Network Design and

Operations: Facility
Location
Module-3
• Warehouse Management Stores management-stores systems and
procedures-incoming materials controlstores accounting and stock
verification Obsolete, surplus and scrap-value analysis-material
handlingtransportation and traffic management -operational efficiency-
productivity-cost effectiveness-performance measurement.
• Supply Chain Network Distribution Network Design – Role - Factors
Influencing Options, Value Addition – Distribution Strategies - Models for
Facility Location and Capacity allocation. Distribution Center Location
Models.
 Introduction
Network design consists of decisions regarding the location of
plants, suppliers and distribution centres so as to serve
customers in a cost-effective way.

Among the several elements of supply chain decisions,

network design plays a crucial role and has significant
implications on supply chain performance.
 Network Operations Planning

• Decisions pertaining to operations planning are tactical in nature.

When taking a decision on operations planning, the firm not only has
to ensure establishing appropriate links between the various entities
in the chain, but also has to consider many other related issues.
A firm with a multi-plant network has to decide
• which suppliers should be linked to which plants
• which plants should be linked to which warehouses
• and which warehouses should be linked to which markets.
• The firm also has to decide the appropriate activity levels at
each plant—that is, how much to produce at each of the
plants.
• Let us take the example of a global firm like Dell Computers, which
manufactures its computer systems in seven locations around the
world:
• Austin, Texas; Nashville, Tennessee; Winston-Salem, North Carolina;
Eldorado do Sul, Brazil; Limerick, Ireland; Penang, Malaysia
and Xiamen, China.
• Computer markets are dynamic in nature; demand across the globe
keeps fluctuating. Hence, optimal service of the global market, using
its seven facilities, is a complex planning operations decision that Dell
has to make every quarter.
Relevant Costs for Network Decisions

• Three types of costs are important for network design and

operations-related decisions:

• Fixed facility costs,

• Variable production costs
• Transportation costs.
• Facility costs are fixed in nature and do not depend on the volume of
production and storage.
• So, for tactical decisions like network operations planning, fixed
facility costs will be incurred irrespective of the allocation decision
and hence are not relevant for decision making.
• If the supply chain production consists of multiple stages, then
production costs will include costs involved in conversion as well as in
transportation from a downstream stage to the upstream stage
Figure showing location of plants
and markets
 Supply Chain Distribution
Network Design
The role of distribution in supply chain
Distribution refers to the steps taken to move and store a product
from the supplier stage to a customer stage in the supply chain.

Distribution occurs between every pair of stages in the supply

chain. Raw materials and components are moved from suppliers
to manufacturers, whereas finished products are moved from the
manufacturer to the end consumer.
Supply chain distribution
network
The process of designing a distribution network has two broad
phases.
In the first phase, the broad structure of the supply chain
network is visualized. This phase decides the number of stages
in the supply chain and the role of each stage.
The second phase then takes the broad structure and converts
it into specific locations and their capability, capacity, and
demand allocation.
Factors influencing distribution
network design
• At the highest level, performance of a distribution network
should be evaluated along two dimensions:

1. Value provided to the customer

2. Cost of meeting customer needs
Value provided to the customer

Although customer value is affected by many factors, we focus on

measures that are influenced by the structure of the distribution
network:
Response time
Product variety
Product availability
Customer experience
Time to market
Order visibility
Returnability
• Response time is the amount of time it takes for a customer
to receive an order.
• Product variety is the number of different products or
configurations that are offered by the distribution network.
• Product availability is the probability of having a product in
stock when a customer order arrives.
• Customer experience includes the ease with which customers can
place and receive orders and the extent to which this experience is
customized. It also includes purely experiential aspects, such as the
possibility of getting a cup of coffee and the value that the sales
staff provides.
• Time to market is the time it takes to bring a new product to the
market.
• Order visibility is the ability of customers to track their orders from
placement to delivery.
• Returnability is the ease with which a customer can return
unsatisfactory merchandise and the ability of the network to
handle such returns.
Cost of meeting customer needs
• Inventories

• Transportation

• Facilities and handling

• Information
Relationship between Number
of facilities and Inventory
Relationship between number of
facilities and transportation
cost
Relationship between number of
facilities and facility cost
 Design options for distribution
Network
• Managers must make two key decisions when designing a distribution
network:

1. Will product be delivered to the customer location or picked up from

a prearranged site?

