Network Planning

K.L.Bhaskaran

The Logistics Network

The Network consists of:
Facilities:
Vendors, Manufacturing Centres, Warehouse/
Distribution Centres, Retailers and Customers
Raw materials, components and finished products
that flow between the facilities.

Network Design
Costs -

Manufacturing Cost
Facility Cost
Logistics Cost
Inventory Cost

Target
Levels

- Achieve planned Service

3

Objective of Logistics Networking

Design or configure the network so as

to minimize annual system-wide cost
subject to a variety of service level
requirements

Why Network Planning?

Find the right balance between inventory,
logistics and manufacturing costs
Match supply and demand under uncertainty
by positioning and managing inventory
effectively,
Utilize resources effectively by sourcing
products from the most appropriate
manufacturing facility

Network Design
Physical configuration and
infrastructure of the supply chain.
A strategic decision with long-lasting
effects on the firm.
Decisions relating to plant and
warehouse location as well as
distribution and sourcing

Objective and Trade-Offs

Objective: Design or reconfigure the logistics
network in order to minimize annual system-wide cost
subject to a variety of service level requirements
Increasing the number of warehouses typically yields:

An improvement in service level due to the reduction in

average travel time to the customers
An increase in inventory costs due to increased safety stocks
required to protect each warehouse against uncertainties in
customer demands.
An increase in overhead and setup costs
A reduction in outbound transportation costs: transportation
costs from the warehouses to the customers
An increase in inbound transportation costs: transportation
costs from the suppliers and/or manufacturers to the
warehouses.

Network Planning Step-1

Network design
Number, locations and size of manufacturing
plants warehouses and suppliers

Assignment of retail outlets to warehouses

Major sourcing decisions

Typical planning horizon is a few years.

Network Planning Step -2

Inventory positioning
Identifying stocking points
Selecting facilities that will produce to stock and
thus keep inventory
Facilities that will produce to order and hence
keep no inventory
9
Related to the inventory management strategies

Network Planning Step-3

Resource allocation
Determine whether production and
packaging of different products is done at the
right facility
What should be the plants sourcing
strategies?
10
How much capacity each plant should

INDIA

ABROAD

11

Logistics Network Configuration

Configuration of the logistics network may involve the following
strategic decisions
Determining the number of retailers, distribution centers and
manufacturing facilities
Determining the location of each facility
Determining the size of each facility
Products to be manufacture/stored in each manufacturing
facility
Location of suppliers
Deciding SKUs in every distribution location
Allocating retailers to different distribution centres
Determining transportation modes
Determining the operation of the network (direct shipments,
e.g.)
12

Roles of different type of facilities

Manufacturing plants

Responsible for manufacturing the goods for distribution

Some companies may not own manufacturing plants

Distribution centres

Reducing lead times, increasing product availability at the retailer level

(depot effect)
Enabling economies of scale by consolidating shipments from the
manufacturing plants.
Delaying the allocation of material to retailers (joint ordering effect)
Providing a second level of support for emergency orders at retailer level
Consolidation point for reverse logistics
Localization of goods to different countries

Retailers (stores, bases)

Primary access point for customers

13

Facility (Manufacturing) Decisions

What is the role of every facility? What
should it make ?
What should be the capacity?
Where should it be located?
What markets should it cater to?
Where should the suppliers be located?

14

Factors influencing network design

Strategic factors
- Cost leadership
- Responsiveness/variety
Technological factors
Macroeconomic factors
- Tariffs and taxes
- Exchange rate and demand risk
- Political factors
Infrastructure factors
Competitive factors

15

Factors influencing network design

Customer response time and local presence

Logistics and facility costs

Inventory costs
Transportation costs

Inbound versus outbound

External versus internal fleet
Truckload (TL) versus less than truckload (LTL)

Facility costs

Setup
Operating costs

16

Open questions in network design

Do I need a distribution centre at all?

How many levels do I need in distribution?
How many distribution centers do I need?
What is the impact of competition on facility decisions?
How many retail stores do I need?

