A Model-Based Decision Support to Manage Outbound Logistics

M Raja*

The logistics involved as a part of Supply Chain Management (SCM) demand the development of appropriate models to support decision making. In real life large business environment, the situation demands handling large-scale data and rapid development of models to process the same. These data may emerge from online transaction systems and the same need to be prepared or consolidated to input to the optimization models. The widespread implementation of Enterprise Resource Planning (ERP) systems provides ample opportunity to access transactional databases for the integration of supply chain activities (Jeremy, 2008). In this paper, a prototype was developed to implement a decision support system for outbound logistics by a large cement manufacturing organization with multiple plants and distribution channels. While the dataflow from the transaction system to the optimization model was developed smoothly and transparently, the output of the model is integrated to the decision support system to manage outbound logistics. The approach adopted to integrate the transaction processing application with the decision support system is aimed at strengthening the existing scalable Supply Chain Infrastructure (SCI).

Introduction
New models of managing and conducting businesses demand the organizations to manage spatially spread organizational units and sub-units through networking which in turn presumes to implement an integrated logistics planning as a strategic option (Alan, 2001). Integration has been the focus in the development of logistics which endeavors to integrate the supply and distribution network that may comprise different tiers of suppliers and distributors and uses different modes and means of transporting the goods. This integration has enhanced the importance of logistic function and made the top management to give a strategic importance to it. The strategic models as envisaged by Porter (1985) have identified a central role to the integrated logistic function to make a major contribution to the competitiveness and growth of a business.
* Director, IIST, Hyderabad 500055, India. E-Mail: ijsysmgmt@iupindia.org 2009 IUP. All Rights Reserved. A Model-Based Decision Support to Manage Outbound Logistics 45

This integration involves the primary activities, namely the inboundand outbound logistics, operations, marketing and sales and services across the organizational units of several firms, involved in the supply chain network. An effective management of logistics network can maximize contribution, reduce turnaround times, and make product distribution cycle shorter and more efficient. While planning such logistics, the inbound logistics which spans sourcing and procurement, poses problems related to where to acquire materials and components, where to store, how much to store and how to retrieve from stores, etc. On the other hand, the outbound logistics which spans post-manufacturing delivery into distribution channels and sales outlets poses problems related to what markets to serve, what modes of transport to engage and when to ship, etc. In the case of market-driven manufacturing, the logistics of manufacturing such as what to produce, how much to produce, when to produce, etc., is bound to depend on the outbound logistics. The manufacturing strategy and decisions combined together with inboundand outbound logistics strategy and decisions enable the supply chain to become more efficient and responsive, and helps the organization to respond to the changing demand-supply scenarios at minimum cost and time. Some of the issues related to the outbound logistics for those organizations, which manufacture and distribute bulk materials such as cement and fertilizers, revolve around many questions that remain answered using management tools and techniques. What form of transportationby road, by rail or by seais ideal to deliver the material? What size of the fleet and which routes to optimize the distances and reduce costs without compromising on the delivery schedules? How to reduce losses due to damage and pilferage? How to streamline the number of stock points or depots reducing inventory based on demand and rationalizing delivery based on demand, consumer segments and price realization. To get the answers, the logistics management systems run algorithms simulating the output under varying inputs. Taking the plants and market locations fixed the software-enabled models run various permutations and combinations to decide modes of transport, fleet sizes, route-planning to locations of depots or supply points to work out optimum solutions. An important factor in the implementation of mathematical programming is the automatic generation of the mathematical formula in a format compatible to the optimizational software. Modeling languages such as AMPL to formulate formats in matrix forms to interface with optimizing softwares like CPLEX, MINTO and XPRESS (Nitin, 2003). Since real life problems have to handle hundreds or thousands of variables and constraints which also aid the multiple decision making process, there is a growing interest in the development of modeling languages and packages. In the present case study, the focus was to establish information flow between transaction processing which is handled by the Enterprise Resource Planning (ERP) software SAP R/3 and the optimization models
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developed using inbuilt modeling language of an application development package called SAS.

