Logistic networks comprise of the following components: First, we have the vendors, the manufacturing companies, the distribution (warehouses) channels, the customers who receive the goods, raw materials, and finally the finished products which are consumed.
This entails the allocation of resources used for manufacturing and distribution over a period of time. Decisions to be made here include: Inventory policies, means of transportation are chosen, the workforce size is decided and distribution channels are selected.
In Strategic Planning, the managers make decisions that mostly involve capital-intensive investments and their effect is long-lasting. Some of these decisions include: Determining the number of the new plants, their sizes, and locations, the centers that will be used for distribution purposes, and the warehouses. It also entails acquiring production equipment that is new, designing how the centers are going to work within each plant, and finally, the coming up of transportation facilities, data processing means, and communications equipment.
These entail operational decisions made on daily basis. Here, the following takes place. Customer orders are assigned to individual machines, there is the scheduling of vehicles, processing, and dispatch of orders takes place.
Network Design: Key Issues
In Network Design, some very important factors have to be put into consideration and they include:
deciding the number, location, and size of warehouses;
deciding the products to be produced by each vendor;
deciding the channels of distribution;
coming up with the sourcing strategy which is optimal;
deciding the warehouse which will serve various customers.
Strategic Planning, Tactical Planning, and Operational Control
Strategic planning, tactical planning, and operational control help in balancing all the service levels that are subject to the following:
the costs of production;
the costs incurred in carrying out inventory costs;
costs incurred in the transportation of goods;
costs incurred in handling the goods.
Advantages of Warehouses
The more Warehouse, the more:
improvement in service level;
inventory costs due to increased safety stock;
overhead and setup costs;
reduction in outbound transportation costs (from warehouses to customers);
inbound transportation costs (from plants to warehouses).
The Impact of Increasing the Number of Warehouses
Improve service level due to reduction of average service time to customers
Increase inventory costs due to a larger safety stock
Increase overhead and set-up costs
Reduce transportation costs in a certain range
Reduce outbound transportation costs
Increase inbound transportation costs
Industry Benchmarks: Number of Distribution Centers
Potential Warehouse Location
Geographical and infrastructure conditions.
Natural resources and labor availability.
Local industry and tax regulations.
As a result, there is only a limited number of locations that would meet all the requirements. These are the potential location sites for the new facilities.
Service Level Requirement
specifying a maximum distance between customers and the warehouse
Fixed costs: proportional to the warehouse capacity in a nonlinear way
Handling costs: labor costs, utility costs, proportional to annual flow through the warehouse
Storage costs: proportional to the average inventory level
Inventory turnover ratio
annual sales (flow) 1828800800100 = average inventory level
Data Collection for Network Design
This is achieved through the following: Listing all products that are produced, locating customers, determining the transportation rates, the warehousing costs, having information on demand for each product by customer location, how customers are buying goods in terms of size, season, and the content and finally customer service goals.
Customers located in close proximity are aggregated using a grid network or clustering techniques.
Impact of Aggregating Customers
Aggregating customers leads to the following:
It balances what we call the consumer balance. The downside of it is that it can lead to needless complexities which may arise and loss of accuracy.
What Is Product Grouping?
Companies may have hundreds to thousands of individual items in their production line
Variations in product models and style
Same products are packaged in many sizes
Collecting all data and analyzing it is impractical for so many product groups
In practice, items are aggregated into a reasonable number of product groups, based on:
Transport class of merchandise
It is common to use no more than 20 product groups.
The cost of obtaining and processing data
The form in which data is available
The size of the resulting location model
The accuracy of forecast demand
What Is a Demand Forecast?
The three principles of all forecasting techniques:
Forecasting is always wrong
The longer the forecast horizon the worst is the forecast
Aggregate forecasts are more accurate
The variability faced by the aggregated customer is smaller than the combined variability faced by the two existing customers
Aggregate demand points for 150 to 200 zones.
Make sure each zone has an equal amount of total demand.
Place the aggregated point at the center of the zone.
Aggregate the product into 20 to 50 product groups.
In this case, the error is typically no more than 1%.
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