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Journal of Business Logistics, 2012, 33(2): 118127 Council of Supply Chain Management Professionals

Optimization Modeling for Logistics: Options and Implementations

Michael R. Bartolacci1, Larry J. LeBlanc2, Yasanur Kayikci3, and Thomas A. Grossman4
1 2

Penn State University - Berks Owen Graduate School of Management, Vanderbilt University 3 University of Leoben 4 University of San Francisco

ogistics optimization has signicantly grown in popularity over the last few decades. Improvements in computing power, modeling software, and the willingness of companies to invest time in the modeling eort have allowed models that were once too unwieldy to solve to optimality to be solved quickly. This has led to a more wide-spread recognition by logistics managers of the potential advantages of using optimization. The scope of logistics optimization in companies and organizations has expanded to address strategic, tactical, operational, and collaborative decision making. Spreadsheets, an analytical tool familiar to managers, have played a crucial role in the expanded modeling eorts of companies. Although optimizations role in logistics has grown tremendously, there still are areas that remain to be explored that will allow it to achieve an even larger and more successful role in the management of companies. Additionally, there are some models that are still too large or too complex to currently solve to optimality, despite the advances in computing power and modeling solving software. Keywords: optimization; spreadsheets

INTRODUCTION The logistics function in a company or organization involves all levels of management and includes strategic, tactical, operational, and collaborative decisions. Companies are often faced with fundamental decision-making situations while rethinking and reconguring their logistics strategies and correspondingly streamlining the associated operational processes. In doing so, they must balance trade-os associated with the best possible strategy between the present value of the long-term savings and the immediate cost of switching tactics. More than 20 years ago Powers (1989) detailed how computer modeling and optimization were beginning to tackle the complex problems of business logistics. Since then, and especially in recent years, the use of optimization for logistics planning and management has grown tremendously. Approaches that relied solely on the expert knowledge of experienced employees have given way to much more sophisticated optimization approaches for organizing and carrying out logistics and supply chain functions. Supply chain and logistics functionality have become standard modules in large pervasive enterprise resource planning software systems as well as vertical market software targeted at a specic industry segment. The word logistics can take on a variety of meanings depending upon the industry segment, the level of the person using the term, and size of the organization involved. Historically, logistics focused on ows of goods to and from a company or organization. Outbound logistics traditionally dealt with the movement of goods from a manufacturer to its distribution partners, including internal distribution centers (DCs). Inbound logistics traditionally dealt with the purCorresponding author: Michael R. Bartolacci, Penn State University - Berks, 0111 Luerssen Building, Reading, PA 19610, USA; E-mail: mrb24@

chasing and transportation of raw materials and components to a factory or storage facility. The owner of a small neighborhood grocery store would dene logistics much dierently than the CEO of Wal-Mart. Even though both businesses might provide similar products to similar customers, the scale of the organization and the level of the persons view of the organization are necessary to how one denes this function. We use the broad denition of logistics management promulgated by the Council of Supply Chain Management Professionals (2012): Logistics management is the part of supply chain management that plans, implements, and controls the ecient, eective forward and reverse ow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers requirements. Companies are now able to integrate and collaborate in multiple networks with trading and cooperating partners such as customers, distributors, suppliers, transport services, and even competitors. When viewed together, these entities form a two-dimensional supply chain with a horizontal dimension for partnerships with potential competitors or similar organizations (e.g., substitutors, indirect competitors, noncompetitors, complementors, etc.) and a vertical dimension for traditional supply chain partners such as raw materials suppliers and distributors. This two-dimensional array of cooperating organizations broadly denes the scope of logistics. Logistics by its nature includes some of the activities or business processes traditionally labeled Supply Chain as well as select activities processes that are categorized by more recent terminology such as Collaborative Planning, Collaborative Transport and even Business Analytics. This broad denition brings to light a need to discuss the evolution of logistics optimization in further detail before delving into examples and applications of such. Logistics optimization has progressed as the power of computers, and more importantly, the sophistication of algo-