Transportation Model Structure

The transportation constitutes the highest single cost of the supply chain logistics accounting more than 60% of the total logistics cost (IBM, 2005). The transportation model in Supply Chain Management (SCM) in general and outbound logistics in particular, focuses on optimization of a number of criteria, like maximizing the utilization of all the available products, maximizing the realization or contribution, meeting the minimum demand, etc. These objectives need to be satisfied subject to various constraints posed by loading and unloading facilities, transport modes and capacities, sizes of the fleet deployed, etc. Optimization techniques such as liner programing, inter programing and goal programing were used to obtain solutions for these problems. The block diagram given in Figure 1 may depict a generic transportation model structure.

Figure 1: A Generic Structure of a Logistics Model

Availability Constraints Packing Constraints

Loading/Unloading Constraints Minimum and Maximum Demand Constraints

Maximize Product Utilization Ensure Minimum Demand Maximize Net Realization Maximize Contribution Minimize Inventory Level Avoid Waiting Time at Loading and Unloading Points, etc.

Minimum and Maximum Goods Available Mode and Route Capacity Constraints Market Segmentation Constraints

Constraints on Dispatch Volumes, etc.

Destination-Wise Movement Plan Source-Wise Dispatch Plan Product-Wise Movement Plan Estimated Costs-Freights, Taxes, Handling Charges, etc. Total ContributionMarket Segmentation-Wise, Distribution Channel-Wise

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Though the implementations of optimization of problems have been attempted by many organizations over a period of time, the success stories of integrating the same as part of logistics management are yet to be demonstrated by many. The implementation issues revolve around some of the following impediments:

The model conceptualization and its synchronization with the business objectives and handling of conflict objectives are major obstacles. The mathematical formulation of models and constraints needs to be done dynamically. The number of variables to be handled by the software and the computer time required to solve the same, pose problems to the computing resources. The volume of data to be gathered and organized for the input to the model is high. The absence of incorporating comprehensive data checking and business rules to avoid infeasible solutions poses severe threat while running the models. The routine translation of the model output into an operational plan needs to be programmed. Building decision support systems around the model and solvers and integrating the same with the existing information infrastructure need to be synchronized with the overall information system and technology plan.

Software S yste ms Management

f or

S upply

Chain

and

Ente rprise

ERP and SCM are two categories of software which are widely used in many manufacturing and distribution organizations as enterprise systems. While the ERP systems support integrated transaction processing, backbone of an organization, the SCM systems provide capabilities to coordinate and execute organization-wide manufacturing and distribution processes and functions. While ERP systems enhance organizational performance by reducing or eliminating inconsistent information and increasing transaction processing efficiency, the SCM systems are aimed to provide decision support and business planning capabilities (Ball et al., 2002). Software developed to integrate enterprise applications specifically for the supply chain is designed to achieve a number of purposes, such as to connect trading partners with the users enterprise systems, allow companies to use internet to reduce communication cost (John, 2008). These products differ widely in scope and breadth. Some focus on transportation and the others on order management. SCM and ERP software
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packages are available in the market for quite some time and are now resulting in integrated ERP/SCM solutions (Linthicum, 2000). As the industries have gained experience in implementing these packages, the software vendors have enhanced the features and capabilities which overlap in many aspects. The most prominent resource planning software packages, like SAP R/3, J D Edwards, Baan, Avalon, and PeopleSoft, etc., have included various modules to meet the requirements of the customers. However, the Delphi study (Henk et al., 2003) conducted with 23 Dutch supply chain executives shows that only a modest role for ERP in improving future supply chain effectiveness and a clear risk of ERP actually limiting progress in SCM. As a consequence, a number of SCM software packages such as i2, Manugistics and Logility seem to attract the market. The Automation Research Corporation depicts the classification of industries and the fitness of some of these standard supply chain packages as shown in Figure 2. Figure 2: A Classification of the Software Packages for the SCM
PROCESS AutoSimulation Numetrix i2 Pulp Bulk Chemicals Textiles Specialty Chemicals Manufacturing Intensive Semi Conductors Telecom Equipment Automobile Consumer Durables Garments i2 Paragon PeopleSoft Manugistics IMI Drugs Personal Care CONSUMER Oil and Gas Manugistics Logility EXE IMI

