Inventory Theory - Group 11 - Technical Paper

THE BEST SUPPLY CHAINS AREN'T JUST FAST AND COST-EFFECTIVE. THEY ARE ALSO AGILE AND ADAPTABLE.
- HAU L. LEE
HIERARCHICAL FACILITY NETWORK PLANNING MODEL FOR GLOBAL LOGISTICS NETWORK CONFIGURATIONS
FRANS HENDRY DAVID - BRIAN INVENTORY THEORY FALL 2013 NATIONAL TAIWAN UNIVERSITY OF SCIENCE AND TECHNOLOGY
OUTLINE
Introduction System Specification Model Development
Hierarchical Cluster Analysis Facility Network Configuration
Numerical Study
Experimental Design & Data Collection Setting Parameter Analysis of Numerical Study
Conclusions
INVENTORY THEORY - FALL 2013 NATIONAL TAIWAN UNIVERSITY OF SCIENCE AND TECHNOLOGY
GROUP 11 TECHNICAL PAPER
INTRODUCTION
PROBLEM FORMULATION
Network congurations are critical issues in the area of global logistics (GLs) as they determine the performance of GLs operational strategies.
Elaborate via integration and classification of corresponding facilities, such as international hubs and depots.
Performance of GLs strategies and their functional integration should rely on elaborate network congurations to accomplish the goals of GLs management.
Implementation: DHL, UPS, FedEx and TNT
Challenges for GLs network design:

1. Efficiently coordinating activities of all transnational facilities, is difcult due to the different functional relationships in both the spatial and temporal domains.
GLs operational networks are typically hierarchical, containing different nodes located in different network layers, where each node has its own operational goals and problems.
2. Existing models that are suitable for GLs hierarchical network planning are scarce.
Most of previous literature is likely to address the issue of GLs network congurations directly by mathematical programming, thus solving the induced facility location problems all in one phase without considering the hierarchical and geographic relationships
LITERATURE REVIEW (1)

Paper Study that were used in this paper are divided into three sections:
Pioneering Work Algorithm Paper Technique Paper

General logistic network configuration have been addressed in some pioneering works:
1. T. Miller, D. Wise, L. Clair, Transport network design and mode choice modeling for automobile distribution: a case study
Determine best transport mode and rail network location strategy using a mixed integer programming model
2. T.G. Crainic, Service network design in freight transportation

Used Mathematical programming approach for inter-modal service network design to seek for a set of interrelated decisions that ensure an optimal allocation and utilization of resources to achieve the economic and customer service goals of the company.
3. S. Melkote, M.S. Daskin, Capacitated facility location/network design problems

Formulated a combined facility location/network design problem using a mixed integer programming approach, where service capacities of facilities are considered.
4. A. Cakravastia, I.S. Toha, N. Nakamura, A two-stage model for the design of supply chain networks
Developed an analytical model of the supplier selection process in designing a supply chain network, where the capacity constraints associated with potential suppliers are considered in the supplier selection process

5. V. Jayaraman, A. Ross, A simulated annealing methodology to distribution network design and management.
Proposed the Production, Logistics, Outbound, Transportation (PLOT) distribution network design system, which was characterized by functions of multiple distribution channel members and their corresponding locations
6. Z. Drezner, G.O. Wesolowsky, Network design: selection and design of links and facility location
Introduced a novel network design problem which determines the links and facility locations, using several heuristic solution tools such as a descent algorithm, simulated annealing, tabu search, and a genetic algorithm.
7. D. Ambrosino, M.G. Scutella, Distribution network design: new problems and related models
Solved some complex distribution network design problems, which involve facility location, warehousing, transportation and inventory decisions

Few hierarchical network design studies have used algorithm:
8. J.R. Current, C.S. Revelle, J.L. Cohon, The hierarchical design problem
Formulated a hierarchical network design problem (HNDP) for identifying the shortest paths among facilities in a proposed two-level hierarchical network.
9. N.G.F. Sancho, The hierarchical network design problem with multiple primary paths
Developed a dynamic programming model to nd a suboptimal solution for the HNDP with multiple primary paths. For all hierarchical network characteristic, the model still stresses the algorithm improvement to search better optimal solution in the proposed model
10. C.C. Lin, S.H. Chen, The hierarchical network design problem for time-denite express common carriers
Utilized a time-constrained hierarchical hub-and-spoke network to determine eet size and schedules on primary and secondary routes to minimize total operating cost while meeting the desired service level.