Optimization Modeling for Logistics


rithms has improved progressed during the past decades. In the context of logistics optimization, this means optimization algorithms coded in software can solve problems of evergreater complexity and scope. In fact, Bixby (2007) notes that the solution time for linear programs decreased by a factor of more than ve million from 1988 to 2004. Furthermore, improvements are occurring every day with respect to the ability of optimization algorithms and software to take advantage of ever more powerful computing platforms. To put Bixbys observation into perspective, an optimization that took two months to solve to optimality in 1988 could be in 2004 solved in about one second. As the ability to utilize more sophisticated algorithms and software for logistical problems grew, so did the scope and nature of the problems that could be optimized. Traditional logistics problems were limited in their scope, with examples being problems such as the classical traveling salesman problem for deliveries, the depot DC location problem, and the transshipment problem, all of them for a single company or organization. As hardware and software grew in their ability to optimize problems of increasing complexity and scope, greater breadth and depth grew into the formulations for logistical optimization. (Despite these advances, some limits on the ability to solve complex problems do still remain.) Entities such as suppliers and customers were included in model formulations as a result of the increased computing power and more advanced software. This links what were previously considered separate functions within a company or organization from an optimization point of view: inbound logistics (purchasing procurement raw materials inventory management) and outbound logistics (distribution shipping customer delivery and service). Logistical modeling in recent years has even tackled what traditionally was considered the softer side of supply chain management from years past. Notions such as collaboration, which obviously involves more than just the handshake agreements of decades ago, can be incorporated into optimization models today. Third party logistics providers have emerged as a more involved entity in supply chain management in recent years as well (Zacharia et al. 2011). As a result, such providers have had to be factored into the overall logistics optimization modeling eorts of companies and organizations such as those detailed by Cochran and Ramanujam (2006) for electronics manufacturing. Logistics optimization can be distinguished from traditional operations research (OR) through its emphasis on practical implementation as opposed to its proof of optimality. Much of the OR literature includes proofs of convergence to a globally optimal solution. While achieving optimality is the desired end result for any logistics optimization problem, the practicality of actual implementation takes precedence. This can be clearly seen by the fact that logistics optimization and its applications have been revealed in business and trade publications and not just academic literature outlets. Most notably, it was seen in the groundbreaking work of Davenport and Harris (2007), and more recently Sashihara (2011), Forbes (Carr 2011), and the specialist outlet OR MS Today (Greenland 2011, one of many examples in this outlet).

Optimization also provides a rich set of benets that reduce the burden on human decision makers. Decisions that are routine but complex in nature can be now be made quickly, even instantly, enabling faster responses by decision makers. These decisions can be made without human intervention, and if the system is suciently trusted, without human review. This can dramatically reduce the workload on logistics analysts and managers thus freeing them for higher level tasks. In addition, this decision automation also allows for a richer consideration of new opportunities. For example, when negotiating new cost structures, a manager equipped with an optimization model can quickly analyze dierent possible negotiated outcomes to understand how he will make dierent decisions and ultimately strive for an optimal response. The academic literature is replete with examples of logistics optimization examples. These are a few from the last two years: railway equipment distribution (Gorman et al. 2010), product portfolio management (Ward et al. 2010), pre-positioning emergency items (Duran et al. 2011), mari n et al. 2011), papermaking (Evertime schedules (Salmero ett et al. 2010), global fashion distribution (Caro et al. 2010), mine planning (Newman et al. 2010), service and parts network design (Sen et al. 2010), passenger railway capacity management (Gopalakrishnan and Rangaraj 2010), helicopter transportation (Menezes et al. 2010), vehicle routing (Bell and Gris 2010), spreadsheet modeling (Galbreth and LeBlanc 2010), strategic inventory (Shapiro and Wagner 2010), and order crossover (Srinivasan et al. 2011). These examples span small projects implemented by a single individual to massive global projects with teams of a dozen or more people and budgets in the millions of dollars. To gain a better understanding of how logistics optimization can be undertaken, we illustrate a transshipment optimization model with the following example used by Mendocino Forest Products (MFP). The data and number of sites are disguised for proprietary reasons. Logistics optimization example MFP manufactures specialty wood products for use in decks, patio covers, fences, garden trellises, etc. Its supply chain includes vendors shipping lumber to treating plants or DCs, which ship to customers. Prior to implementing this model, MFP had expanded its supply chain by acquiring competitors. MFPs shipping plan consists of two sets of interconnected inbound and outbound logistical decisions: How to source product (CWT shipped from each vendor to each DC), and how to get product to customers (CWT shipped from each DC to each customer). Figure 1 shows part of a spreadsheet containing the main logic of a model of MFPs transportation operations. The shipping plan is the numeric values entered into the two ranges of cells in the heavy solid borders. Each of these cells contains the decision regarding CWT that each of four vendors (A, B, C, and D) shall ship to each of eight DCs (numbered one through eight), and the CWT that each DC shall ship to 12 customers (shown as C1 through C12).