17

Data for Network Design

1 A listing of all products
2 Location of customers, stocking points and sources
3 Demand for each product by customer/Retail location
4 Transportation rates
5. Warehousing costs
6 Shipment sizes by product
7 Order patterns by frequency, size, season, content
8 Order processing costs
9 Customer service goals
10 Production Costs
11 Sourcing Costs
18

Data Aggregation
Customer Zone

Go by Pincode

Product Groups

Distribution pattern

Products picked up at the same source and destined to the same

customers
Logistics characteristics like weight and volume.

Product type

product models or style differing only in the type of packaging.

Replacing Original Detailed Data with

Aggregated Data
Technology exists to solve the logistics
network design problem with the
original data
Data aggregation still useful because
forecast demand is significantly more
accurate at the aggregated level
Aggregating customers into about 150200 zones usually results in no more
than a 1 percent error in the estimation
of total transportation costs

General Rules for Aggregation

Customers can be classified into classes according to

their service levels or frequency of delivery
Make sure each zone has approximately an equal
amount of total demand
Zones may be of different geographic sizes.
Place aggregated points at the center of the zone

Internal Transportation Rate

For company-owned trucks
Data Required:
Annual costs per truck
Annual mileage per truck
Annual amount delivered
Trucks effective capacity
Calculate cost per mile per SKU.

External Transportation Rate

Two Modes of Transportation
Truckload, TL
Country sub-divided into zones. One
zone/state except for:
Zone-to-zone costs provides cost per mile per
truckload between any two zones.
TL cost from Coimbatore to Mumbai =
Coimbatore Mumbai cost per mile X Coimbatore
Mumbai distance

TL cost structure is not symmetric

External Transportation Rate

Two Modes of Transportation

Less-Than-Truckload, LTL
Class rates
standard rates for almost all products or commodities shipped.
Classification tariff system that gives each shipment a rating or a class.
Factors involved in determining a products specific class include:
product density, ease or difficulty of handling and transporting,
and liability for damage.
After establishing rating, identify rate basis number.
Approximate distance between the loads origin and destination.
With the two, determine the specific rate per hundred pounds (hundred
weight, or cwt) from a carrier tariff table (i.e., a freight rate table).
Exception rates provides less expensive rates
Commodity rates are specialized commodity-specific rates

Reevaluation of Infrastructure
Changes in:
demand patterns
product mix
production processes
sourcing strategies
cost of running facilities.
Mergers and acquisitions may mandate the
integration of different logistics networks

Logistics Costs
Fixed costs
Operational Costs
Maintenance Costs

Total Cost Analysis

26

Costing System
Direct Labour
Direct Material
Direct Overhead
Indirect costs

27

Direct Material

Direct Labour

Product
Cost

Direct
Overhead
Other Costs

How do you allocate these?

Cost Centres
Parts of the business to which particular costs
can be attributed
In large businesses this can be
a particular location, section
of the business, capital asset
or human resource/s
Enable a business to identify where costs are
arising and to manage those costs more
effectively
29

Full Costing
A method of allocating indirect costs to a
range of products produced by the firm.
e.g. if a firm produces three products - a, b,
and c - and has indirect costs of Rs.1
million, assume proportion of direct costs
of 20% for a, 55% for b and 25% for c
Indirect costs allocated as 20% of Rs.1
million to a, 55% of Rs.1 million to b and
25% of Rs.1 million to c
30

Logistics Costs
Absorbed in different cost elements.
Costing is based traditionally on
functional basis
Costs are averaged out.

31

How can logistics costs be represented

Problems with traditional cost accounting as
related to logistics
The true costs of servicing different customer
types, channels and market segments are
poorly understood.
Costs are captured at too high at a level of
aggregation.
Costing is functionally oriented at the expense
of output.
The emphasis on full cost allocation to products
ignores customer costs
32

Is it correct ?

33

Logistics costs
How do you find out if it is profitable to
do business with a customer?
The costing system should mirror the
material flow.
The costing system should be capable
of enabling separate cost and revenue
analyses to be made by customer type,
market segment or distribution channel.
34

Logistics Costs
Define the desired outputs of the
logistics system
Identify the costs associated with
providing these outputs.