Related technique paper:
11. Y.W. Wan, R.K. Cheung, J. Liu, J.H. Tong, Warehouse location problems for airfreight forwarders: a challenge created by the airport relocation 12. C.C. Lin, Y.J. Lin, D.Y. Lin, The economic effects of center-to-center directs on huband-spoke for air express common carriers 13. M. Wasner, G. Zapfel, An integrated multi-depot hub-location vehicle routing model for network planning of parcel service 14. A.A. Chaves, L. Lan, Hybrid algorithms with detection of promising areas for the prize collecting traveling salesman problem 15. J.-B. Sheu, A novel dynamic resource allocation model for demand-responsive city logistics distribution operations 16. K.-M. Osei-Bryson, T.R. Inniss, A hybrid clustering algorithm 17. A. Nagurney, D. Matsypura, Global supply chain network dynamics with multicriteria decision-making under risk and uncertainty 18. B. Groothedde, C. Ruijgrik, L. Tavasszy, Towards collaborative, intermodal hub
networks: a case study in the fast moving consumer goods market

Main weakness for previous literature research:
Studies regarding hierarchical GLs network congurations are rare Limited to the scope of domestic logistics, and thus, issues of global logistics and inuencing factors characterizing uncertainties of transnational logistics activities remain unsolved
This paper presents a novel planning methodology for hierarchical GLs network that integrates cluster analysis and integer programming to solve the GLs network design problem.
In short, this study contains:

1. Hierarchical clustering to partition the demand dataset into a meaningful set of mutually exclusive hierarchical clusters. 2. GLs facility classication, where inuencing factors associated with each type of facility are considered. 3. The integer programming methodology , to address the resulting network design issues, where the corresponding facilities (hubs, dist. Center, depot) are hierarchically structured.
This study also considering multiple GLs channel members and related factors (e.g., customs accessibility, transnational transportation and inventory costs)
INVENTORY THEORY - FALL 2013 NATIONAL TAIWAN UNIVERSITY OF SCIENCE AND TECHNOLOGY GROUP 11 TECHNICAL PAPER
SYSTEM SPECIFICATION
SYSTEM SPECIFICATION
System Component Definition
Conceptual Framework
SYSTEM COMPONENT DEFINITION

Three node types are defined: Hubs
Based on
Distribution Center
Warehouse Depot
SYSTEM COMPONENT DEFINITION

Service component intensity () is composed of:
Transshipment amount () Storage value ()
Where = + Specifically is used to determine the type of candidate facilities

Hub Distribution Center Warehouse
1 2 < 1 < 2
1 and 2 are two thresholds which can be determined by averaging the values suggested by GL enterprise managers in practical application
CONCEPTUAL FRAMEWORK
PHASE 1
Identifying original demand spot location Hierarchy clustering the demand spot location
PHASE 2 & 3
Determining the number and location of facility nodes for each demand group using integer programming.
Considering several factors:

1. 2. 3. 4. 5. Investment costs and risks Logistic operational costs Potential benefits Transnational logistic restriction Regional demand variations
CONCEPTUAL FRAMEWORK
Four assumptions used to facilitate the model formulation: Only three facility types (hubs, distribution center, warehouse depots)
Differ in their express cargo capacities
The demand quantity associated with each given original demand spot is known. The range of service-competence intensity associated with each node type in the proposed hierarchical GLs network is known. The proposed hierarchy is composed of three layershubs, distribution centers, and warehouse depots
The facilities on a given layer are served by facilities of layer directly above.
MODEL DEVELOPMENT
SCHEME OF PROPOSED MODEL
DEMAND-SPOT HIERARCHICAL CLUSTER ANALYSIS

Hierarchical cluster analysis considers each given object i as a point in a multidimensional space characterized by two attributes : the amount of inbound and outbound cargo associated with object i
Variable is an important step in hierarchical cluster analysis, since differences in units and magnitude of variance between attributes influence computational results of distance metrics.
HIERARCHICAL TREE
FACILITY NETWORK CONFIGURATION