M. R. Bartolacci et al.

Figure 1: Supply chain with vendors shipping to DCs, which ship to customers.

A B 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33








Product Shipments (CWT) from Vendors to DCs DC 1 A Vendor B 16 C D 16 <= 15 <= 9 <= 12 <= 15 <= 13 <= 10 <= 17 <= 15 9 12 15 13 10 17
Total shipments into DC 8: =SUM(J5:J8)

Cost per CWT Shipped from Vendors to DCs DC

8 Vendor

1 A $ 2 B $ 1 C $ 8 D $ 1

$ 9 $ 10 $ 1 $ 2

$ $ $ $

5 1 7 5

$ $ $ $

3 2 1 8

$ 3 $ 1 $ 10 $ 4

$ $ $ $

4 9 1 7

$ 10 $ 1 $ 4 $ 9

$ 2 $ 4 $ 1 $ 10

16 18

12 15 13 16 17

DC Capacities

Dashed border ranges are equal by definition because of the TRANSPOSE worksheet function
Total shipments into DC1: Q20:Q27 =TRANSPOSE(C9:J9)

Product Shipments (CWT) from DCs to Customers Customer 1 2 3 DC 4 5 6 7 8 9 9 = 4 = 7 = 2 4 = 1 1 23 = 14 = 5 9 = 4 = 9 = 7 = 5 = 12 = 12 4 4 9 5 4 7 9 12 3 12 2 14 4

Total shipments out of DC1: =SUM(C20:N20)

Cost per CWT Shipped from DCs to Customers Customer C1 16 15 9 12 15 13 10 17 = = = = = = = = 16 15 9 15 13 10 17 DC 12 1 2 3 4 5 6 7 8 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12

C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12

$ $ $ $ $ $ $ $

6 7 5 4 6 3 8 1

$ 3 $ 2 $ 4 $ 3 $ 10 $ 9 $ 9 $ 9

$ $ $ $ $ $ $ $

4 1 2 9 8 9 9 1

$ 1 $ 10 $ 7 $ 6 $ 5 $ 9 $ 10 $ 4

$ 6 $ 10 $ 1 $ 1 $ 4 $ 6 $ 3 $ 2

$ 3 $ 10 $ 7 $ 7 $ 7 $ 7 $ 10 $ 9

$ 1 $ 10 $ 4 $ 6 $ 7 $ 3 $ 4 $ 2

$ 10 $ 5 $ 6 $ 1 $ 6 $ 8 $ 1 $ 2

$ 7 $ 4 $ 5 $ 3 $ 10 $ 4 $ 9 $ 8

$ $ $ $ $ $ $ $

1 3 2 7 3 6 6 4

$ 8 $ 6 $ 1 $ 8 $ 10 $ 8 $ 2 $ 10

$ 10 $ 8 $ 7 $ 4 $ 3 $ 8 $ 6 $ 10

Total shipments into C12: =SUM(N20:N27)

23 14

Customer Demands

Heavy border: Variable cells--management decisions Dashed border/bold/italics: Data cells--can't change

Miminize total shipping cost =SUMPRODUCT(U5:AB8,C5:J8) +SUMPRODUCT(U20:AF27,C20:N27)

MFP incurs shipping costs dependent on the specic shipping legs. The challenge for the analyst is to nd the lowest cost shipping plan. However, there are several restrictions that must be considered. Naturally, MFP wants to satisfy customer demands. However, MFP must not exceed the capacity at any of the DCs. Finally, inventory must not pile up at the DCs, so a shipping plan must have product ow into each DC to match product ow going out. For large models, this is a tricky challenge for the analyst. Cells C5:J8 with the heavy solid borders show the CWT to be shipped from each vendor to each DC, and cells C20:N27 with the heavy solid borders show the CWT to be shipped from each DC to each customer. Each CWT shipped from vendor A to DC 1 incurs a cost of $2 (000), shown in cell U5; cells U5:AB8 contain the costs per CWT for all vendorDC pairs. Likewise, each CWT from DC 1 to customer C1 incurs a cost of $6 (000), shown in cell U20; cells U20:AF27 contain the costs for all DC-customer pairs. The total cost for a shipping plan is computed in cell AE29. This is calculated as the sum of the products of the shipping costs per CWT and the actual CWT shipped. For a given shipping plan (the heavy solid border cells), the spreadsheet shows the total shipments into a DC in cells C9:J9 (column sums) and the DC capacities in cells C11:J11. The analyst wants to recommend a plan that keeps the shipments to each DC at or below capacity. The total shipments out of a DC are shown in cells O20:O27 (row sums); these must equal the total shipments into a DC which are shown in cells Q20:Q27. The total shipments to a customer are shown in cells C28:N28, and the customer demands are shown in cells C30:N30; the analyst very much wants the CWT shipped to be equal to customer demand.

