Presentation - MIT Center for Transportation and Logistics

Analysis of an International Distribution Hub for Fast Moving Consumer Goods
Conducted by:
Sebastian Ortiz Duran
&
Rich Hawks
Advised by:
Dr. Stephen Graves
Agenda
• Review of Consumer Co.’s Current Import Supply Chain
• Proposed Solutions
• Mixed Integer Programming Model of Current Supply Chain with Hub Capability
• Solution Analysis
• Sensitivity Analysis
2
Key Insights
• Hub capability in an international supply chain may provide higher flexibility and lower cost.
• Logistics infrastructure and economies of scale impact international transportation costs more than total distance travelled. • Postponing final allocation to regional distribution centers until containers reach a hub enables the use of more accurate forecasts. 3
Review of Current Supply Chain
• 11 Countries each with one Regional Distribution Center (RDC’s) • Each imports from 3 Production Countries
– Argentina
– Brazil
– Mexico
• Average Lead Time 35 days
Standard Deviation 16 days
4
Current Network Design
Node j
Guatemala
Node i
Argentina
El Salvador
Honduras
Nicaragua
Costa Rica
Brazil
Panama
Colombia
Venezuela
Mexico
Ecuador
Peru
Bolivia
5
Company Proposed Network Design
Node j
Guatemala
El Salvador
Node i
Honduras
Argentina
Nicaragua
Node z
Brazil
Mexico
Costa Rica
Panama
Panama
Colon
Free Trade Zone Hub
Colombia
Venezuela
Ecuador
Peru
Bolivia
6
Postponement Benefits
Mean Absolute Percentage Error (MAPE) decreases as the days between shipment and actual sales decrease
Postponing final allocation to regional DCs until containers reach a hub enables the use of more accurate forecasts
Example
44% MAPE
66 days
Argentina
33% MAPE
35 days
Argentina
Costa Rica
4 days
Panama
Hub
Costa Rica
7
Alternative Proposed Network Design
Node j
Guatemala
El Salvador
Node i
Honduras
Argentina
Nicaragua
Node z
Brazil
Mexico
Costa Rica
Panama
Panama
Colon
Free Trade Zone Hub
Colombia
Venezuela
Ecuador
Peru
Bolivia
8
Alternative Proposed Network Design
Node j
Guatemala
El Salvador
Node i
Honduras
Argentina
Nicaragua
Node z
Brazil
Panama
Colombia
Free Trade Zone Hub
Mexico
Costa Rica
Colombia
Venezuela
Ecuador
Peru
Bolivia
9
Expected Hub Results
Advantages
1. Reduced Inventory
2. Reduced Order Variability from Risk Pooling
3. Increased Container Utilization
4. Increased Flexibility
Disadvantages
1. Increased Transportation Distance and Costs
2. Increased Handling Costs
3. Increased Overhead Costs
4. Increased Risk of Theft/Damage
10
Mixed Integer Model Setup
Objective Function: Minimize Total Relevant Costs
Total Relevant Costs = Transportation + Holding + Hub Handling
Transportation Costs = Direct + Hub Inbound + Hub Outbound
Holding Costs = Pipeline + Cycle + Safety Stock
Binary Decision Variables H ij Hub Flow M
1 when node i ships to node j through node z (hub)
0 when node i ships to node j directly
Hub Safety Stock 1 when hub holds safety stock
0 when hub holds no safety stock (Cross Dock)
Constraint: Maintain Current Fill Rates at RDC’s
11
Transportation Costs
Transportation Costs = Annual Shipments x Cost per Shipment
Variable
Description
D
Annual demand in pallets from node i at node j
L
Pallet Capacity per Container
U
Container Utilization
R
Cost per Shipment from node to node, includes inland freight, FOB expenses, ocean freight, duties on shipping
Direct
3
∑
i =1
⎛ (1 − H ij ) * Dij
⎞
⎜
* Rij ⎟
∑
⎜
⎟
Li * U ij
j =1 ⎝
⎠
11
Hub Inbound
⎛ 11
⎞
(
H
*
D
)
⎜
⎟
∑
ij
ij
3
⎜ j =1
⎟
*
R
∑
iz ⎟
⎜ L *U
i =1
i
iz
⎜⎜
⎟⎟
⎝
⎠
Hub Outbound
⎞
⎛ 3
(
H
*
D
)
⎟
⎜