2. Will product flow through an intermediary (or intermediate

location)?
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup
 Manufacturer storage with Direct shipping

• In this option, product is shipped directly from the manufacturer to the end
customer, bypassing the retailer (who takes the order and initiates the
delivery request). This option is also referred to as drop-shipping. The
retailer carries no inventory. Information flows from the customer, via the
retailer, to the manufacturer, and product is shipped directly from the
manufacturer to customers, as shown in Figure.
Manufacturer storage with Direct shipping
Manufacturer storage with Direct
shipping and in-Transit Merge
• Unlike pure drop-shipping, under which each product in the order is
sent directly from its manufacturer to the end customer, in-transit
merge combines pieces of the order coming from different locations
so the customer gets a single delivery.
• Information and product flows for the in-transit merge network are
shown in Figure. In-transit merge has been used by Dell and can be
used by companies implementing drop-shipping.
• When a customer ordered a PC from Dell along with a Sony monitor
(during Dell’s direct selling period), the package carrier picked up the
PC from the Dell factory and the monitor from the Sony factory; it
then merged the two at a hub before making a single delivery to the
customer
Manufacturer storage with Direct shipping and in-Transit
Merge
Distributor storage with Carrier
Delivery
Under this option, inventory is held not by manufacturers at
the factories, but by distributors/retailers in intermediate
warehouses, and package carriers are used to transport
products from the intermediate location to the final customer.
Distributor storage with Carrier
Delivery
Comparison with manufacturing
storage
High level of inventory : - because of loss of aggregation

Low transportation cost : - an economic mode of

transportation (e.g. truck load) can be employed.

Higher facility cost : - because of loss of aggregation

 Distributor storage with last-Mile Delivery

• Last-mile delivery refers to the distributor/retailer delivering

the product to the customer’s home instead of using a
package carrier.
Distributor storage with last-
Mile Delivery
Comparison with Distributor storage with Carrier Delivery

Higher level of inventory :- because of lower aggregation

Higher transportation cost:- especially when delivering to

individuals

Higher facility cost

Manufacturer or Distributor storage with Customer pickup

In this approach, inventory is stored at the manufacturer or distributor

warehouse, but customers place their orders online or on the phone
and then travel to designated pickup points to collect their
merchandise.
Orders are shipped from the storage site to the pickup points as
needed.
Manufacturer or Distributor storage
with Customer pickup
• Inventory costs using this approach can be kept low, with either
manufacturer or distributor storage to exploit aggregation.
• Transportation cost is lower than for any solution using package
carriers because significant aggregation is possible when delivering
orders to a pickup site.
• Facility costs are high if new pickup sites have to be built. A solution
using existing sites can lower the additional facility costs.
Retail storage with Customer pickup

• In this option, often viewed as the most traditional type of

supply chain, inventory is stored locally at retail stores.
Customers walk into the retail store or place an order online
or by phone and pick it up at the retail store.
• Local storage increases inventory costs because of the lack of
aggregation
• Transportation cost is much lower than with other solutions
because inexpensive modes of transport can be used to
replenish product at the retail store.
• Facility costs are high because many local facilities are required.
• Good response times can be achieved with this system because
of local storage
 Warehouse Management

