Designing the Logistics Network

Henry C. Co Technology and Operations Management, California Polytechnic and State University

Classification of Location Models

Time horizon.
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Single-period problems decisions made at the beginning of the planning horizon on the basis of the forecasted logistics requirements. Multi-period problems at the beginning of the planning horizon, decide a sequence of changes to be made at given time instants within the planning horizon. Single-type location problems a single type of facility (e.g. only RDCs) are located. Multi-type problems several kinds of facility (e.g. both CDCs and RDCs) are located. Single-commodity problems a single homogeneous flow of materials exists in the logistics system Multi-commodity problems there are several items, each with different characteristics; each commodity is associated with a specific flow pattern. In complex logistics systems there can be material flows among facilities of the same kind (e.g. component flows among plants). Facility locations depend not only on the spatial distribution of product demand but also on the mutual position of the facilities (location problems with interaction).

Facility typology.
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Material flows.
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Interaction among facilities.

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Ghiani, p. 74
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Dominant material flows.

l l

Single-echelon location problems either the material flow coming out or the material flow entering the facilities to be located is negligible. Multiple-echelon problems both inbound and outbound commodities are relevant (e.g., when DCs have to be located taking into account both the transportation cost from plants to DCs and the transportation cost from DCs to customers); Constraints aiming at balancing inbound and outbound flows have to be considered.

Ghiani, p. 75
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Classification of Location Problems

Demand divisibility.
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Divisible For administrative or book-keeping reasons, that each facility or customer may have to be supplied by a single center Indivisible Facility or customer may be served by two or more centers. Direct route Transportation cost = transportation rate x freight volume x distance; appropriate Consolidation (pdf) (Excel) Vehicle makes collections or deliveries to several points the routes followed by the vehicles should be taken explicitly into account when locating the facilities (location-routing models). See Figure 3.2:
A warehouse serves three sales districts located at the vertices of triangle ABC: 1. If each customer requires a full-load supply, then the optimal location of the DC is equal to the Steiner point O. 2. If a single vehicle can service all three points, then the DC may be located at any point of the triangle ABC perimeter.

Influence of transportation on location decisions.

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Ghiani, p. 75-76
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Retail location.
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Main issue is to optimally locate a set of retail outlets that compete with other stores for customers. Predicting the expected revenues of a new site is difficult since it depends on a number of factors such as location, sales area and level of competition. Retail location problems can be modeled as competitive location models, the analysis of which is also beyond the scope of this course.

Ghiani, p. 76
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The Transportation Problem

The Hot Mexican Restaurant problem is an example of a transportation problem by linear programming.
Students who have not taken TOM 315 will find this exercise very helpful. The Excel worksheet for the problem is available here.

Single-Echelon Single-Commodity Location Models

The Excel worksheet for the Koster Express example in Gianni, p. 81 can be found here.

Assumptions
Facilities to be located are homogeneous (e.g. they are all regional warehouses); Either the material flow coming out or the material flow entering such facilities is negligible (i.e., Single-echelon problems). All material flows are homogeneous and can therefore be considered as a single commodity; Transportation cost is linear or piecewise linear and concave; Facility operating cost is piecewise linear and concave (or, in particular, constant)
Ghiani, p. 77
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A Bipartite Complete Directed Graph

G(V1 V2, A), where the vertices in V1 stand for the potential facilities, the vertices in V2 represent the customers, and the arcs in A = V1V2 are associated with the material flows between the potential facilities and the demand points. Assume demand is divisible (each facility/customer may have to be supplied by a single center). Let:
l l l l l l

dj = the demand of customer j; j V2 Qi = the capacity of the potential facility i; i V1 Ui = a decision variable that accounts for operations in potential facility i; i V1 sij = a decision variable representing the amount of product sent from site i to demand point j; i V1, j V2 Cij (sij ) = the cost of transporting sij units of product from site i to customer j; i V1, j V2 Fi(ui ) = the cost for operating potential facility i at level ui; i V1.
Ghiani, p. 77
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Ghiani, p. 77
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Koster Express

Ghiani, p. 81
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Koster Express

Ghiani, p. 81-82
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Notation: i location of a hub; j location of a terminal. Good are transported from j to i. V1 represent the set of hub locations, and V2 represent the set of terminals; The binary variables yi , i V1, is equal to 1 if location i is a hub; otherwise yi = 0. The binary variables xij, i V1, j V2, is equal to 1 if the hub located in i serves terminal j , xij=0 otherwise; however, due to the particular structure of the problem constraints, variables xij cannot be fractional and greater than 1, therefore xij {0,1}, i V1, j V2 can be replaced with xij0, i V1, j V2.
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Koster Express

Ghiani, p. 82-83
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The table in row 17 through row 29 is cij = 20.74lij , where 0.74 is the transportation cost (in $/mile), and lij is the distance (in miles) between the terminals
(see Tables 3.1 and 3.2).

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This is a difficult problem for Solver to solve. The Solver Parameters menu above assumes that Altus, Ardmore, and Bartlesville are not hubs. Problems like this (p-median) are generally not solved this way.
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Linear transportation costs and concave piecewise linear facility operating costs
The Excel worksheet for the Logconsult example in Gianni, p. 93-94 can be found here.

Ghiani, p. 93-94
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This graph shows a linear cost curve.

These two graphs show a piece-wise linear cost curve. Figure 3.8 shows the two graphs together. Designing the Logistics Network (Henry C. Co) 19

Intercept = 54,400

Facility fixed costs include rent, amortization of the machinery, insurance of premises and machinery, and staff wages. They add up to $80,000 per year. In Equation (3.31), the intercept of the regression equation of the variable cost is added to the $80,000.

Intercept = 2,252

Intersect At 3,500

(80,000+ 54,400) + $4.1/hundred kgs (80,000+ 2,252) + $18.5/hundred kgs

Ghiani, p. 92,96
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D56=SUMPRODUCT(B27:E32,B37:E42)+SUMPRODUCT(F37:F42,G37:G42)

B44:E44 >= 1

F48:F53 <= H48:H53

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Two-Echelon Multicommodity Location Models

Pool Distribution/Consolidation Warehouse Excel Worksheet

Homework
Cosmos Bottling Co. Case PowerPoint Presentation Excel Worksheet Merlion Golf Supplies Case Excel Worksheet

Homework
Logistics Under Wraps Case Excel file: Sales Excel file: Distributor Zones