∑
ij
ij
11
⎜ i=1
* Rzj ⎟
∑
⎟
⎜ Lzj *U zj
j =1
⎟
⎜
⎠
⎝
12
Pipeline Holding Costs
Pipeline Holding Cost = Lead Time x Landed Cost x Carrying Charge
Variable
Description
W
Lead Time from node to node
B
Landed Cost per Pallet (Transfer Price + Shipping Cost)
C
Carrying Charge
at Hub
⎛
⎛ Dij ⎞ ⎞
⎜
⎟⎟ ⎟]
C z * ∑ [ Biz *Wiz * ∑ ⎜ H ij * ⎜⎜
⎟
i =1
j =1 ⎝
⎝ 365 ⎠ ⎠
3
at RDC from Hub
11
at RDC Direct
3
⎛
Dij ⎞ ⎞ ⎛ 3 ⎛
Dij ⎞ ⎞
⎛
⎜
⎟
⎜
⎟⎟ ⎟]
⎟⎟ + ∑ ⎜⎜ Bij *Wij * (1 − H ij ) *
C j * [⎜ Bzj *Wzj * ∑ ⎜⎜ H ij *
∑
⎜
⎟
365 ⎠ ⎠ ⎝ i =1 ⎝
365 ⎠ ⎟⎠
j =1
i =1 ⎝
⎝
11
13
Cycle Holding Costs
Cycle Holding Costs = (Order Quantity / 2) x Landed Cost x Carrying Charge
Variable Description
Q
Order Quantity (dependant on demand volume)
B
Landed Cost per Pallet
C
Carrying Charge
at Hub
Qiz ⎞
⎛
C z * ∑ ⎜ Biz *
⎟
2 ⎠
i =1 ⎝
3
at RDC from Hub
Qzj
⎛
C j *[⎜⎜ Bzj *
∑
2
j =1
⎝
11
at RDC Direct
⎞ 3 Bij * Qij
⎟⎟ + ∑
]
2
⎠ i =1
14
Safety Stock Holding Costs
Safety Stock Holding Cost = Std Dev of Forecast Errors x k factor x Landed Cost x Carrying Charge
Variable
Description
C
Carrying Charge
B
Landed Cost per Pallet
σ
Standard Deviation of Forecast Errors over a Variable Lead Time
k
# of Standard Deviations worth of Safety Stock required to at Hub
provide a given Fill Rate
3
at Hub
C z * ∑ (Biz * kiz * σ iz )
i =1
at RDC from Hub
11
∑C
j =1
j
at RDC Direct
* [Bzj * k zj *σ zj+∑ (Bij * kij *σ ij )]
3
i =1
15
Safety Stock Considerations
σ at RDC’s when M = 0 (Cross Dock) ‐ Lack of protection at hub requires RDCs’ include Standard Deviation of Forecast Errors over a Variable Lead Time to the Hub (Eppen, 1981)
‐ Due to risk pooling and postponement benefits, only a fraction α of this variability must be accounted for, where α is approximately 1/(# countries served)
LT2
Production Country
Destination 1
Destination 2
LT1
Destination 3
Hub
Destination 4
k when Q is small relative to σ
‐ Backorders are double counted and safety stock is inflated unnecessarily
σ
≥2
‐ When , correct k is that which satisfies the following equation (Silver, 1970):
Q
G (k ) − G (k +
Q
σ
)=
Q
σ
* (1 − E )
16
Model Example Solution
Solution Analysis
$30 • Flowing all channels through hub in either Panama or Colombia increased total supply chain costs $25 Supplt Chain Cost (millions)
• Hybrid Panama achieved >4% total supply chain savings
$20 Hub Handling
$15 $10 Holding
$5 Shipping
$‐
Baseline
Hybrid Panama
Total Hub Panama
Total Hub Colombia
18
Transportation Cost Analysis
• Panama’s infra‐
structure efficiency reduces transportation cost per mile
$24,000,000 Bubble Size= Cost per Mile
$2.5
$22,000,000 Transportation Cost
• Each of scenarios tested increased distance travelled over current supply chain
$20,000,000 Baseline
$18,000,000 Hybrid Panama
$1.7
$16,000,000 $14,000,000 $1.9
Total Hub Panama
Total Hub Colombia
$1.6
$12,000,000 7,000,000 8,000,000 9,000,000 10,000,000 Miles Travelled
19
Sensitivity Analysis – Key Variable Impact on Savings
100%
80%
Change in Total Cost Savings
60%
Avg. Yearly Demand
40%
Fill Rate
20%
Avg. Lead Time
Hub Handling Cost
0%
‐20%
‐10%
0%
10%
20%
Cost per Mile
‐20%
‐40%
‐60%
Change in Variable Value from Baseline
20
Conclusions
• Direct shipping not always more economic
• Hub allows postponement of allocating decision to distribute product with a better forecast
• Hybrid Solution provides reduced overall cost
• Potential for greater savings in reduced overstock and write‐offs
• Hub capability provides supply chain flexibility to quickly adapt to changes in the environment
21
Thank you!
Questions?
22