QSO-630-Q2870: Supply Chain Management

2-3 Assignments: Solution to Specified Problems

Answer to Question 1
It is important for a firm to periodically review its logistics network design because the
factors (including demand patterns, product mix, production processes, sourcing strategies,
various costs in the logistics network, regulations, contracts, etc.) that affect the performance of
the logistics network changes over time. The effects of these dynamics need to be evaluated
periodically in order to determine whether the existing configuration is still satisfactory given
the new operating environment.
The requirements for a firm logistic network may change over time due to mergers and
acquisitions that may mandate integration of different logistic network or service level
requirements may change due to increased demand which may require the firm to redesign its
logistic network, add more suppliers and build new warehouses and distribution centers that
are closer to the end customers.

Answer to Question 2
The design of the logistics network is a strategic decision that has long lasting effects
and impacts all functions within the company because it involves determining the appropriate
number of facilities, location of each facility, the size of each facility, allocating space for
products, determining sourcing requirements and distribution strategies. So for it to be
successful many levels of the organization must be involved, including

QSO-630-Q2870: Supply Chain Management

2-3 Assignments: Solution to Specified Problems
1. Upper Management: Since the new design must align with the vision and strategic goals of the
company and since the project may be costly, so management buy-in is essential to ensure that
sufficient resources are devoted to the project.
2. Sales and Marketing: Since demand forecasts and anticipated changes in product design and
offerings affect the network, hence the need to involve sales and marketing teams.
3. Manufacturing and Operations: Since the logistics network design has an apparent impact on
day-to-day operation of the firm. It is essential that the people involved with operating the
system on a daily basis are involved in its design for the implementation to succeed.

Answer to Question 3
Since the decision to build a single warehouse has been made upfront, then the focus
will be on the location and capacity of the warehouse and determine how much space need to
be allocated for each product in the warehouse. The steps for the analysis are

1. Data Collection
Locations of customers, retailers, existing warehouses (5 warehouses located in
Atlanta, Boston, Chicago, Dallas and Los Angeles), manufacturing facilities (a

single manufacturing facility in San Jose), and suppliers.

Current candidate sites are Atlanta, Boston, Chicago, Dallas, and Los Angeles

Candidate locations for the new warehouse.

Products information (sizes, shapes and volumes)
Annual demand (past actuals and future estimates) and service level

requirements of the retail stores.

Transportation rates by mode.

QSO-630-Q2870: Supply Chain Management

2-3 Assignments: Solution to Specified Problems

Transportation distances from candidate warehouse locations to retail stores.
Warehousing costs, including labor, inventory carrying charges, and fixed

operating costs.
Shipment sizes and frequencies for customer delivery.
Fixed ordering costs, order frequencies and sizes by product or product family.

2. Data aggregation. Demand needs to be aggregated based on distribution patterns and/or

product types. Replace aggregated demand data points by a single customer.
3. Mathematical model building.
4. Model validation based on existing network structure.
5. Select a few low cost alternatives based on the mathematical model, and make final decision
by incorporating qualitative factors that were disregarded in the mathematical model, e.g.,
specific regulations, environmental factors, etc., and optionally, build a detailed simulation
model to evaluate these low cost candidate solutions.
6. Then decide where to locate the centralized warehouse.

The advantage with the centralized warehouse would an increase service level due to
less stock-out. Also, the fixed costs associated with warehousing will typically decrease, and
inbound transportation costs from the manufacturing facility to the warehouse should be less
than the sum of the previous inbound transportation costs. The disadvantage of the newly
suggested distributive strategy relative to the existing one would be increased outbound
transportation costs from the central warehouse to the retailers.