Common characteristics of logistics optimization modeling Logistics optimization, under our broad denition, encompasses a variety of modeling and optimization techniques. Optimization models range from the transshipment problem described above to the recent much more comprehensive modeling of transport collaboration where competitors may share a distribution facility and even trucks for shipping goods to customers. What aspects do all logistics optimization models have in common? This is a question that should be addressed prior to any discussion of the spectrum of such models and their associated optimization approaches. The common characteristics of logistics problems include such notions as a reliance on forecasting precision for success, an emphasis on managing inventory (usually with a goal of reduction), and a matching of strategies and goals among partners. Such commonalities present both opportunities and potential pitfalls with respect to developing accurate models for optimization. One glaring example of this is the so-called bullwhip eect, where errors in forecasting at one level in a supply chain create ineciencies and even larger errors elsewhere as its eects cascade through the succeeding levels in other parts of the organization and its outside partners. One must be careful when developing and linking models for optimization purposes that such an eect is not dismissed, or even worse, aggravated by the modeling and optimization process. An example of an opportunity is the fact that partners in a supply chain usually have similar overall goals that can be modeled hierarchically, or at least similarly, to allow for some consistency in the overall modeling and optimization process. Logistics optimization presents an opportunity to achieve eciencies if carried out correctly;

Optimization Modeling for Logistics


and can be utilized for logistical decisions at various levels of an organization.

Strategic logistics models Strategic logistics planning decisions are critical in that they typically involve major capital investments and have a longterm impact on the company or organization. A typical strategic logistics problem is the determination of the optimal number of new plants or DCs and the corresponding location and size for each. Such strategic decisions set the stage for the tactical modeling of the internal design parameters for each site and corresponding equipment, transportation, and related resources necessary for their proper functioning. Biswas and Narahari (2004) develop an object-oriented modeling system to support decisions at the strategic, tactical, and operational levels. An aggregate level optimization was utilized for strategic and tactical decisions while simulation was utilized for lower level tactical decision making. An example of real world applications of such optimization is the approach used by consumer products giant P&G. P&G uses an Excelbased large-scale optimization model utilizing the add-in package Whats Best to solve supply chain problems such as plant location, plant size, and other similar decisions (Anthes 2005). Timpe and Kallrath (2000) present strategic logistical models based on a mixed integer linear programming approach for production, distribution, and sales planning with dierent time scales for business and production aspects. Dogan and Goetschalckx (1999) propose a mixed integer linear programming model for designing supply chain production and distribution planning. A multi-level model which included strategic supply chain design decisions is proposed by Goetschalckx et al. (2002). The outputs of the strategic sub-model act as the inputs of the operational sub-model, which incorporates demand uncertainty, of production and distribution, whose results once again, feedback the strategic sub-model in an iterative process. LeBlanc et al. (2004) analyze time-cost trade-os in transportation using linear programming. An integrated planning and coordination model for production and distribution facilities developed by Jayaraman and Pirkul (2001) is solved by Lagrangian relaxation techniques and heuristic solution processes. A combined model of network design and production and distribution planning proposed by Jang et al. (2002) are solved by Lagrangian relaxation techniques and genetic algorithms. LeBlanc and Galbreth (2007b) provide additional examples. Tactical logistics models Tactical logistics models are often implemented to allocate the manufacturing and distribution resources eectively over a shorter time horizon than strategic models. Typical tactical problems involve work-force size, inventory policy, modecarrier assignment, service negotiations, sourcing strategies, distribution channels, and similar decisions. Often such models may be combined with the strategic models for a company in a two level unied approach (Vidal and Goetschalckx 2001; Goetschalckx et al. 2002). Hybrid models, with the combination of linear programming and simulation, were proposed to optimize the total system capacity in multi-product, multi-echelon, and procurement-productiondistribution systems (Lee and Kim 2002; Lee et al. 2002).