INDUSTRY

Distribution Intensive Sourcing Intensive

i2 Baan SynQuest Manugistics HK Systems

DISCRETE

The potential benefits to be derived by implementing these packages are, of course, enormous provided that a number of decision support systems are
A Model-Based Decision Support to Manage Outbound Logistics 49

identified and developed to exploit the amount of data these packages collect and organize. The advantages often come at a high price. However, when it comes to a stage, where we need to do aggregate planning, which is generally what the decision-makers need to do, the solution requires various kinds of tools and techniques. For example, the organization referred in this case study has invested to implement various modules such as material management, sales and distribution modules and production planning module for process industry of SAP R/3. At the end of implementation, it was realized that the implemented modules do not support optimization techniques such as linear/goal programming techniques. In such situations, the decision support models developed around these techniques need to be integrated with the business processes configured with the standard packages such as ERP packages. If similar models identified as part of SCM are already developed using standard packages such as SAS and put into operational use, the integration with transactional databases becomes easier. In addition to this, if decision support models are built using packages such as SAS system, which has in-built modules such as data warehousing and mining tools, it will significantly improve the managements ability to exploit information. The hardware and software generally used to handle SCM is collectively referred as Supply Chain Infrastructure (SCI). Some of the major issues related to this infrastructure are reported in Ball et al., 2000.

Enterprise Applications Integration

The integration of enterprise applications has the aim of facilitating the seamless information exchange between various business applications to achieve organizational goals and objectives. With the development of web and middleware technologies (Umar, 2003), the problems related to the integration of application are being increasingly addressed. The convergence of this hardware with the internet technology transforms the information-based applications into servicebased enterprise-wide applications (Kostas, 2002). The integration of legacy applications with other critical software system provides various advantages. While it minimizes or eliminates the costs involved in re-developing the existing applications (Umar, 1997), it extends the utilization of such applications and thereby increases the life-cycle of legacy systems. When the transaction processing systems were built using service-oriented architecture where services and applications were viewed as objects with well-defined interfaces, object wrappers play a vital role in integrating the legacy applications. Web-based application development allows integrating enterprise-wide applications through web gateways such as Common Gateway Interface (CGI) and Server Side Includes (SSI). However, when the existing legacy systems were developed using integrated system of software modules such as SAS, the models already developed and implemented need to be integrated only thru data integration and not the control integration. However, SAS has announced, recently, its new service-oriented
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architecture capability within the SAS enterprise intelligence platform across its range of solutions.

A Case Study
One of the largest cement manufacturing organizations in India having multiple plants and multiple brands and distribution channels across a large number of depots has to handle a complex situation while planning its supply chain aiming at reducing the distribution costs, incurred across the plants and maximizing the contributions realized thru its various products such as various grades of cement with various brands and cross-brands. Though the sales were done through carry-forward agencies, the distribution management was coordinated by its central marketing division. The block diagram given in Figure 3 depicts the value chain for this organization at a macro level. Plants produce the main product namely various grades of cement and dispatch the same to customers both directly as ex-factory sales and distribute to other customers thru dealers and carry-forward agencies. The plants may also supply semi-produced and unpacked materials to other plants, such as grinding units and package units. Hence, the involved logistics has to handle dispatches across its own plants and the receiving units have to plan their own outbound logistics. In Figure 3, while Plant 1 produces the main products and dispatches to the customers and carry-forward agencies, it also dispatches its semi-processed material known as clinker to another plant which is located at a geographically dispersed location for grinding. Some of the plants producing the finished products may also dispatch the material in bulk to other packing plants. After a debate across senior management, the objectives and constraints to be incorporated into the model were narrowed down and a decision support system was evolved. The objective was narrowed down to maximize contribution taking into account various constraints related to the utilization of the clinker and cement, manufactured across a number of plants. Various alternative modes of transport and their capacities need to be evaluated by monitoring and measuring their impact on the maximum contribution to be achieved. Minimum demands for the customers to be ensured while ensuring that the maximum dispatches from a particular plant to a particular sub-location do not exceed the limits agreed upon by the manufacturing association. The material availability constraints need to be derived by taking into account various production plans drawn by a number of manufacturing plants. The model needs to handle scenarios related to some of the integrated plants having geographically dispersed grinding and packing plants. The designed and developed optimization model can be depicted using the following objective function and constraints: Maximize (Total Contribution) = Z = Sum-Up Over (ijkl ) [X (ijkl ) * C (ijkl )] where i = Plant
A Model-Based Decision Support to Manage Outbound Logistics 51

