LOGISITCS

MANAGEMENT
Dr. LE THI DIEM CHAU
Dr. Tran Quynh Le
Assoc. Prof. Dr. Do Ngoc Hien
Dept. of Industrial Systems Engineering
Mechanical Engineering Faculty
Ho Chi Minh City University of Technology (HCMUT)–VNUHCM

2024
TOPIC 7.
LOGISTICS NETWORK
CONFIGURATION

• The logistics network

• Network Design: Key Issues

• A Typical Network Design Model

Dr. Le Thi Diem Chau, lechau@hcmut.edu.vn 2

The Logistics Network

❑ The Logistics Network consists of:

▪ Facilities: Vendors, Manufacturing
Centers, Warehouse/ Distribution
Centers, Retail outlets and
Customers
▪ Raw materials, work in process
inventory and finished products
that flow between the facilities
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 Network Design: Key Issues

Pick the optimal Determine optimal Determine best

number, location, and sourcing strategy distribution channels
size of warehouses
and/or plants
Which plant/vendor Which warehouses
should produce which should service which
product customers
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Network Design: Key Issues

❑ The objective is to balance service level against

▪ Production/ purchasing costs

▪ Inventory carrying costs

▪ Facility costs (handling and fixed costs)

▪ Transportation costs

That is, we would like to find a minimal-annual-cost configuration of the distribution

network that satisfies product demands at specified customer service levels.
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 Network Design Tools: Major Components

Mapping Data Engine

- Mapping allows you to visualize - Data specifies the costs of - Optimization Techniques
your supply chain and solutions your supply chain
- Mapping the solutions allows you - The baseline cost data
to better understand different should match your
scenarios accounting data
- Color coding, sizing, and - The output data allows
utilization indicators allow for you to quantify changes to
further analysis the supply chain 6
Mapping Allows You to Visualize Your
Supply Chain

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Displaying the Solutions Allows you To
Compare Scenarios

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Data for Network Design

• A listing of all products

• Location of customers, stocking points and sources
• Demand for each product by customer location
• Transportation rates
• Warehousing costs
• Shipment sizes by product
• Order patterns by frequency, size, season, content
• Order processing costs
• Customer service goals
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Data Collection

All products, including Location of customers,

volumes, and special retailers, existing Annual demand for
transport modes. (e.g. warehouses and DCs, each product by
frozen food need manufacturing facilities, customer location.
freezer) and suppliers.

Warehousing costs,
including labor, Shipment sizes
Transportation rate
inventory carrying and frequencies for
by mode.
charges, and fixed customer delivery.
operating costs.

Order processing Customer service 10

costs. requirements and goals.

Solution Techniques

❑ Mathematical optimization techniques:

1. Exact algorithms: find optimal solutions

2. Heuristics: find “good” solutions, not necessarily optimal

❑ Simulation models: provide a mechanism to evaluate specified design

alternatives created by the designer
A Typical Network Design Model

❑ A Typical Network Design Model

❑ A Typical Location Model

❑ Complexity of Network Design Problems

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A Typical Network Design Model

◼ Several products are produced at several plants.

◼ Each plant has a known production capacity.
◼ There is a known demand for each product at each customer zone.
◼ The demand is satisfied by shipping the products via regional
distribution centers.
◼ There may be an upper bound on total throughput at each distribution
center.

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A Typical Location Model

▪ There may be an upper bound on the distance between a distribution

center and a market area served by it.
▪ A set of potential location sites for the new facilities was identified
▪ Costs:
▫ Set-up costs
▫ Transportation cost is proportional to the distance
▫ Storage and handling costs
▫ Production/supply costs
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Complexity of Network Design Problems

▪ Location problems are, in general, very difficult problems.

▫ The complexity increases with

▫ The number of customers,

▫ The number of products,

▫ The number of potential locations for warehouses, and

▫ The number of warehouses located. 15

A Typical Network Design Model: Problem

▪ Single product

▪ Two plants p1 and p2

▪ Plant P1 has an annual capacity of 200,000 units.

▪ Plant p2 has an annual capacity of 60,000 units.

▪ The two plants have the same production costs.

▪ There are two warehouses w1 and w2 with identical warehouse handling costs.

▪ There are three markets areas c1,c2 and c3 with demands of 50,000, 100,000
and 50,000, respectively. 16
 Why Optimization Matters?

