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CTL.

SC2x -Supply Chain Design

Supply Chain Network Design

1
New England Root Beer Distributors (NERD4)
• Case Objective
 NERD, a regional distributor of high quality root beer in the northeast
of the United States, is exploring network restructuring to include:
 Sourcing from a new supplier
 Eliminating some Distribution Centers (DCs)
• Supply Chain Details
 Sources product (barrels) from single plant in Scranton PA (SCP) to five
DCs located in Massachusetts, Rhode Island, and New Hampshire.
 Transportation from SCP to DCs is by a national truckload carrier.
 Product is stored at these DCs and is distributed by a local courier to
12 total cities. Each city is supposed to be dedicated to a single DC.
 The DCs vary in size with capacities of 1000 barrels/week (Boston,
Providence, and Worcester) and 500 barrels/week (Nashua and
Springfield).

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New England Root Beer Distributors (NERD4)
Questions to consider:
1) Is this the right number of DCs? Should they be CO
reduced?
PO
2) Should NERD source from Bellows Falls plant (BFP)?
MN
3) Does this configuration provide sufficient level of
service? BR

4) Can the current configuration handle increases in NA


demand?

BO

WO

SP

HA
P
R

Plant
Scranton
N
NH
L

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Collecting the Data

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Collecting Data for the Model
• What data do we need?
 Transportation Data
 Costs - fixed and variable
 Capacities
 Inbound (Plants to DCs) and Outbound (DCs to Cities)
 Facility Data
 Costs - fixed and variable
 Capacities
 Plants, DCs, Cities
 Current Product Flows
 Actual Inbound to DCs
 Actual Outbound to Cities

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 5


Transportation Data – Local Outbound
• Outbound Transportation (DCs to Cities)
 Handled by a local courier
 No capacity issues at this time
 Cost structure
 Fixed costs - none
 Variable costs – 0.55 $/barrel/mile
• Need Distance Matrix (DC to City) – from history
 Used average distance delivered from DC to within each city
 Includes intra-city distances (e.g., BO to BO)

dij BO BR CO HA MN NA NH NL PO PR SP WO
BO 8 93 69 98 55 37 128 95 62 42 82 34
NA 37 65 33 103 20 12 137 113 48 72 79 41
PR 42 106 105 73 92 72 94 57 104 17 68 38
SP 82 59 101 27 93 79 63 57 127 68 12 47
WO 34 68 72 66 60 41 98 71 85 38 47 18

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 6


Transportation Data – Inbound
• Inbound Transportation (Plant to DCs)
 Handled by various national TL carriers

$/shipment
 Cost structure (by shipment, not unit!)
 Fixed costs
 Variable costs - $/mile
distance
 Minimum charge
• Existing Lanes (SCP to all DCs)
 Convert history ($/shipment) to usable form ($/unit)
 Find cost per shipment and average volume shipped for each lane
 Determine average cost per unit (barrel) for each lane
 No exact approach – find a “good enough” approximation
 Be careful with minimum charges and per mile charges
• New Lanes (BFP to all DCs)
 No history exists!
 Get rates from existing carriers (retail, list, or “rack” rates)
 Regress existing rates to uncover $/unit/mile and estimate
 Use benchmark rates from other sources
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 7
Transportation Data – Inbound
Inbound Transportation Costs
Things to note:
$/barrel BFP SCP
BO $3.40 $4.80 • Outbound transportation is much more
NA $3.00 $5.25 expensive than inbound
PR $4.40 $5.12 • Costs are based on existing historical
SP $3.04 $4.00 volumes
WO $3.36 $4.20
• These are not the lowest possible rates,
just best estimates

Outbound Transportation Costs

$/barrel BO BR CO HA MN NA NH NL PO PR SP WO
BO $4.40 $51.15 $37.95 $53.90 $30.25 $20.35 $70.40 $52.25 $34.10 $23.10 $45.10 $18.70
NA $20.35 $35.75 $18.15 $56.65 $11.00 $6.60 $75.35 $62.15 $26.40 $39.60 $43.45 $22.55
PR $23.10 $58.30 $57.75 $40.15 $50.60 $39.60 $51.70 $31.35 $57.20 $9.35 $37.40 $20.90
SP $45.10 $32.45 $55.55 $14.85 $51.15 $43.45 $34.65 $31.35 $69.85 $37.40 $6.60 $25.85
WO $18.70 $37.40 $39.60 $36.30 $33.00 $22.55 $53.90 $39.05 $46.75 $20.90 $25.85 $9.90

