (“What if” analysis)

• Appropriate when:– Studying impact of change to a limited number of variables

– A more exact representation of the process is needed

– Customer order/stock keeping unit level of detail is needed

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Optimization ?

Business Optimization

• LP/MILP/GA etc. search based solve.• Conditions of certainty with some probability• Execution of a calculation• Ideal (single) answer to the formulated problem.

• Mathematical/Heuristics execution based run.• Process flow and logic• Conditions of uncertainty, randomness and variability• Execution of a process• Realistic (95%) answer to the modeled problem.

Each technique is particularly strong at solving different types of problems, and therefore should not be seen as competing

Solver Simulator

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Assumptions and Data CollectionDefine Analysis Approach and

Technique• Heuristic (Spatial)

• Optimization (Spatial, Temporal)

• Simulation (Temporal)

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Range of Planning Requirements

• Network optimization• Supply chain dynamics• Demand planning• Supply planning• Transportation planning

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Network Optimization

• Determine the appropriate network of the supply chain by addressing strategic questions such as the following:– Where should plants and DCs be located?

– Which plants or DCs should be shut down?

– Which market areas should be served by each DC?

– Which DCs should stock each product?

– Which vendors should be used for long-term contracts?

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Cost Analysis Approach

Expense Components

Handling

+

Inbound Transport

+

DC Handling

+

Inventory

+

Customer Transport

____________

Total Cost

Dealers

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Location Problem Types

• Plant vs. distribution center location• Static vs. dynamic time horizon• Stochastic vs. deterministic data• Single vs. multiple products• Continuous vs. discrete approaches• Spatial vs. temporal dimensions• Profit vs. cost optimization

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Operating Policies

• Products “bundled” for sourcing. All LTL and UPS shipments are sourced from a common DC based on the lowest inbound + outbound transportation cost. Premium shipments have a different source.

• Supplier locations held constant.• Market assignments for all DCs are based on

minimizing combined inbound and outbound transportation.

• Location impact of inventory is projected using the “square root of N” rule with a 20% annual inventory carrying cost

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Supply Chain Dynamics

• Exploring the relationship and operating dynamics between supply chain operations and partners. Specific questions include:– What are the relevant trade-offs between service

objectives, uncertainty, and inventory level?– How does forecast, demand, and lead time uncertainty

impact supply chain inventory and performance?

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

AnalysisComplete Sensitivity Analysis

• Determine responsiveness to changes– Demand

– Transport cost

– Competitive/environmental issues

– Costs

• Test sensitivity

• Assess probability and identify best options

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Develop Recommendations

• Identify best alternative

• Perform cost-benefit evaluation

• Develop risk appraisal

• Develop presentation

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

LOGISTICAL REDESIGN PROCESSPhase III: Recommendations and Implementation

Identify Best Alternative Evaluate Cost-Benefit Data Develop Risk Appraisal Develop Presentation

Define Implementation Plan Schedule Implementation Define Acceptance Criteria Implement

Developmentof

Recommendations

Implementations

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Recommendations

• Identify best alternatives

• Cost/best evaluation

• Risk appraisal

• Develop report and presentation

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Implementation

• Define implementation plan

• Schedule implementation

• Define acceptance criteria

• Implement