Answer to Question 4

QSO-630-Q2870: Supply Chain Management

2-3 Assignments: Solution to Specified Problems
a. In automobile manufacturing, cars are usually delivered over land, and demand is concentrated
around major cities. Therefore, the warehouses would be located near large cities with easy
access to freeways and railroads to help reduce the delivery lead time to dealerships in the
cities.
b. In the pharmaceutical industry, overnight delivery is common. Therefore, proximity to a major
airport is a major factor to consider when choosing a warehouse location. Additionally, for raw
material warehouses it is important that these are close to natural resources.
c. In the book industry, supplier warehouse locations would be affected by the availability of
nearby natural resources.
d. In the aircraft manufacturing industry, sub-assemblies and parts are delivered by thousands of
suppliers scattered all over the globe to the manufacturing facilities. Therefore, for these
supplier warehouses, by far the most significant consideration is the ability to ship

parts easily and on-time, i.e., the proximity to railroads, freeways, harbors, etc. In such a
capital intensive industry, regulations such as tax breaks have an impact on potential
warehouse locations.
e. With a large customer base shopping for books on-line, short delivery lead times are crucial.
Therefore, in book distribution, large centralized warehouses on reasonably priced land and
where quick transportation modes are available should expected
f. Furniture manufacturing and distribution depends heavily on manual labor. Therefore,
warehouses in this industry should be located close to cities with sufficient labor supply.

QSO-630-Q2870: Supply Chain Management

2-3 Assignments: Solution to Specified Problems
g. In PC manufacturing, the strategy would be to outsource from all around the world where labor
is cheaper and regulations favor the huge investments associated with high-tech manufacturing.
These considerations should be factored in when choosing candidate warehouse locations.

Answer to Question 5
There would be more warehouses closer to the end customer for the pharmaceutical
industry due to the short delivery lead times, while for the chemical industry there would be
fewer centralized warehouses in order to consolidate orders and decrease outbound
transportation costs.

Answer to Question 6
There could be a variety of reasons why is typically more expensive to ship a fully
loaded truck from Illinois to New York than from New York to Illinois. The truck may have a

longer route in the other direction leading to fewer or greater mileage. If we expect that the
truck would travel empty on its return route, then TL rate would be higher, the probability that
the truck comes back empty from Illinois (industrial heartland) to New York is lower than the
corresponding probability from New York to Illinois which explains the asymmetric cost
structure between these two cities.

QSO-630-Q2870: Supply Chain Management

2-3 Assignments: Solution to Specified Problems
Answer to Question 7
1. Handling costs
Labor cost of workers in material handling and utility costs that are proportional
to annual flow through the warehouse. Include cost of conveyors, fork lifts,
automated guided vehicles (AGVs), etc., used to carry the goods in the
warehouses.
2. Fixed costs

All cost components not proportional to the amount of flow through the

warehouse
Purchasing or rental cost of land.
Typically proportional to warehouse size (capacity) but in a nonlinear way.
The cost of insurance for the facility.

3. Storage costs

Inventory holding costs

Proportional to average positive inventory levels.
Note that this includes the risk of obsolete inventory that needs to be salvaged.

Answer to Question 8
An exact optimization technique is guaranteed to provide an optimal solution (if
one exists) even if it takes a long time. On the other hand, a heuristic algorithm is an
experience-based method that will find good solutions to the problem in a reasonable
amount of time where the terms good and reasonable depend on the heuristic and the
particular problem instance. The choice between an exact optimization technique and a
heuristic algorithm for a given problem frequently depends on the trade-off between
solution quality and solution time. Note that even if a heuristic algorithm (by chance)

QSO-630-Q2870: Supply Chain Management

2-3 Assignments: Solution to Specified Problems
finds the optimal solution to a problem, it cannot confirm the optimality of the solution.
On the other hand, for many problems there are no known optimal algorithms, so
heuristics must be used

Answer to Question 9
Simulation is a popular performance evaluation and modeling tool for complex
stochastic systems that cannot be evaluated analytically. A simulation model can closely reflect
a real system and mimic its behavior, but it has some drawbacks: simulation is a descriptive
tool, i.e., it cannot provide optimal values for system inputs. It generates, for a given set of

inputs, sample outputs from the system that are used to compute statistical estimates of the
performance measures. Also, accurate simulation models of large systems require extensive
development effort, and typically take a long time to run. Thus, when detailed system
dynamics is an important issue it makes sense to utilize the following two-stage approach in
solving difficult logistics problems:
1. Use a mathematical optimization model to generate a number of good candidate solutions,
taking into account the most important cost components.
2. Use a detailed simulation model to evaluate the candidate solutions generated in the first phase.