Big data supply chain

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EME 6753: Engineering Supply Chain Management

CHAPTER 15: LOGISTICS,

DISTRIBUTION, AND

TRANSPORTATION

LO15-1: Explain what logistics is.

LO15-2: Contrast logistics and warehouse design alternatives.

LO15-3: Analyze logistics-driven location decisions.

FedEx – Speed is Hidden in its

Logo • Started in 1971, known

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• Serves 130 countries/territories

• See the arrow between the E and X, stands for speed

and accuracy

• Vision: Information about the package is as important as

the delivery of the package itself

• Strive to deliver at the exact time as the estimated delivery

time given by the tracking system

for speedy delivery

• Owns 50 aircrafts

• 3696 vehicles

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Logistics

• Logistics: the art and science of obtaining, producing,

and distributing material and product in the proper place

and in the proper quantities • Accounts for eight to nine percent of US GDP

• International logistics: managing these functions when

the movement is on a global scale

• Third-party logistics company: an outside company

used to manage all or part of another company’s logistics

functions

Transportation Modes

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• Truck: great flexibility

• Ship: high capacity and low cost but slow

• Plane: fast but expensive

• Train: low cost but slow and variable

• Pipeline: highly specialized and limited to liquids, gases,

and solids in slurry form • No packaging is needed and the costs per mile are low

• Hand delivery: last step in many supply chains

• Multimodial solutions are the norm

Logistics-System Design Matrix:

Framework

Describing Logistics Processes

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Exhibit 15.1

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Cross-Docking

• Cross-docking: large shipments are broken down into

small shipments for local delivery in an area • Minimizes inventory in the warehouse

• Hub-and-spoke systems: the sole purpose of the

warehouse (the hub) is sorting goods to consolidation

areas, where each area is designed for shipment to a

specific location • Hubs are located near the geographic center of the region they are to

serve to minimize the distance a good must travel

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Issues in Facility Location

• Proximity to customers: makes rapid delivery easier

• Business climate: can include presence of similar-sized

businesses, businesses in the same industry, and other

foreign companies

• Total costs: object is to minimize overall cost

• Infrastructure: adequate road, rail, air, and sea

transportation along with energy and telecommunications

• Quality of labor: educational and skill levels must match

needs

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Issues in Facility Location Continued

• Suppliers: proximity of important suppliers supports lean

production

• Other facilities: location of other facilities can influence a

location decision

• Free trade zones: a closed facility into which foreign

goods can be brought without being subject to the normal

customs requirements

• Political risk: risks in both the country of location and the

host country influence the decision

• Government barriers: barriers in many countries are

being removed

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Issues in Facility Location Concluded

• Trading blocs: firms locate within a bloc to take

advantage of new markets or lower total cost

• Environmental regulation: these impact a certain

industry in a given location and must be included in the

decision

• Host community: host community’s interest is part of the

evaluation process

• Competitive advantage: the location should provide the

company with a competitive advantage

Boeing Adds South Carolina to Its

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Dreamliner Assembly Location • Boeing assembled all commercial planes in Seattle until

the Dreamliner 787 came along

• First Dreamliner came out of SC plant on April 27, 2012

• By the end of 2013, 3.5 planes per month are expected

• Boeing chose SC over the vigorous objection of its union

• The union finally relented, and signed a contract, when

the firm agreed to add an advanced version to the

Dreamliner line-up in Seattle

Plant Location Methods

1. Factor-rating system

2. Transportation method of linear programming

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3. Centroid method

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Factor-Rating System

• Is the most widely used

• List of factors is developed

• Range of possible points is assigned to each factor

• Each site is rated against each factor

• The sums of assigned points for each site are computed

• The site with the most points is selected

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Transportation Method of Linear

Programming

• Transportation method is a special linear programming

method

• Two common objectives… 1. Minimize costs of shipping n units to m destinations

2. Maximize profit of shipping n units to m destinations

Example 15.1

• U.S. Pharmaceutical Company has four factories

supplying the warehouses of four major customers

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• Its management wants to determine the minimum-cost

shipping schedule for its monthly output to these

customers

• Factory supply, warehouse demands, and shipping costs

per case for these drugs are given in the table in the next

slide

15-16 Example: U.S. Pharmaceutical

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Company Exhibit 15.2

Example: Excel Screen Showing the U.

