LOGISTICS DESIGN AND OPERATIONAL PLANNING

The supply chain logistics environment is constantly evolving as a result of changes in markets,
competitors, suppliers, and technology. To develop and focus the enterprise strategy to match this
changing environment and effectively evaluate alternatives, a systematic planning and design
methodology is required.

Planning Methodology

Even for established industries, a firm's markets, demand, cost, and service requirements change
rapidly in response to customer and competitor behavior. To accommodate such change, firms often
face questions such as:

(1) How many warehouses should our logistics system use and where should they be located?

(2) What are the inventory / service trade-offs for each warehouse?

(3) What types of transportation equipment should be used and how should vehicles be routed?

(4) Is investment in a new materials handling technology justified?

Just as no ideal logistical system is suitable for all enterprises, the method for identifying and
evaluating alternative logistics strategies can vary extensively. However, there is a general
process applicable to most logistics design and analysis situations. Figure14.1 illustrates a generalized
planning process flow. The process is segmented into three phases: problem definition and planning,
data collection and analysis, and recommendation and implementation.
Phase 1: Problem Definition and Planning

Phase I of logistics system design and planning provides the foundation for the overall
analysis. A thorough and well-documented problem definition and plan are essential to all that
follows.

Feasibility Assessment

Logistics design and planning must begin with a comprehensive evaluation of the current operating
situation. The objective is to understand the environment, process, and performance
characteristics of the current system and to determine what, if any, modifications appear worthy of
evaluation. The process of evaluating change is referred to as a feasibility assessment, and
includes situational analysis, framing the supporting logic, and cost/benefit estimation.

Situation Analysis

The collection of performance measures, characteristics, and information that describes the current
logistics environment is called the situational analysis. A typical analysis requires internal
operational review, a market assessment, and a technology assessment to determine existing
capabilities and improvement potential.

Table 14.1 lists some of the topics frequently covered during an internal review. The format
highlights the fact that the assessment must consider the processes, decisions, and key measures for
each major logistics activity. Process considerations focus on physical and information flows
through the supply chain. Decision considerations focus on the logic and criteria currently used
for supply chain management. Measurement considerations focus on the key performance indicators

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and the firm's ability to measure them.

Table 14.2 illustrates some typical market assessment topics. The assessment should focus on
external relationships with suppliers, customers, and in some situations consumers. The
assessment should consider trends in requirements and processes as well as enterprise and
competitor capabilities.

Technology assessment focuses on the application and capabilities of key logistics technologies,
including transportation, storage, materials handling, packaging, and information processing. The
assessment considers the firm's capabilities in terms of current technology as well as the potential
for applying new technologies. The objective of the technology assessment is to identify technology
advancements that facilitate effective trade-offs with other logistics resources such as transportation or
inventory. Table 14.3 illustrates typical technology assessment topics across selected logistics
functions. Such an assessment should be completed with respect to each component of the logistics
system as well as from the perspective of overall integration.

Supporting Logic

The second feasibility assessment task is the development of a supporting logic to integrate the
findings of the internal review, market assessment, and technology study. Supporting logic
development often constitutes the most difficult part of the strategic planning process. The purpose
of the situational analysis is to provide senior management with the best possible vision of the
strengths and weaknesses of existing logistics system capabilities for both the existing and potential
future logistical requirements.
Supporting logic development builds on this comprehensive review in three ways.
1. First, it must identify the value proposition to justify detailed research and analysis. In this sense,
the supporting logic development forces a critical view of potential improvement opportunities,
including determination of whether the cost/benefit justification provides a solid business case.
2. Second, supporting logic development critically evaluates current procedures and practices on
the basis of a comprehensive factual analysis to remove perceptual biases. Identification of
areas with improvement potential, as well as those where operations are satisfactory, provides a
foundation to determine the need for strategic change.
3. Third, the process of developing supporting logic should include clear statements of potential
redesign alternatives. The statement should include: (1) definition of current procedures and
systems, (2) identification of the most likely system design alternatives based on leading industry
competitive practices and the prevailing theories of integrated logistics, and (3) suggestion
of innovative approaches based on new theory and technologies

Cost/Benefit Estimate

The final feasibility assessment task, the cost/benefit estimate, is an estimate of the potential
benefits and risks associated with performing a logistics analysis and implementing
the recommendations. Benefits should be categorized in terms of service improvements, cost
reduction, and cost prevention

Project Planning

Project planning is the second Phase I activity. Logistics system complexity requires that any effort to
identify and evaluate strategic or tactical alternatives must be planned thoroughly to provide a sound
basis for implementing change. Project planning involves these specific tasks: statement of
objectives, statement of constraints, measurement standards, assumptive logic, analysis

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techniques, and project work plan.