Figure 3: Logistics Across the Involved Multiple Plants

Manage Plant 1 Inbound Logistics Suppliers Produce Products Manage Dispatches Manage Plant 2 In-Bound Logistics Suppliers Transport In-Bound Logistics Maintain Grinding Plant

Produce Products Manage Dispatches Transport Maintain Grinding Plant Produce Products Manage Dispatches

Manage Sales and Outbound Logistics

Produce Products Manage Dispatches

Commission Agents Dealers Customers

C & F Agents Transporters

Customers

j = Customer location/destination k = Transportation mode-route l = Product (brand/grade/packing combinations) X (ijkl ) denotes the material quantity distributed by plant i to location j by transport mode-route k for supplying the productlwhich is a combination of brand, grade and packing combination. C (ijkl ) denotes the cost of material distributed by plant i to location j by transport mode-route k for supplying the product l which is a combination of brand, grade and packing combination.
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The constraints domain spans:

Minimum demand to be ensured at the customer/destination location. Maximum demand to be restricted to the customer/destination location. Minimum volume of the product to be utilized. Maximum product available at the plants for distribution. Maximum material to be allocated keeping in view of plants capacities. Minimum and destinations. maximum transport possible between plants and

Minimum and maximum dispatches possible via each and combination of possible mode-routes. Maximum plant to sub-location allocations. Maximum to be dispatched to sub-locations.

More than 30 sets of business and data checking rules were applied on the input data sets to ensure non-feasible solutions. Some of the data checking rules formulated are:

Maximum demand to destination should be more than minimum dispatch for the mode-route combination. Minimum demand to destination should be less than maximum transport for that destination. For a particular plant-transport mode-route combination, the minimum and maximum transport quantities should be in multiple of minimum and maximum rake quantities. Minimum transport to a sub-location such as a state should not exceed maximum allocation agreed to that sub-location.

The above model was built around a package, which has the capability of slicing and dicing the data in flexible ways to generate information in multi-dimensional reports. The reports generated from the decision support includes location-wise, customer-wise, customer group-wise allocations along with summary reports on realization and contributions achieved due to allocations. The maximization of contribution takes into account implicitly various variable costs of manufacturing such as raw material, power and fuel, packing material, etc., and also the selling expenses due to commission, freight and handling charges, taxes, etc. Since it was observed that the manufacturing costs across various players in the industry are more or less the same and since the volume of the product to be transported is high, the focus was more on transportation and the associated costs. The more crucial aspect for this supply chain is to derive best modes and routes of transportation from plants to salepoints while maximizing the contribution. The decision support system developed to handle logistics planning was integrated with the existing ERP Systems as shown in Figure 4.
A Model-Based Decision Support to Manage Outbound Logistics 53

Figure 4: The Interface of the Outbound Logistics Planning System with the ERP
Min. and Max. Demand Logistics Planning System Product Availability Delivery Schemes Customers SAP R/3 Plants

Depots

Standard Reports from the Model Output

The designed software can accept input from the spreadsheet and other database systems which will be automatically transferred into data sets of SAS that may be further altered, if necessary. The software formulates the model with appropriate objective function and constraints and stores the same into datasets. A number of business rules and data consistency checks were done on the input datasets before passing it on to an OR module of the software. A typical output of the model is as shown in Figure 5. Figure 5: A Model Output from the LP Module

54

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The output generated by the OR module is again stored in a dataset from which a number of MIS reports both tabular and graphically are being generated. These reports allow the managers to evaluate alternative scenarios as part of decision making. Typical graphical reports are shown in Figures 6 and 7. Figure 6: Plant-Wise Dispatch for a Particular Product

Figure 7: Plant-Wise Contribution in Rupees per Metric Ton for a Particular Product

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Conclusion
The implementation of ERP system offers opportunities for an organization to access transactional databases and integrate optimization models developed to manage supply chain activities. A logistics model was developed to handle

transportation of bulk material from a number of plants to depots, customers and other carry-forward agencies. The same is implemented with the aid of an operations research module of the SAS software system. The developed system was integrated with the existing ERP software and put into operational use. The transporting the material across the country. system helped the management to significantly reduce the cost involved in

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