• Warehouses or stores play a vital role in the operations of a

company. It is in direct touch with the user department in its
day-to-day activities.
• The most important purpose served by the stores is to
provide uninterrupted service to a construction site. Further,
stores are often equated directly with money as money is
locked up in the stores.
Definition of warehouse
• The simplest definition of the warehouses or stores is that it
is the place where one keeps (or offloads) material for some
time before its use.
According to a more functional definition of stores, it is a place where following activities are
carefully undertaken:
• Receipt of goods
• Timely procurement of materials
• Accounting the transactions
• Minimizing obsolescence surplus & scrap by proper identification and using correct preservation
methods
• Ensuring good housekeeping by accurately and timely updating
• Issue of receipts, ensuring issues and other documentation and handling other issues pertaining to
storage and cleanliness
• In some cases, the procurement and optimization of inventory is also added to the functions of
stores.
For example, the store’s manager may be given the additional powers to procure urgently required
items.
 Objectives and Functions of
stores
(a) To receive raw materials, components, tools, equipment and other
items and account for them,
(b) To provide adequate and proper storage and preservation to the
various items,
(c) To meet the demands of the user departments by proper issues and
account for the consumption,
[d) To minimize obsolescence, surplus and scrap through proper
codification, preservation and handling,
 Objectives and Functions of
stores
(e) To highlight stock accumulation, discrepancies and abnormal
consumption and evolve effective control measures,
(f) To ensure good housekeeping so that material handling, material
preservation, stocking, receipt and issue can be done adequately, and
(g) To assist in verification and provide supporting information for
effective purchase action.
 STORES SYSTEMS AND PROCEDURES

• Broadly, the systems in stores can be studied under three areas

namely

• Receipt
• Issue
• Documentation.
• It may be seen that at every stage a great deal of information is
required for checking, controlling and feedback purposes.
• Well-designed stores systems and procedures ensure timely
information for decision making, particularly because stores is the
starting point of all activities for control.
 Management of Receipts

The inputs into stores or receipts can originate from internal as well as external sources. The
procedures start even before the material reaches the stores when a Purchase Order (PO) is
placed on the vendor. In certain organisations, the stores and purchase activities are
bifurcated, but care should be taken to ensure close coordination. The details should be
maintained in a chronological order to enable the ease of understanding. The scope of work
involves following functions:
(a) Requirement determination,
(b) Raising purchase requisition,
(c) Chasing purchase orders to expedite supplies,
(d) Scheduling arrival of materials,
(e) Receiving the materials physically and planning for storage,
(f) Quantity & quality inspection,
(g) Checking input documents like invoice, lorry receipt, delivery challans and other challans,
invoices
etc.,
Management of Receipts

• (h) Taking stock of material received and also of rejected material,

(i) Endorsing the suppliers bills and quantities and forwarding for
payment to accounts, Provisional goods inwards in case of later
inspection,
(k) Final goods inwards in case of final acceptance of goods,
(1) Informing indenting departments of arrival of goods,
(m) Sending paperwork to purchase accounts for payment,
(n) Updating insurance paperwork for latest goods arrival, and
Management of Receipts

(0) In case of demurrages, arrange for insurance company visit.

All this demands a clearly laid out procedure which all concerned are informed about. In
addition to
these functions, other functions are as follows:
(a) Regularize miscellaneous items like samples & cash purchases by raising receipt
notes,
(b) Complete record keeping formalities for returnable items and items received from
feeder shops for
later internal or external consumption,
(c) Keeping record of scrap received, and
(d) Keeping record of other bulk material supply items which may not be physically
received or stored
in the warehouse, like fuel oil etc.
 Issue Control

• Issue to consuming department

• Issues to outside suppliers for processing or conversion.

• The scope of this issue control involves the issue of the right
material, in the right quantity, to the right personnel, at the right
time and place on receiving the right authorization, maintaining the
records for the same.

Production Logistics Automotive - Contract Logistics _ SCM.mp4

• Based on consumption schedules/production programs, listing for
each material, quantity to be issued for each project for that material
is made and circulated to all concerned.