Table 1 Distribution costs per unit

Assumption:
- Production costs are
the same, warehousing
costs are the same
$0
$3 D = 50,000
Cap = 200,000
$4

$5
$5 D = 100,000
$4 $2

$2 $1
Cap = 60,000
$2
D = 50,000
 Traditional Approach #1:

Assign each market to closet WH. Then assign each plant

based on cost.
D = 50,000
Cap = 200,000

$5 x 140,000 D = 100,000
$2 x 50,000

$2 x 60,000 $1 x 100,000
Cap = 60,000
$2 x 50,000
D = 50,000

Total Costs = $1,120,000

 Traditional Approach #2:

Assign each market based on total landed cost

D = 50,000
P1 to WH1 $3
P1 to WH2 $7
$0 P2 to WH1 $7
$3 P2 to WH 2 $4
Cap = 200,000
$4
D = 100,000
$5
$5 P1 to WH1 $4
P1 to WH2 $6
$4 $2 P2 to WH1 $8
$1 P2 to WH 2 $3
$2
Cap = 60,000
$2
D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4
 Traditional Approach #2:
Assign each market based on total landed cost
D = 50,000
P1 to WH1 $3
$0 P1 to WH2 $7
$3 P2 to WH1 $7
Cap = 200,000 P2 to WH 2 $4
$4

$5 D = 100,000
$5
P1 to WH1 $4
$4 $2 P1 to WH2$6
P2 to WH1 $8
$2 $1
P2 to WH 2$3
Cap = 60,000
$2
D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4

Market #1 is served by WH1, Markets 2 and 3 are served by WH2

 Traditional Approach #2:
Assign each market based on total landed cost

D = 50,000
P1 to WH1 $3
P1 to WH2 $7
$0 x 50,000
P2 to WH1 $7
$3 x 50,000
P2 to WH 2 $4
Cap = 200,000
D = 100,000
$5 x 90,000 P1 to WH1 $4
P1 to WH2 $6
$1 x 100,000 P2 to WH1 $8
$2 x 60,000 P2 to WH 2 $3
Cap = 60,000
$2 x 50,000
D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4
Total Cost = $920,000
The Optimization Model

❑ The problem described earlier can be framed as the following linear

programming problem.
❑ Let:
◼ x(p1,w1), x(p1,w2), x(p2,w1) and x(p2,w2) be the flows from the
plants to the warehouses.
◼ x(w1,c1), x(w1,c2), x(w1,c3) be the flows from the warehouse w1 to
customer zones c1, c2 and c3.
◼ x(w2,c1), x(w2,c2), x(w2,c3) be the flows from warehouse w2 to
customer zones c1, c2 and c3 22
The Optimization Model

❑ The problem we want to solve is:

Min 0x(p1,w1) + 5x(p1,w2) + 4x(p2,w1) + 2x(p2,w2) + 3x(w1,c1) +
4x(w1,c2) + 5x(w1,c3) + 2x(w2,c1) + 2x(w2,c3)
❑ Subject to the following constraints:
x(p2,w1) + x(p2,w2) = 60000
x(p1,w1) + x(p2,w1) = x(w1,c1) + x(w1,c2) + x(w1,c3)
x(p1,w2) + x(p2,w2) = x(w2,c1) + x(w2,c2) + x(w2,c3)
x(w1,c1) + x(w2,c1) = 50000
x(w1,c2) + x(w2,c2) = 100000 x(w1,c3) + x(w2,c3) = 50000
All flows greater than or equal to zero 23
The Optimal Strategy

Table 2 Distribution strategy

Facility Customer
Warehouse P1 P2 C1 C2 C3
W1 140,000 0 50,000 40,000 50,000
W2 0 60,000 0 60,000 0

The total cost for the optimal strategy is 740,000. 24

A Typical Location Model: Problem

A company needs to decide where to open a new manufacturing plant to

serve three cities (demand points). The goal is to minimize the total cost,
which includes fixed costs of setting up the plant and transportation costs
for shipping products to the cities. The demand in each city and the
transportation costs vary.

F1 C1

F2 C2

F3 C3 27

Modeling a mathematical model

A Typical Location Model: Problem
The company can open the plant in any of three possible locations: Location A,
Location B, or Location C.
Fixed cost of opening the plant in each Demand from the three cities:
location: City 1: 100 units
Location A: $300,000 City 2: 150 units
Location B: $250,000 City 3: 120 units
Location C: $280,000

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 Network structures

Single-echelon/single-tier Multi-echelon/multi-tier
• Does not involve any intermediary facilities • Have several layers of
between the suppliers and the source(s) of intermediate facilities
demand
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Question & Answer

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THANK YOU!
Dr. Le Thi Diem Chau
Email:
lechau@hcmut.edu.vn

You don’t know what you don’t know