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 8


Facility Data – Costs

DC Costs
• Fixed vs Variable Costs
 One can argue that . . . barrels/week
 All costs are variable – “over time I can change anything”
 All costs are fixed – “once a facility is in place, everything is set”
 Think of the impact to the design
 Fixed costs – will minimize the number of facilities opened
 Variable costs – will use all facilities with lowest unit cost
• Third Party Facilities
 Terms of contract - Monthly/weekly fixed fee plus handling or variable charges
• Owned Facilities
Plants Var Cost
 Fixed Costs BF Plant $2.00
 Operating versus Capital Costs SC Plant $0.75
 Capacity can be used as a tool
Distribution Center Var Cost Fixed Cost
 Variable costs Boston - BO $1.50 $11,000
 Activity Based Costing (ABC) Nashua - NA $0.95 $5,000
Providence - PR $1.05 $9,000
 Labor, Utility, Material, Handling etc. costs Springfield - SP $1.10 $8,000
 Capture from historical data Worcester - WO $1.12 $7,000

 Run regressions on the cost of each DC by the volume handled

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 9


Facility Data – Capacity
Capacity ca·pac·i·ty kəˈpasədē/ noun
- the maximum amount that something can contain.

• Supply Chain Capacity


 The maximum amount of product/material that can be
processed/manufactured through a facility over a set period of time
 Very difficult to measure in practice – not a single number
 Essentially limits to time & space that can be increased
 Shifts can be add
 Processes and policies can be improved
 Material handling equipment can be upgraded
Capacity
 Loading docks can be better scheduled Distribution Center (barrels/week)
Boston - BO 1000
 Capacity as step function of fixed costs Nashua - NA 500
Providence - PR 1000
Springfield - SP 500
Worcester - WO 1000

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 10


Current Product Flows
• Why?
 Need to understand what is actually happening today
 Comparisons to future “optimal” decisions
• Capture historical delivery and transportation data
 Try not to remove outliers
 Capture what actually happened, not what you wished had happened

Current
Flows
BO BR CO HA MN NA NH NL PO PR SP WO Qty
BO 400 0 25 0 15 30 0 0 20 50 0 40 580
NA 0 15 50 0 90 100 0 0 85 0 0 0 340
PR 5 0 0 25 0 0 60 60 0 40 60 60 310
SP 15 0 0 85 0 10 80 10 15 60 60 20 355
WO 30 45 5 20 5 0 0 0 0 160 80 70 415
Qty
Delivered 450 60 80 130 110 140 140 70 120 310 200 190

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 11


Building the Model

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Grey Cells – Data

NERD4 Model Yellow Cells – Decision Variables


White Cells - Formulas

[cell B3] =SUM(B4:B8)


[cell B4] =SUMPRODUCT(D12:D16,C12:C16)
[cell B5] =SUMPRODUCT(B20:M24,R3:AC7)*$B$30
[cell B6] =SUMPRODUCT(G12:H16,E12:F16)
[cell B7] =F4*E4+E5*F5
[cell B8] =SUMPRODUCT(N20:N24,B12:B16)

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 13


Network Design Baseline
• Create 3 Baselines:
 Baseline 1 – Actual Flows
 Using current product flows - not optimized
 Does the model costs reflect the actual costs?
 Baseline 2 – Adhere to Policy
 Force outbound flows from dedicated DCs – not optimized
 Does the enforced policy change the outcome?
 Baseline 3 – Optimal DC Assignment
 Optimized the flow from DCs to Cities – keep # DCs the same
 Does the new assignment change the outcome?

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 14


Baseline 1 – Actual Flows

Using the model as a calculator only


Plugging in the volumes (cells B20:M24) and (D12:F16)
The model is “costing out” the solution
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 15
Baseline 2 – Adhere to Policy

Use model as a calculator to cost out solution


Assigned flows from DCs to Cities per policy
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 16
Baseline 3 – Optimal DC Assignment

Force all DCs open (PMIN = PMAX=5) cells C33:D33


Allow model to select assignments
Notice – BR served by 2 DCs & capacity is tight at smaller DCs (NA and SP)!
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 17
Compare Baselines to Actual costs
• How does Baseline 1 compare to actual costs?
 Are we within 10%?
 How do the individual buckets look?
• How does Baseline 2 (adhering to policy) compare?
• How does Baseline 3 (optimal assignment) compare?
BL1: BL2: BL3:
Actual Adhere Optimal
TOTAL COST $93,965 $82,723 $79,072
DC fixed cost $40,000 $40,000 $40,000
OB Transport $40,772 $29,365 $25,856
IB Transport $9,319 $9,501 $9,424 Which Baseline should we
Mfg Costs $1,500 $1,500 $1,500 use to compare against
DC Handling $2,374 $2,358 $2,293 future designs?
# DCs to Open 5 5 5
LOS - Avg Distance 37.1 26.7 23.51
LOS - PctIn50Miles 73% 81% 87%
Demand 2000 2000 2000
$/bl $46.98 $41.36 $39.54
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 18
Comparing Baseline Costs
$100,000