REVIEW OF LOGISTICS OPTIMIZATION: STRATEGIC, TACTICAL, OPERATIONAL, AND COLLABORATIVE Logistics has become an integral part of the business operations of both manufacturing and service companies. Due to the inherent complexity of decision making in supply chains, there is an increasing need for the application of optimization modeling methodologies that can help identify and implement strategies by designing ecient supply chain networks. Therefore, the goal of logistics optimization is to allow managers to make complex judgments and accurate decisions regarding all facets of the logistics function in their company or organization. In addition, logistics optimization spans multiple technical elds and can be known by dierent monikers such as OR, applied articial intelligence, and business analytics (Sashihara 2011). Logistics optimization can, for example, enable shippers as well as transport carriers to nd an optimal solution while they are restructuring and reconguring their logistics strategies to provide high eciency (with respect to costs), high eectiveness (with respect to internal and external customer service), and high environmental sustainability (with respect to being green in their carbon footprint) throughout their entire supply chain (Sbihi and Eglese 2007; Langley et al. 2009). Considering the broad spectrum of the logistics context, there may be various classications to categorize the optimization modeling: deterministic, stochastic, hybrid, or IT-driven modeling (Min and Zhou 2002). Mathematical optimization techniques are used to determine how best to allocate supply chain resources, often on the basis of net present value. We will review logistics optimization under three model decision-making categories: strategic (long-term), tactical (medium-term), and operational (short-term and real-time), all derived from the time horizon of decisions that are made. All of these logistics models are associated with dicult problems where optimization can be utilized to gain eciency and realize genuine cost savings. We will also examine logistics optimization with respect to the emerging area of collaborative planning models (vertical, horizontal, and lateral). Commonly, a collaborative logistics chain is characterized and classied by its structure: vertical, horizontal, and lateral (Simatupang and Sridharan 2002). Companies integrate and collaborate in multiple logistics networks either with trading partners, such as shipper and carrier, in the same supply chain vertically (vertical collaboration), or form a partnership with potential competitors or other organizations, such as two shippers and a shared carrier, in the other supply chains horizontally (horizontal collaboration). There is also a combined form of collaboration known as lateral collaboration that connects the signicant business benets of both vertical and horizontal collaboration in a large logistics networks within dierent supply chains (such as between a number of dierent shippers and carriers).


M. R. Bartolacci et al.

Hybrid models of mixed integer programming and simulation were also used for planning transportation modes, which is another tactical decision process (Cordeau et al. 2006). Carlsson and Ro nnqvist (2005) propose integrated logistics optimization models and solution methods based on branch-and-bound for decision making in the forestry products industry, involving such problems as route planning and transportation mode selection. Eskigun et al. (2005) propose an optimization model based on a Lagrangian heuristic for tactical supply chain network decisions considering leadtimes, the location of distribution facilities, and the choice of transportation mode. Operational logistics models One example of operational logistics would be the planning of loading dock operations. Others would include such activities as the assignment of customer orders to trucks or transport vehicles, truck vehicle load planning, vehicle routing and scheduling, dispatching, and the expediting and processing of order deliveries. All represent the set of transport and logistics operational control problems (Stank and Goldsby 2000). Setting operational level logistics models apart from the previous two categories is the temporal nature of the decision making. More timely information is required to sustain ecient and eective operations with these types of optimization models. For example, if a vehicle is being loaded with multiple customer orders, its route should be optimized, especially if the route becomes a regularly scheduled and repeated tour (Ergun et al. 2007). Evers et al. (2000) propose a communication-oriented operational level logistics modeling framework titled AgileFrames. This framework contains three distinct operational control layers: the service layer, the conict-handling layer, and the execution layer. They present this modeling framework in conjunction with a mechanism for constructing an agile logistics function for a shipping container terminal port. Hung et al. (2006) propose an operational level dynamic supply chain modeling framework based on an object-oriented architecture in order to enable a exible specication of the supply chain conguration to be developed along with its corresponding operational decisions and policies. The framework is generated by linking generic nodes and specifying the physical and business attributes of each supply chain member. In addition to this optimization procedure, the eects of uncertainties in the supply chain are evaluated through Monte Carlo simulation. This framework was demonstrated via a case study involving a vertically integrated multinational pharmaceutical company. Collaborative planning logistics models Collaborative planning is a joint decision-making process for aligning the logistics functions of individual parties using separate supply chains with the aim of achieving overall coordination despite the presence of information asymmetry (Stadtler 2009). Collaborative planning enables individual parties (i.e., carriers, shippers, receivers, third party logistics, etc.) in a supply chain to optimize such aspects as travel time, load capacity usage, or asset utilization (Audy et al. 2010).