35

Activity-based costing
Conventional Costing
Total Cost = Material + Labour+ Overheads
Overheads are allocated to the products on volume
based measures e.g. labour hours, machine hours,
units produced
Will this not distort the costing in the new
environment?

ABC provides an Alternative.

Activity-based costing

Allocation of indirect costs based

on activities

Results in better allocation

ABC Purpose

Does provide true cost

37

Activity-based costing
Criticisms of Traditional Cost Allocation
Assumes all cost is volume-related
Departmental focus, not process focus
Focus on costs incurred, not cause of
costs

38

Activity-based costing
Todays businesses are working in an
increasingly complex environment.
Use of Advanced Technology
Product Life Cycle
Product Complexity
Channels of Distribution
Quality Requirements
Product Diversity

Activity-based costing

Traditional allocation method

Costs

Products

Activity-based allocation method

Costs

Activities
First stage

Customers

Second stage
40

Activity-based costing

When is ABC Most Useful?

High Overheads
Product Diversity or Multiple Products
Customer Diversity
Service Diversity
41

Inbound

Customer 1

20

Storage

Picking &
Packing

100

50

100

270

130

230

Customer 2

20

20

60

Customer 3

40

90

70

80

210

180

Outbound

170

400

370

How do you capture data?

I.T System
Time Sheets

Attributable Cost
This is a cost per unit that could be avoided if
a product or function were to be discontinued
entirely without changing the support
organization structure.
You supply from Chennai to a customer in
Pune and another customer in Mumbai What
are the cost implications,
a. If you decide not to supply to Pune
Customer?
b. If you decide not to supply to Mumbai
customer?
44

Channel Structure
Depends on
- Length. How many intermediaries/
distributor, wholesaler, retailer, sub
retailers?
- Breadth : How many wholesalers,
distributors etc?
- How many different types of channels?
45

Design Options for a

Distribution Network
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and InTransit Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Consumer
Pickup
Retail Storage with Consumer Pickup
Selecting a Distribution Network Design
46

Length and Breadth

Length

Distributor

Wholesaler

Retailer

Breadth

Mfr.

Distributor

Wholesaler

Retailer

Some Distribution Choices

Direct ship to customer
From factory
Direct ship to customer via in-transit merge
i.e., have product elements merged at one
site before going to the customer
Direct ship to customer via retailer
Direct ship to retailer
Warehouse/Distribution Center shipping to
retail store
Retail store to customer
Last mile issue
48

Manufacturer Storage with

Direct Shipping
Manufacturer

Retailer

Customers

Product Flow
Information
Flow

In-Transit Merge Network

Factories

Retailer

In-Transit Merge by
Carrier

Customers

Product Flow
Information Flow

Distributor Storage with

Carrier Delivery
Factories

Warehouse Storage
by
Distributor/Retailer
Customers
Product Flow
Information
Flow

Distributor Storage with

Last Mile Delivery
Factories

Distributor/Retailer
Warehouse

Customers
Product Flow
Information
Flow

Direct to Retail
Retailer

Manufacturer

Milk Run

All Shipments via DC

Warehouse

Warehouse
Manufacturer

Retailer

Milk Run from DC

Warehouse

Warehouse
Manufacturer

Retailer

B
E

A
G

C
Hub and Spoke System
Point to Point System

Comparison
Network Structure

Pros

Cons

Direct Shipping

-No intermediate
warehouse
-Simple to Coordinate

-High Inventories (Due

to large lot size )
- Significant receiving
expense

Direct Shipping with

milk runs

-Lower transportation
cost for small lots
- Lower inventories

Increased coordination
complexities

All shipments via

central DC

-Lower inbound
transportation costs
through consolidation

-Increased inventory
cost
- Increased handling at
DC

58

Comparison ( continued )
Network Structure

Pros

Cons

All shipments through

central DC with cross
docking

-Very low inventory

requirement
- Lower transportation
cost through
consolidation

Increased coordination
complexity

Shipping via DC using milk

runs

- Lower inbound
transportation cost for
small lots

- Further increase in
coordination complexity

Tailored network

-Transportation choice
best matches needs of
individual product and
store

Highest coordination
complexity

59