$90,000

$80,000

$70,000

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

$-
BL1: Actual BL2: Adhere BL3: Optimal

DC fixed cost OB Transport IB Transport Mfg Costs DC Handling

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Running Initial Scenarios

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Scenarios to Run
• Scenario 1 – Reduce to 4 DCs
• Scenario 2 – Reduce to 3 DCs
• Scenario 3 – Reduce to 2 DCs
• Scenario 4 – Reduce to 1 DC
• Scenario 5 – Open the BFP plant @ 250 unit capacity
• Scenario 6 – Open BFP with unlimited capacity
• Scenario 7 – Demand increases by 50% w/BFP
• Scenario 8 – Demand increases by 50% w/o BFP
• Scenario 9 – Keep only large DCs (BO, PR, WO) open
• Scenario 10 – LOS Minimums AvgDist25, Pct 80%
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 21
Baseline 3: Optimal Assignment

Force all DCs open (PMIN = PMAX=5) in cells C33:D33

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Scenario 1: Reduce to 4 DCs

Force 4 DCs open (PMIN = PMAX=4) in cells C33:D33

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 23


Scenario 2: Reduce to 3 DCs

Force 3 DCs open (PMIN = PMAX=3) in cells D33:D33

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 24


Scenario 3: Reduce to 2 DCs

Force 2 DCs open (PMIN = PMAX=2) in cells D33:D33

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 25


Scenario 4: Reduce to 1 DC

Force 1 DCs open (PMIN = PMAX=1) in cells D33:D33

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 26


Comparing TOTAL COST
BL3: Optimal
$79,072
S1: 4DC
$73,771
S2: 3DC
$68,765
S3: 2DC
$77,397

Scenarios 1-4 DC fixed cost


OB Transport
IB Transport
$40,000
$25,856
$9,424
$31,000
$29,860
$9,095
$20,000
$36,295
$8,825
$18,000
$46,277
$9,000
Mfg Costs $1,500 $1,500 $1,500 $1,500
DC Handling $2,293 $2,316 $2,145 $2,620
# DCs to Open 5 4 3 2
LOS - Avg Distance 23.51 27.1 33.0 42.07
LOS - PctIn50Miles 87% 87% 87% 0.65
Demand 2000 2000 2000 2000
$/bl $39.54 $36.89 $34.38 $38.70

$80,000

$70,000

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

$-
BL3: Optimal S1: 4DC S2: 3DC S3: 2DC S4: 1DC

DC fixed cost OB Transport IB Transport Mfg Costs DC Handling

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 27


An Aside on Bar Charts . . .
$100,000
$90,000
$80,000
$70,000
Do this!
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$100,000
$-
BL1: BL2: BL3: S1: 4DC S2: 3DC S3: 2DC S4: 1DC $95,000
Actual Adhere Optimal
$90,000

$85,000

Not this! $80,000

$75,000

$70,000

$65,000
BL1: BL2: BL3: S1: 4DC S2: 3DC S3: 2DC S4: 1DC
Actual Adhere Optimal

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 28


Running Advanced Scenarios

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 29


Scenarios to Run
• Scenario 1 – Reduce to 4 DCs
• Scenario 2 – Reduce to 3 DCs
• Scenario 3 – Reduce to 2 DCs
• Scenario 4 – Reduce to 1 DC
• Scenario 5 – Open the BFP plant @ 250 unit capacity
• Scenario 6 – Open BFP with unlimited capacity
• Scenario 7 – Demand increases by 50% w/BFP
• Scenario 8 – Demand increases by 50% w/o BFP
• Scenario 9 – Keep only large DCs (BO, PR, WO) open
• Scenario 10 – LOS Minimums AvgDist25, Pct 80%
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 30
Scenario 5: BF Plant @ 250 barrel/week
• The Bellow Falls plant (BFP) used to complement the Scranton plant (SCP)
• Data:
 Variable cost is more expensive $2.00 per barrel
 Current capacity they can provide is 250 barrels/week
• Action:
 Set BFP capacity (cell G4 = 250)
 Set PMIN=1, PMAX=5, (cells C33, D33)
CO

BFP
PO

MN

BR

NA

BO

WO

S
P

HA

P
R

SCP N
L

NH

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 31


Scenario 5: BF Plant @ 250 barrel/week

• Uses all 250 units


• Saves ~$250 per week from S2
• Should we buy more capacity?