Statement of Objectives
The statement of objectives, documents the cost and service expectations for the logistics system
revisions. It is essential that they be stated specifically and in terms of measurable factors. The
objectives define market or industry segments, the time frame for change, and specific
performance expectations. These requirements typically define specific goals that management is
seeking to achieve. For example, the following suggest a combination of measurable
objectives that might be used to guide a logistics analysis:

A. Provide the 100 most profitable customers with perfect order performance on all orders.

B. For all other customers provide the following performance:

1. Inventory availability:
• 99% for category A products
• 95% for category B products
• 90% for category C products
2. Desired delivery of 98% of all orders within 48 hours of order placement
3. Minimize customer shipments from secondary warehouses
4. Fill mixed commodity orders without back order on a minimum of 85 percent of all orders
5. Hold back orders for a maximum of 5 days

Measurement Standards and Assumptive Logic

The feasibility assessment often highlights a central need for development of measurement
standards. Such standards direct the analysis by identifying cost assumptions and performance
objectives essential to evaluate recommendations. Management must stipulate measurement
standards and objectives as a prerequisite for plan formulation.

Project Work Plan

On the basis of feasibility assessment, objectives, constraints, standards, and analysis
techniques, a project work plan can be developed and the resources and time required for
completion identified.

Phase 2: Data Collection and Analysis

Once the feasibility assessment and project plan are completed, Phase II of a network design study
focuses on data collection and analysis. This phase requires assumption definition, data collection, and
analysis of alternatives.

Assumptions and Data Collection

This activity extends the feasibility assessment and project plan by developing detailed planning
assumptions and identifying data collection requirements by:

1. Defining analysis approaches and techniques

2. Defining and reviewing assumptions
3. Identifying data sources
4. Collecting data
5. Collecting validation data

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1. Defining Analysis Approaches and Techniques

An early Phase II task is the determination of the appropriate analysis technique for the planning
situation under consideration. While a wide number of options are available, the most common
techniques are:

1. Analytical
2. Simulation
3. Optimization
An analytical approach uses numerical tools such as spreadsheets to evaluate each
logistical alternative. A simulation approach can be likened to a laboratory for testing
supply chain logistics alternatives Optimization uses linear or mathematical programming to evaluate
alternatives and select the best design or alternatives under consideration.

Analysis assumptions define the constraints and limitations required to fit the problem to the
analysis technique. These assumptions frequently focus on problem size, degree of analysis detail,
and solution methodology. Table 14.4 offers more detailed descriptions for each assumption category.

Table 14.5 summarizes the shipment volume, cost, and service characteristics of the existing,
system. Shipment volume is defined in terms of weight shipped; cost, in terms of transportation
and inventory carrying expenses; and service level, in terms of the percentage of sales volume
serviced within 2 days' transit time from the warehouse. Likely questions for the analysis might be: (1)
What is the performance impact if the Chicago warehouse is closed? (2) What is the performance
impact of removing the Los Angeles warehouse? and (3) What is the performance impact of
removing the Atlanta warehouse?

2. Defining and Reviewing Assumptions

Assumption definition and review builds on the situation analysis, project objectives, constraints,
and measurement standards. For planning "purposes, the assumptions define the key
operating characteristics, variables, and economics of current and alternative systems. While the
format will differ by project, assumptions generally fall into three classes:

1. Business assumptions
2. Management assumptions
3. Analysis assumptions

Business assumptions define the characteristics of the general business environment, including
relevant market, consumer, and product trends and competitive actions. Management
assumptions define the physical and economic characteristics of the current or alternative
logistics environment and are generally within management's ability to change or refine. Analysis
assumptions define the constraints and limitations required to fit the problem to the
analysis technique. These assumptions frequently focus on problem size, degree of analysis
detail, and solution methodology. Table 14.4 offers more detailed descriptions for each assumption
category.

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3. Identifying Data Sources

detailed data must be collected and organized to support the analysis. For situations
when data is extremely difficult to collect or when the necessary level of accuracy is unknown,
sensitivity analysis can be used to identify data impact. The first major data category is sales
and customer orders. The annual sales forecast and percentage of sales by month, as well as
seasonality patterns, are usually necessary to determine logistics volume and activity levels

Transportation data requirements include the number and type of modes utilized, modal selection
criteria, rates and transit times, shipping rules, and policies. If private transportation is included in
the analysis, then information is required concerning the private fleet.

4. Data Collection

Once alternative data sources have been identified, the data collection process can begin. The
process includes assembly of required data and conversion to appropriate formats for the analysis
tool. This is often a tedious and time-consuming task, so errors are likely.

5. Validation Data In addition to collecting data to support alternative analysis, base case or
validation data must also be collected to verify that the results accurately reflect reality. The
specific question concerns whether the chosen analytical approach accurately replicates
historical logistics practices.