S.

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Pharmaceutical Problem

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Exhibit 15.3

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Example: Solver Parameters

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Centroid Method

• Used for locating single facilities

• Considers existing facilities, the distances between them,

and the volumes of goods to be shipped between them • Assumes inbound and outbound transportation costs are equal

• Does not include special shipping costs for less than a full load

• This methodology involves formulas used to compute the

coordinates of the two-dimensional point that meets the

distance and volume criteria stated above

Centroid Method Formulas

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Cx = ∑dixV iVi

∑

Cy = ∑∑diyV iVi

Cx = X coordinate of centroid

Cy = X coordinate of centroid dix =

X coordinate of the ith location diy =

Y coordinate of the ith location

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Vi = volume of goods moved to or from i th location

Example 15.2: HiOctane Refining

Company • The HiOctane Refining Company needs to locate an

intermediate holding facility between its refining plant in

Long Beach and its major distributors

• Next slide shows the coordinate map and the amount of

gasoline shipped to or from the plant and distributors

• In this example, for the Long Beach location (the first

location), dix = 325, diy = 75, and Vi = 1,500

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Example 15.2: Grid Map for Centroid

Example

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Exhibit 15.4

Example 15.2: Calculations

Cx= X coordinate of centroid Cy= Y

coordinate of centroid dix= X coordinate of

the ith location diy= Y coordinate of the ith

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location Vi= volume of goods moved to or

from the ith location

Example 15.2: Grid Map for Centroid

Example with Centroid

Start search for

new location

here

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Exhibit 15.4 (Partial)

Locating Service Facilities

• New service facilities are far more common than new

factories and warehouses • Much less expensive

• Multiple sites close to customers

• Location decision closely tied to the market selection

decision

• Decision more about maximizing profits than minimizing

costs

Example 15.3: Linear Regression as a

Model for Service Location • Develop a model for locating a hotel

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• The goal is to locate so as to maximize long-term

profitability

• What category of variables and individual items in the

category are important? • Competitive

• Room rate

• Competitor’s rate, etc.

• Demand generators

• Nearness to military base, hospitals

• Nearness to college

• Nearness to malls, etc.

Example 15.3: Independent Variables

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Collected for the Initial Model-Building

Stage

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Exhibit 15.5

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Example 15.3: Choosing Variables That

Matter • Look at the correlation of profitability (operating margin

over the last few years) with all the potential parameters

• Pick the ones that are highly correlated (in a positive or

negative fashion)

• Run a regression line with the chosen parameters as the

independent variables and profitability as the dependent

variable

• Profitability = 39.05 − 5.41 × State pop. per inn (1,000)

+ 5.86 × Room rate for the inn

− 3.91 × Square root income of area (1,000)

+ 1.75 × College enrollment within 4 miles

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Example 15.3: How the Result Is Used

• The hotel chain implemented the model on a spreadsheet

and routinely uses the spreadsheet to screen potential

real estate acquisitions

• The founder and president of the hotel chain has accepted

the model’s validity and no longer feels obligated to

personally select the sites

• This example shows that a specific model can be obtained

from the requirements of service organizations and used

to identify the most important features in site selection

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Summary • Logistics covers the entire scope of obtaining, producing, and

distributing material and product to the proper place and in the correct quantities

• The focus is on the movement of material and the location of warehouses and manufacturing plants

• Third-party logistics companies provide services to many companies

• Decisions related to how material will be transported and where plants and warehouses are located have an impact on the cost of the product

• Transportation alternatives include water, rail, highways, air, pipelines, and hand delivery

• Finding the optimal logistics-system design is a complex task

• The factor-rating system is an analytical tool that allows consideration of many different types of criteria

• Locating service type businesses is often very dependent on

how close the contact needs to be to customers

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