Collaboration in logistics can occur at a variety of levels and business functions among the dierent participating organizations. As an example, Liu et al. (2010) formulate a model for task selection and routing for a collaborative trucking service that chooses between its own eet vehicles and third party carriers to serve multiple customers and partners. The discussion of collaboration is intended to show that logistics optimization can go beyond what is traditionally considered optimization modeling. Rigorous methodologies and modeling can be applied to collaborative logistics to attain optimal solutions to unique and dicult problems. Collaborative Planning Forecasting and Replenishment, Ecient Consumer Response, Continuous Replenishment Process, Vendor Managed Inventory, and Collaborative Development Chain Management are the typical applications of vertical collaboration in outbound logistics that seek to optimize logistical objectives. Typical applications of horizontal collaboration optimization include Manufacturers Consolidation Centers, city hubs, spatial pooling, joint route planning, and purchasing groups. The concept of Collaborative Transportation Management (Tyan et al. 2003) and Factory Gate Pricing and Pallet Networks (Mason et al. 2007) are examples of the combined or hybrid collaborative optimization approach.

PRACTICAL LOGISTICS OPTIMIZATION IMPLEMENTATION OPTIONS FOR MANAGERS In order to use optimization modeling for logistics, managers must decide on the type of software to construct and optimize the model. There are two practical options: a spreadsheet such as Microsoft Excel, and algebra-based modeling software. This choice has important implications for how easily the supply chain optimization model can be shared, displayed, modied, and extended for repeated use. A spreadsheet is easy to use for what-if analysis that can be accomplished by simply changing data values in input cells, recalculating the model, and observing the new results in output cells. Optimization of a spreadsheet model is easily performed using the basic Solver tool that comes free with Excel, the basic Solvers sophisticated commercial extensions (Frontline Systems 2012), or the commercial product Whats Best! (Lindo Systems 2012a). This can lead to increased use and acceptance of spreadsheet optimization models due to the fact that most managers and analysts have experience with spreadsheets and are comfortable with their use. This ease of use can also be disadvantageous if it encourages careless programming practices (McConnell 1996) that lead to problems with errors in models or to poorly documented models that cant be transferred to and used by other managers or analysts. When a spreadsheet model becomes too large and complex, further development becomes very challenging and time consuming (Grossman et al. 2007). A model with 20 customers is easy to build and use, but the same model logic with 2,000 customers can be challenging to utilize. For example, if the scale of the spreadsheet model in Figure 1 were expanded to include dierent numbers of

Optimization Modeling for Logistics


vendors, DCs, or customers, then major changes would be required to the spreadsheet. These include the following: Rows corresponding to the new vendors would have to be inserted before row 9. Columns corresponding to the new DCs would have to be inserted before columns K and AC. Rows corresponding to the new DCs would have to be inserted before row 28. Columns corresponding to the new customers would have to be inserted before columns O and AG. Column-sum, row-sum, transpose, and SumProduct formulas would need to be added or updated. Data representing the demands at the new customers and shipping costs for the new vendor-DC and DC-customer legs would be needed. Spreadsheets perform even worse with respect to their hyper-scalability (Savage 1997) which essentially is the inclusion of a new echelon in the model. For example, Figure 1 models a supply chain of vendors shipping to DCs which ship to customers. If the model were expanded to include regional DCs that ship to local DCs for the eventual shipping to customers, major changes would be required. This process is time-consuming and requires careful spreadsheet programming to avoid the introduction of errors. Sharing an optimization model with others is important. Spreadsheets have the benecial feature that one can quickly comprehend the main idea contained in a well-built spreadsheet. However, this ease of sharing can obscure an important organizational risk. When a key analyst leaves, the manager needs to ensure that the model is transferred to a new analyst. This requires a complete and accurate understanding of all aspects of the spreadsheet. It is dicult to fully understand a complex spreadsheet written by someone else because one must read past the large number of cell formulas and formatting to discern the underlying structure of the model logic. This is particularly dicult with a spreadsheet that is written without careful attention to structured design and proper documentation. Spreadsheet enhancement using VBA (Visual Basic for Applications) Managers should be aware of the fact that Microsoft Excel has a programming feature called VBA that expands the size