Phase 3: Recommendations and Implementation

Phase III operationalizes planning and design efforts by making specific management
recommendations and developing implementation plans.

Recommendations

Alternative and sensitivity analysis results are reviewed to finalize managerial recommendations. This
review process includes four tasks:

1. Identifying the best alternative

2. Estimating costs and benefits
3. Developing a risk appraisal
4. Developing a presentation

1. Identifying the Best Alternative-The alternatives and sensitivity analyses should identify the
best options to consider for implementation. However, multiple alternatives often yield
similar or comparable results. Performance characteristics and conditions for each
alternative must be compared to identify the two or three best options

2. Estimating Costs and Benefits - potential benefits were identified as service improvement,
cost reduction, and cost prevention. It was noted that these benefits are not mutually
exclusive and that a sound strategy might realize ail benefits simultaneously.

3. Evaluating Risk A second type of justification necessary to support strategic planning

recommendations is an assessment of the risk involved. Risk assessment considers the
probability that the planning environment will match the assumptions. Additionally, it
considers the potential hazards related to system changeover.

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 4. Presentation-The final task is development of a managerial presentation that identifies,
quantifies, and justifies suggested changes. The presentation and accompanying
report must identify specific operating and strategic changes, provide a qualitative rationale
as to why such change is appropriate, and then quantitatively justify the changes in terms of
service, expense, asset utilization, and
productivity improvements.

Defining the Plan

The first task defines the implementation plan in terms of the individual events, their
sequence, and dependencies. While the initial plan may be macro level, it must ultimately be
refined to provide individual assignment responsibility and accountability. Plan dependencies identify
the interrelationships between events and, thus, define the completion sequence.

Scheduling

The second task schedules the implementation arid time-phases the assignments identified
previously. The schedule must allow adequate time for acquiring facilities and equipment,
negotiating agreements, developing procedures, and training

Acceptance

The third task defines the acceptance criteria for evaluating the success of the plan. Acceptance
criteria should focus on service improvements, cost reduction, improved asset utilization, and
enhanced quality.

Plan Implementation

The final task is actual implementation of the plan or design. Implementation must include
adequate controls to ensure that performance as scheduled and that acceptance criteria are carefully
monitored.

Supply Chain Analysis Methods and Techniques

Supply chain design analysis performs the strategic evaluation of supply chain alternatives such
as sourcing, plant location, warehouse location, and market service areas, increasingly
important to optimize flows for global supply chains

Design Decisions
Logistics and supply chain managers are often faced with decisions regarding the strategic and
operational designs of their supply chain networks. Supply chain networks include the combination
of suppliers, manufacturing plants, warehouses, consolidation points, service providers, and
retailers to bring product from the raw material stage to the end consumer
Supply chain design decisions focus on selecting the number and location of plants, warehouses, and
other supply chain nodes. Typical management questions include:

1. Where should the manufacturing plants be located and which products should they
produce?
2. How many warehouses should the firm use, and where should they be located?
3. What customers or market areas should be serviced from each warehouse?
4. Which product lines should be produced or stocked at each plant or warehouse?
5. What is the role of master or regional distribution centers relative to field or local
warehouses?

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 6. What sourcing and marketing channels should be used to source material and serve
international markets?
7. What combination of public and private warehouse facilities should be used?
8. What service providers and value-added services should be used meet market
requirements?
Design Logic
The design alternatives include combinations of suppliers, plants, warehouses, and product
stocking strategies.

Tool Selection

A supply chain design analysis typically begins with the selection of an appropriate modeling tool.
While generalized mixed integer programming packages can be used, supply chain design is unique
and common enough that it is advisable to seek out one of the customized tools. There are a
number of PC-based packages that can be used to effectively evaluate supply chain alternatives.
Ballou and Masters have completed a number of surveys documenting the availability of these tools.
These design tools typically differ in their capacity, flexibility, graphics, and solution speed

Data Requirements

The primary supply chain design analysis data requirements include:

1. Market product
2. Network
3. Customer demand
4. Transportation rate
5. Variable and Fixed cost definitions

Figure 14.3 illustrates how the United States might be segmented into market areas for a supply
chain analysis. Each dot represents an aggregation of demand. A number of market definition
structures have been developed. The most useful structures for supply chain modeling are:

1. County
2. Standard metropolitan statistical area (SMSA)
3. Zip or postal codes.

Figure 14.4 illustrates a channel for industrial and retail customers. While using a more
comprehensive definition reduces the chance of suboptimizing system performance, total
channel and supply chain design analysis increases complexity, again resulting in more extensive
data collection and longer solution times. Supply chain analysts must evaluate the trade-offs
between increasing analysis complexity and improved potential for total supply chain
optimization.