• This automatically controls consumption as the work order issued

details on the quantity of material to be issued by the stores and the
stores personnel are not authorized to issue beyond these quantities.
• The stores also keeps check on inventory and raises alarms or raises
purchase orders (as the case may be) from time to time.
• Proper weighing and counting equipment should be used for issuing
bulk materials. Thus, these instruments need to be calibrated
frequently. Provision should be made for emergency issue and
procedures should be clearly defined for all concerned to regularize
this.
 Stores Documentation

• All the documents received or generated in-house should be properly

categorized and a numbering system should be developed for proper
storage and quick retrieval. Besides the receipt and issue documents,
some other methods of documentation necessary are given.
(a) Bincard or kardex,
(b) Stores transfer voucher (from one stores to another),
(c) List of slow moving/fast moving/obsolete items,
(d) Scrap disposal,
(e) Rejection notes,
(f) Acceptance notes,
(g) Delivery notes,
(h) Travel requisitions,
(i) Tour and expense reports,
(j) Impress details,
(k) Indents,
(1) Codification methodology, and
(m) Material requirement planning.
STOCK VERIFICATION

• The stock verification is the determination or quantification of the material

in stock and checking its deviation from the figures shown in the books.
• The store’s manager holds the responsibility for all happenings in the
store. He must periodically verify all stocks to reconcile the books with the
physical presence of the material.
• The problems mount as the number of items or the number of
transactions increase. Stock verification also checks for pilferage and
shows the qualitative upkeep of the stores.
• The causes for discrepancy in stock can be due to the following
reasons:

(a) The scales or weighing machines etc. have not been properly
calibrated or are not of good quality
or being maintained improperly,
(b) Issues without indents or proper paperwork,
(c) Delays in updating paperwork,
(d) Untrained individuals handling paperwork,
(e) Pilferage,
(f) Obsolescence,
(g) Deterioration and damage due to natural causes like corrosion,
insect damage, rodent damage or seepage of rainwater etc., and
(h) Deterioration and damage due to unnatural causes like theft,
sabotage etc.
WASTE MANAGEMENT - DISPOSAL OF
SURPLUS,
OBSOLETE AND SCRAP
• Surplus: These are materials which have no immediate use or at least
in the foreseable future. They have accumulated due to faulty
planning, forecasting and purchasing.

• Sometimes, they may have accumulated since they are standardly

bought in quantities only and not in loose form where they would be
more expensive. In short, surplus stocks are the items which are in
excess of their requirement.
•
• Obsolete Stocks: They are those items which are not damaged and have
economic worth but are not suitable for the company's specific operations. For
example, the spare parts of machines that have been
phased out. Changes in product design, technological advancements,
rationalization, food and drugs whose effectiveness has lapsed over time, wrong
codification etc. are some of the reasons why
obsolescence occurs.
• The difference in obsolete and surplus lies in the potential for usage. Surplus
items are only in excess of what is required, obsolete items cannot be used at all.
• Scrap: This is another term which is used to describe material not
useful to the organisation (sometimes, used also for obsolete and
surplus items when these are not useful to the organisation). Scrap
can be defined as the residue from a construction or manufacturing
process which cannot be used economically within the organisation.
Typical scrap material in the construction industry are empty tins,
drums, and packing material etc.
•
Reasons for Obsolescence

• Following are some of the reasons of obsolescence:

(a) Development of better and more efficient or cost economic

technology,
(b) Advent of new Automation technologies and design changes,
(c) Standardization of items within the organization,
(d) Cannibalization of equipment to obtain spares for the other,
(e) Incorrect purchase practices like buying in bulk, and
(f) Faulty store keeping or inefficient material handling.
Control of Obsolescence

• Computerized maintenance of records can help largely in identifying potential

obsolete items. Market intelligence should be practiced as a norm. Using the
FSN analysis, the non-moving (N) items can be tracked.