and reusability of spreadsheet optimization models. This VBA feature is an object-oriented programming language that is built-in to Excel. VBA is used routinely by many spreadsheet power users and professional programmers, yet is an unknown feature to many experienced Excel users. The analyst can create a VBA program that contains the logic of the optimization model: regions, product lines, time periods, etc. At the push of a button, the VBA program will populate a blank spreadsheet with the cell formulas for an optimization model for that business situation. This allows easy reuse of optimization models, and the creation of optimization models that are too large to build manually in Excel. VBA can even be used to correctly ll out the Solver dialog box. A disadvantage is that developing a VBA program to create the formulas for implementing the optimization model is time consuming. It is warranted only for models that are run frequently with complex changes in the supply chain being modeled. LeBlanc and Galbreth (2007a) provide examples. Algebraic-based modeling software Supply chain professionals should be aware that although algebraic software is used less frequently than spreadsheets, it can have many practical advantages over them. The algebraic approach requires programming the model logic as a set of algebraic equations, as shown in Figure 2. For very large or complex models that will be used repeatedly, such as in a production IT environment, the algebraic approach has compelling benets that justify the eort and cost required. Obviously, special technical skills are required to use this software. The algebraic approach scales eortlessly. For example, changing from 20 customers to 200,000 requires merely replacing 20 with 200,000 in an input le. The algebraic approach has excellent hyper-scalability as it is straightforward in its ability to add echelons or otherwise change of scale to the model logic. Of course, there are disadvantages to the algebraic approach. Specialized personnel must be recruited, or outside consultants brought in, in order to properly use the algebraic approach. It is also more dicult to use than a spreadsheet for exploration. Only analysts, not managers or executives, have the skills necessary to perform whatif analyses or even explore the software to understand what is being executed. Billington and Davis (1992) of HewlettPackard state that One of the greatest obstacles to applying

Figure 2: A model represented in the OPL algebraic modeling software that is equivalent to the spreadsheet model in Figure 1.

sum (v in Vendors, d in DCs ) V2D_Cost [v, d] * V2D_Flow [v, d] + sum (d in DCs, c in Customers) D2C_Cost [d, c] * D2C_Flow [d, c]; /* All Vendor to DC leg costs /* All DC to Customer leg costs */ */

Subject to (
/* For all DCs called d forall (d in DCs /* For all DCs called d forall (d in DCs ) Sum of Flows from Vendors into DC sum (v in Vendors) V2D_Flow[v, d] Sum of Flows from Vendors into DC sum (v in Vendors) V2D_Flow[v, d] Cant Exceed <= Equals == DC Capacity DC_Caps[d]; */

Sum of flows from DC to customers */ Sum (c in Customers) D2C_Flow [d, c]; Customer Demand */ Cust_Demands[c];

/* For all Customers called c forall (c in Customers)

SUM of Flows from DCs into Customer Equals sum (d in DCs ) D2C_Flow[d, c] ==


M. R. Bartolacci et al.

highly analytical models, though, is the fact that they alienate senior managers unfamiliar with the intricacies of modeling technology (p. 587). And of course, algebraic modeling software is expensive relative to spreadsheet software. There are several established commercial algebraic modeling software products. These include AMPL (AMPL 2012), GAMS (GAMS 2012), LINGO (Lindo Systems 2012b), OPL (IBM 2012, which is used in Figure 2), and OPTMODEL (SAS Institute 2012).

LOGISTICS MODELING AND OPTIMIZATION: A TOOL FOR SUCCESS The practical aspects of logistics modeling and optimization involve many factors in order for success to be achieved. Probably the most important of these is the expertise and knowledge of the processes and entities to be modeled by the personnel (analysts, managers, etc.) carrying out the modeling eort. Goetschalckx et al. (2002) and Vidal and Goetschalckx (2001) detail modeling eorts that involve both a multinational companys strategic supply chain design and the tactical decisions involving distributions of products and transfer prices at and between the countries of operation level. This model involves an international company spanning multiple countries, each with their own exchange rates, which add further complexity to the overall problem. It is easy to see that great expertise is necessary in order to fully understand the nature of the two levels of logistical problems being modeled prior to any attempts at building such a model. It should also be obvious that the modeling of a given problem partially determines the approach taken for its optimization. Although a spreadsheet could be utilized to optimize a very complex multi-level problem such as the one they describe, it is more likely that an experienced analyst working in conjunction with managers from the involved entities in each country would utilize an algebraic modeling software approach instead. The widespread acceptance and use of heuristics in the eld of logistics is one of the characteristics that sets it apart from the world of pure OR theory. Decades ago, logistical theory was embodied in the rules of thumb and best practices created by experienced and knowledgeable employees and managers. Such practices traded-o theoretical optimality for practicality of implementation and decreased complexity. Such models, although not optimal and limited in scope, were necessitated due to the constraints on computing power and modeling software of the time. These practical considerations are less of an issue today because of sophisticated, user-friendly optimization software that runs on todays powerful personal computers. These advances have allowed executives, business analysts, managers, and even lower level employees to use optimization for solving various levels (strategic, tactical, operational, and collaborative) of logistical problems to optimality. In other words, you can very nearly have it all with respect to gaining optimality to very complex problems. The speed with which optimal solutions can now be obtained for most logistical problems allows for sensitivity analysis to be performed with respect to the possible ranges in model inputs, and the