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 32


Scenario 6: BF Plant added Capacity
• How much is extra capacity at the Bellow Falls plant (BFP) worth to me?
• Action:
 Set BFP capacity (cell G4 = 2000)

• Only 250 additional units needed


• Saves ~$300 per week
• Prices out the value of adding capacity
• Supplies NA 100%

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 33


Scenario 7: 50% Higher Demand with BFP
• How much is extra capacity at the Bellow Falls plant (BFP) worth to me if
demand increases? C
O

• Action:
B
P
O

M
N

B
R
F
P N
A

 Increase demand by 50% (cells B26:M26)


B
O

W
O

S
P

H
A

P
R

S N
N
L

C
H

• Uses much more of BFP


• Boston and Nashua supplied
from BFP
• Max capacity at 4 DCs!
• How should I compare this?

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 34


Scenario 8: 50% Higher Demand with no BFP
• What are my costs if demand increases and we do not have the BF Plant?
• Action:
 Increase demand by 50% (cells B26:M26)
 Set BF Plant capacity to 0 (cell G4)

• Only about $700 more than with BFP


• Local OB distribution unchanged!

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Scenario 9: Keep 3 Large DCs open
• We want to only close the smaller DCs
• Actions:
 Reset demand to original values (cells B26:M26)
 Set BFP capacity (cell G4 = 0)
 Set PMIN=3, PMAX=3, (cells C33, D33)
 Set fixed cost of SP and NA DCs to 99999 (~ infinity)

• Increase in OB transport costs

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Scenario 10: Enforce LOS Minimums
• I want to ensure that Max Average distance is ≤25 miles and at least 80% of
all demand is within 50 miles with BFP
• Actions:
 Reset demand to original values (cells B26:M26)
 Set BFP capacity (cell G4 = 250)
 Set PMIN=1, PMAX=5, (cells C33, D33)
 Set Max AvgDist = 25 (cell D34)
 Set Min PctWithin50Miles to .80 (cell C35)

• Higher LOS requires more DCs


to be opened
• Capacity at Springfield (SP)
might be worth exploring

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 37


Comparing Scenarios 5-10
S7:
BL3: S2: S5: S6: Demand 50% S8: Demand S9: S10:
Optimal 3DC BFP@250 BFP Infinite BFP 50% no BFP 3 Big DCs LOS Mins
TOTAL COST $79,072 $68,765 $68,515 $68,265 $100,694 $101,344 $82,094 $78,822
DC fixed cost $40,000 $20,000 $20,000 $20,000 $33,000 $33,000 $27,000 $40,000
OB Transport $25,856 $36,295 $36,295 $36,295 $47,974 $47,974 $41,630 $25,856
IB Transport $9,424 $8,825 $8,263 $7,700 $12,020 $14,545 $9,418 $8,861
Mfg Costs $1,500 $1,500 $1,813 $2,125 $4,125 $2,250 $1,500 $1,813
DC Handling $2,293 $2,145 $2,145 $2,145 $3,575 $3,575 $2,546 $2,293

# DCs to Open 5 3 3 3 4 4 3 5
LOS - Avg Distance 23.51 33.0 33.0 33.0 29.1 29.1 37.8 23.505
LOS - PctIn50Miles 87% 87% 87% 87% 81% 81% 65% 0.865
Demand 2000 2000 2000 2000 2000 2000 2000 2000
$/bl $39.54 $34.38 $34.26 $34.13 $50.35 $50.67 $41.05 $39.41

$110,000
$100,000
$90,000
$80,000
$70,000 DC Handling
$60,000 Mfg Costs
$50,000
IB Transport
$40,000
OB Transport
$30,000
DC fixed cost
$20,000
$10,000
$-
BL3: Optimal S5: BFP@250 S6: BFP Infinite S7: Demand 50% S8: Demand 50% S9: 3 Big DCs S10: LOS Mins
BFP no BFP
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 38
Key Take Aways

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Key Take Aways
• How to use a Network Design Model to test different
design scenarios
 Collecting Data
 Costs & capacities
 Transportation arcs & facilities
 Building the Baseline(s)
 Calibrate your model to reality (Baseline1)
 Optimal baseline used to compare to new designs
 Run Scenarios
 Easy to run – spend more time on interpretation!
 Good way to price out potential options
 Resist analysis paralysis

CTL.SC2x - Supply Chain Design Lesson: Network Design Models 40


CTL.SC2x -Supply Chain Design
Questions, Comments, Suggestions?
Use the Discussion!

“Wilson – incredibly excited about network design”


Yankee Golden Retriever Rescued Dog (www.ygrr.org)

caplice@mit.edu

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