• This method can also be combined with the XYZ analysis to identify obsolete
items.
X -items account for 70% of value but about 10% of stock items,
Y -items account for 20% of value but about 20% of stock items, and
Z - items account for 10% of value but about 70% of stock items.
Control of Obsolescence
• One way of controlling can be to introduce buyback clause or having
centralized purchase which can
better plan to keep a low spares level as it can divert these to other
sites.
Control of Scrap

(a) Proper storage and dumping places of scrap need to be identified. It is

usual in India to see that all construction sites or warehouses are littered
nearby with scrap.
(b) Assess the performance of staff by assessing the cleanliness of the place.
(c) Fix tolerance limits itself on the production of scrap. Explaining the
efficient use can control the use of cloth.
(d) Scrap should be segregated and sold as this fetches better value. They can
be separated as drums of cement, gunny bags, tin of paints etc.
(e) Reclamation should be used wherever possible by seeing the economics.
Scrap Disposal Methods

• Depending on the nature of scrap, various methods can be

prescribed. Before disposal action can
be initiated, the "paperwork" for the same has to be initiated as the
stock levels as well as its value change after this. Scrap disposal can be
done in the form given below:

(a) By inviting offers from time to time,

(b) By auction, and
(c) By annual contract.
Transportation: Backbone of
Logistics
Introduction to logistics
• Logistics undertakes the task of safe delivery of the product from one
point to another, and, thus, it is responsible for the security of the
product. Most logistics organization take insurance on the products
being transported.
• Logistics comprises material handling, warehousing, transportation
and packaging the goods and controlling the inventory. Logistics
involves dealing with both finished and unfinished products.
Definition of logistics
• According to Council of Logistics Management, “Logistics is the
process of planning, implementing, and controlling the efficient,
effective flow and storage of goods, services, and related information
from point of origin to point of consumption for the purpose of
conforming to customer requirements.” Note that this definition
includes inbound, outbound, internal, and external movements, and
return of materials for environmental purposes.
• Under logistics operations, transportation means delivering products
to customers on time, in the right quantity, in the good condition and
at the right price. It is the transportation system of a country that
forms the base and plays an important role in the progress of a
country’s economic, social and commercial growth. It has brought
together all the different countries of the world and has created an
organization in itself.
CONCEPT OF TRANSPORTATION

• The movement of people, goods and animals from one place to

another is the basic concept of transport or transportation. It helps in
enabling trade between people and organizations in order to develop
a nation.
Components of transportation

• Infrastructure: There are various fixed infrastructures which enhance

the different modes of transportation. These infrastructures include
roads and terminal facilities, bus stands, railways and railway stations,
airways and airports, waterways and seaports, pipelines and canals,
warehouses, land used for parking and maintenance, etc.
• Vehicles: There is a need for vehicles in order to move goods and
people. Infrastructures are fixed, but vehicles are tangible and moving
devices which carries both people and commodities from one place to
another. In most of the cases, vehicles are required to be driven by
individuals. However, in the modern context, we have self-driven
vehicles which are fully automated and are able to move goods from
one location to another.
• Operation: Transportation is operated by both public and private
individuals. In case of private transport, there are owners of vehicles,
who are solely responsible for the movement of goods from one place
to another, and who carry out all the related activities which forms a
part of transportation. In case of public transport, government is
involved in the operations of transportation. Since privatization yields
better service, most of the transportation operations are taken up by
the private sectors. This is leading to a high rate of competition
among industries.
• Policy: In order to maintain order and discipline in the transportation
system, there are several policies that have been instituted by the
government. This has been done keeping in view the rapidly
increasing rate of population in countries.
MODES OF TRANSPORTATION