Evaluation of Alternatives

Typical supply chain design analysis can lead to evaluation of a large number of alternatives, even
for a relatively small analysis where the enterprise wants to consider all possible combinations of
just 10 different distribution centers, for example. There are 6.2 million variations ranging from 10
different combinations of 1 distribution center to combination of 10. If it took a single minute to

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evaluate each alternative, it would take II years to investigate all possible options. This emphasizes
the importance of the feasibility assessment discussed earlier. This does not even include the
possibility of looking at combinations of different suppliers or manufacturing plants.

Figure 14.5 illustrates the baseline results of a supply chain system with two plants and
two warehouses. The figure illustrates a supply chain with a plant with colocated warehouses in
Pennsylvania and Iowa. As noted in the figure, the performance of this scenario is $66.9 million and
an average distance of 742 miles. While supply chain design tools provide good performance data
in terms of cost, service is typically reported in distance or time to market rather than a measure
such as fill rate. The distance is a proxy variable representing transit time from the warehouse to the
customer.

Figure 14.6 illustrates a revised supply chain design based on the situation discussed earlier. The
results demonstrate that a 3-plant. and 4-warehouse supply chain yields substantially better
performance than the baseline case. As the figure notes, the total cost is reduced to $61.8 million with
an average distance between the warehouse and customer of 428 miles. In this case, the
alternative supply chain design can both improve service, in terms of distance to the customer, and
reduce the total cost.

Inventory Decisions

Inventory analysis decisions focus on determining the optimum inventory management parameters
to meet desired service levels with minimum investment. Inventory parameters refer to:

1. Safety stock
2. Reorder point
3. Order quantity
4. Review cycles for a specific facility and product combination.

There are two types of methods to evaluate and select from inventory management options:
1. Analytic
2. Simulation
Analytic Inventory Techniques

Analytic inventory methods utilize functional relationships such as those discussed in one of the
previous sessions to determine ideal inventory stocking parameters based on the desired service level.
Figure 14.7 illustrates the analytic inventory concept. The technique uses service objectives, demand
characteristics, performance cycle characteristics, and the logistics system characteristics as input to
calculate optimum inventory parameters. From an inventory management perspective, service
objectives are typically defined in terms of case or order fill rates.

Simulation Inventory Techniques

The inventory simulation approach creates a mathematical and probabilistic model of the logistics
operating environment as it actually exists. As Figure 14.8 illustrates, the simulation approach is
similar to creating a laboratory testing environment for the supply chain network and operating
policies. Simulation is similar to the analytic approach except that the roles of the inventory
parameters and service levels are reversed.

Transportation Decisions

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Transportation analyses focus on routing and scheduling of transportation equipment to improve
vehicle and driver utilization while meeting customer service requirements. Transportation
decisions can be characterized as:

1. Strategic or
2. Tactical.

Strategic transportation decisions concern long-term resource allocation, such as for extended
time periods. Thus, strategic routing decisions identify fixed transport routes that may be used for
months or years. Tactical transportation decisions concern short-term resource allocations such
as daily or weekly routes. The objective of transportation analysis is to minimize the combination
of vehicles, hours, and miles required to deliver product. Typical transportation analysis questions
include:

1. How should deliveries be grouped to form routes?

2. What is the best delivery sequence for servicing customers?
3. Which routes should be assigned to which vehicle types?
4. What is the best type of vehicle for servicing different customer types?
5. What delivery sequence should be used to accommodate time restrictions imposed by customers?

Figure 14.9 illustrates a typical routing or delivery problem. The warehouse represents the central
departure site for all delivery vehicles, and each stop represents a customer location, such as a
retailer.
Transportation Analysis Techniques

Routing and scheduling analyses have been well researched for supply chain tactical and operational
planning. They are particularly important for firms completing partial load delivery activities such as
package or beverage distribution. The techniques can generally be classified as:

1. Heuristic approaches
2. Exact approaches
3. Interactive approaches
4. Combination approaches

Heuristic approaches utilize rule-of-thumb clustering or savings techniques to develop routes by

sequentially adding and deleting stops. Exact, or optimal, approaches use mathematical (linear)
programming to identify the best routes. Interactive approaches utilize a combination of simulation,
cost calculator, or graphics capability to support an interactive decision process.

Combinations of the three approaches have proved very effective; Two criteria are
important in evaluating alternative solution approaches:

1. Generalizability
2. Accuracy

Generalizability is the ability to efficiently incorporate extensions for special situations, such as
pickups and deliveries, multiple depots, time windows, vehicle capacities, and legal driving times, in
an actual setting. Accuracy refers to the ability to closely approximate performance
characteristics and the results' proximity to an optimal solution.