sophistication of the modeling and solution software allows for very complex models to be more readily formulated and solved, thus bringing a higher level of quality and reliability to important decisions. For decades, Procter & Gamble mostly trusted its executives and brand managers gut instincts to make critical decisionswhen to launch a new product, say, or how much inventory to stock. Today, thanks to exponentially more powerful computer systems and a new generation of predictive software, a new army of quants at P&G is helping execs with every important decisionand getting it right almost every time (CBS News Moneywatch 2008). Optimization is opening new opportunities to advance theory in logistics. Due to the advances in hardware and software, it is now possible to examine logistics systems at a much ner level of granularity (equivalently, a much lower level of aggregation) than has been possible in the past. Logistics challenges that previously were so complex that they could only be modeled at the level of each of several countries can now be modeled at the level of very many regions within several countries. Analyses that could examine product diversity only at the level of a highly aggregated product line can now work at the level of product, or even individual SKU. Large areas of logistics that were once computationally intractable are now open for exploration using the power of optimization for creating important opportunities to advance theoretical and practical understanding. For example, systems that included modeling and optimization functionality could allow top managers to perform highly granular what-if analyses on their own, in real time, during the process of making strategic decisions. However, we repeat that some truly large models cannot be solved to provable optimality. Another example of logistics optimization that remains to be explored for companies is the integration of small, localized logistics models into a larger corporate-scale model. At present, separate, smaller scale models consider only local needs and necessarily exclude enterprise-level eciencies. In the past, it was infeasible to consider larger-scale optimization models. This raises several theoretical questions around linking local logistics optimization models as compared to replacing them with a richer enterprise-wide model. A third relatively unexplored area for the application of logistics optimization is the area of recovery from disruptions and disasters. This is the next step beyond business continuity planning, in that the goal is not merely to maintain a minimally functional business, but to build capability that can rapidly determine the best way to move available items with available transportation links after hurricanes, earthquakes, res, acts of terrorism, or other disruptive or catastrophic events. Optimization would necessarily play a major role in the in the most ecient recovery of the logistics function. In summation, advances in software, computing power, and data availability have reduced the barrier to harnessing the power of optimization to logistics challenges. Although the modeling process and the decisions to be made during model development grow ever more complex, the use of logistics optimization continues to grow and have favorable results for companies in a wide range of industries. There also exists great potential for its application in new areas within a company or organization in the near future.

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Optimization Modeling for Logistics


coeditor of the International Journal of InterdisciplinaryTelecommunications and Networking. Larry J. LeBlanc (PhD Northwestern University) is a Professor of Operations Management in the Owen Graduate School of Management at Vanderbilt University. His research interests include analyzing spreadsheet risk, teaching management science using spreadsheets, supply chain analysis, spreadsheet optimization models, implementation of algorithms for large-scale optimization models, and telecommunication network design/analysis. He has approximately 60 publications in referred journals and 60 presentations at universities and organizations overseas. Yasanur Kayikci (MSc Technology University of Graz (Austria); MA Istanbul University) is currently working as a senior lecturer at the University of Leoben in the Industrial Logistics Department in Austria. She was born in Istanbul,

Turkey, and majored in industrial engineering at Yildiz Technical University (Turkey). She has worked as project manager and business consultant at various automotive concerns and logistics companies. She is an author and coauthor of numerous publications, and a speaker at various conferences. Thomas A. Grossman (PhD Stanford University) is Associate Dean for Faculty & Research, and Professor of Analytics & Technology at the University of San Francisco. His research focuses on the eective utilization and management of analytics and spreadsheet models. His business experience includes revenue management, where he holds a U.S. patent, and serving as CEO of a 50-person volunteer search and rescue unit.

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