• Road transport
• Pipeline transport
• Rail transport
• Air transport
• Sea transport
• Multimode transport
Road transport
• Amongst all other means of transport, road transport has gained
much importance and value because of the following advantages
which it provides:
Pipeline transport
• Samuel Van Syckel, in the year 1870, was the first person to develop
pipeline transport. Pipeline transport was first used to transport
petroleum from one place to another.
Rail transport
• The primary mode of transport which facilitates the movement of
people and goods from one place to another are railways. It forms an
important part in boosting the trade and commerce of a country and
has helped a lot in the industrialization of nations.
Air Transport
• Transportation by air is the biggest and the most expensive mode of
transport and hence, it is only used to move goods which are highly
perishable and values of which are very high.
• Air transport enables a country to achieve its economic development
and growth. It brings together economies of different countries and
helps in the integration of international trade and commerce.
Sea transport
• Transport by sea involves transporting goods and people through
water mode, such as ships, boats, barges and sailboats over water
bodies from one place to another.
There are ports built near seas and oceans in different cities where
goods from different places are loaded and unloaded at different
ports of different cities.
Multi mode transport
• As the name itself suggests, a multi-model transport involves
transport using more than one means. A combination of different
modes of transport is known as multimodel transport.
Factors influencing transport
• Terminal facilities
• Vehicles
• Fuel cost
• Government regulations
• Transit time
• Routes and sectional capacities
• Distribution pattern
• Nature of product
 Terminal facilities

• Terminal facilities means all of the required land, infrastructure

and equipment which are very important for operations in a
warehouse. They are all used for the accommodation of products as
storage places as well as for transport facilities of those products
 Vehicles

• One of the most important things to be kept in mind is the use of a

specific type of vehicle for the transport of goods. There are different
kinds of goods and commodities which are transferred from one place
to other which differ in size, volume, nature, etc. Considering all these
things in mind, different vehicles need to be used depending upon
specific product types.
 Fuel cost
• Fuel cost plays a very vital role in the transport industry. As and when
the price of fuel comes down, the transport price also goes down and
vice versa. This indirectly benefits customers as well
 Government regulations
• There is a direct impact of government regulations in the transport
industry. Government may levy specific hours of driving for
commercial operators. They may set certain rules and regulations
which directly affect the charges of freight while carrying goods from
one place to another.
 Transit time
• The distance between the storage place or the warehouse to that of
the customers or the suppliers determines the time in which goods
can reach to the ones who most need it. In general practice, this
transit time is not given any attention and this, at times, leads to
higher overall transportation costs.
Routes and sectional capacities
• There are various routes through which goods move in order to reach
their customers. The availability of these routes and their capacity to
carry the same amount of merchandise from the starting point to the
point of consumption is very important.
 Distribution pattern

• The pattern of distribution of different types of goods is another

important factor that influences transportation. Movement of goods
takes place at different stages of its production; from raw materials
supplied to the organization by the suppliers to delivery of finished
products to the actual customers. Some goods directly reach the
customers from the warehouse, while some are distributed to the
wholesalers, retailers and then to the final consumers. These different
patterns of distribution demand proper transportation facilities
and planning.
 Nature of product
• The most valuable aspect of the movement of goods is the
nature of products that are being moved from one place to another.
This aspect demands very sophisticated planning so as to deliver
goods as undamaged to the customers. The type of containers to be
used, the way product needs to be packed, the time in which the
product should reach the consumers, all should be kept in mind.
Some goods are perishable and some are non-perishable and they
should be transported accordingly.
DESIGN OPTIONS FOR A TRANSPORTATION NETWORK

• The design of a transportation network affects the performance of a

supply chain by establishing the infrastructure within which
operational transportation decisions regarding scheduling and
routing are made. A well-designed transportation network allows a
supply chain to achieve the desired degree of responsiveness at a low
cost. Three basic questions need to be considered when designing a
transportation network between two stages of a supply chain:
• 1. Should transportation be direct or through an intermediate site?
2. Should the intermediate site stock product or only serve as a cross-
docking location?
3. Should each delivery route supply a single destination or multiple
destinations (milk run,
discussed later)?
Direct Shipment Network to
Single Destination
Direct Shipping with Milk Runs

• A milk run is a route on which a truck either delivers product from a

single supplier to multiple retailers or goes from multiple suppliers to
a single buyer location.
All Shipments via Intermediate Distribution Center with
Storage
All Shipments via Intermediate Transit Point with Cross-
Docking

• Under this option, suppliers send their shipments to an intermediate

transit point (which could be a DC), where they are cross-docked and
sent to buyer locations without storing them.