Given the aforementioned assumptions, an integrated and composite multiobjective model is formulated to obtain optimal solutions with the goals of : Minimizing hierarchical GLs network investment cost (1) Maximizing profit from hierarchical GLs network operations (2), and The aggregate satisfaction rate of customer demand (3).
However, these three goals may be in conflict during the corresponding

hierarchical GLs network configuration process. A typical example is the trade-off between minimizing hierarchical GLs network investment cost and maximizing operational profit.
FACILITY NETWORK CONFIGURATION
GLs NETWORK INVESMENT COST

BC : Building Cost LC : Land Cost AIC : Asset Input Cost RRC : Related Risk Cost
RMC : Raw Material Cost LBC : Labor Cost LC : Land Cost
MC : Machine Cost EC : Equipment Cost PR : Political Risk NDR : Natural Disaster Risk
PROFIT FROM HIERARCHICAL GLs NETWORK OPERATIONS

r : revenue oc : operational cost tdc : transportation and distribution cost rorc : operational risk-oriented cost
r : revenue oc : operational cost
tdc : transportation and distribution cost err : exchange rate risk hr : human resource
THE AGGREGATE SATISFACTION RATE OF CONSUMER DEMAND
Accounts for the proportion (Z) of potential consumer demands (D) that can be served by the logistics distribution amount (Y) planned within a preset upper bound of delivery time (t)
NUMERICAL STUDY
EXPERIMENTAL DESIGN AND DATA COLLECTION (1)
TAIWAN CHINA USA


Taiwan - 15 original demand spots China - 116 original demand spots USA - 260 original demand spots
Thresholds 1 and 2 for facility service-competence intensity index () using local population data
averaging the values suggested by GL enterprise managers were used in the case study
Based on the predetermined thresholds and proposed facility identification rules, 3 original demand spots in Taiwan (e.g. Taipei, Taichung, and Kaohsiung) were chosen as candidates for the consideration of locating hubs.
Similarly, there are 15 and 36 original demand spots chosen as candidates for locating hubs in China and the USA, respectively.
Accordingly, the problem scope has 3429 decision variables subject to 1068 constraints.

Step by step
First, this study collected data for local populations of these demand spots and the corresponding gross domestic product (GDP) data from databases in Taiwan, China, and the USA.
International express delivery demand associated with each original demand spot was then approximated using a proportion of GDP and the corresponding local population.
The next step generated a four-tier GLs hierarchical network based on geographical relationships
the three main regions (first tier)
sub-regions (second tier)
the local area (third tier)
original demand spots (fourth tier)

HIERARCHICAL CLUSTER RESULT OF PROPOSED MODEL
SETTING PARAMETERS (1)

Model parameters : (1) cost-related parameters
(2) risk-related parameters (3) boundary conditions
Estimated from: interview survey data and corresponding statistics.
Estimating cost-related parameters directly from reported statistical data is difficult due to business confidentiality and security concerns. Therefore, interviews with key staff in express operations and logisticsrelated sectors of DHL were conducted to collect real data. The interviews utilized both open-ended and closed questions regarding existing
strategies in express air delivery and logistics management, as well as potential limitations.
A questionnaire was designed based on the need to estimate cost-related parameters of the model. For example, given a cost item, the corresponding survey respondent was asked to measure unit cost within an acceptable range.

Risk-related parameters estimated in this scenario aim at the unit increments of money risks for environmental risk cost and operational risk cost induced by the hierarchical GLs network configuration.
Corresponding parameters are classified into and associated with the following activities:
Government stability
Natural Disaster
Exchange rate
Personnel skills

Among these risk-related parameters, Government Stability and Personnel skills are associated with the corresponding artificial organization and behavior; the others are influenced by natural disasters and operational situations in the resulting hierarchical GLs network. As mentioned, a unit increase in risk-induced penalty refers to the monetary value of a particular penalty caused by the unit of a given physical amount associated with a particular activity.
Natural Disaster Risk

To estimate unit incremental risks for natural disasters, this study first averaged aggregate earthquake and flood damage costs of these three regions over the last 30 years using historical data provided by central governments. Second, aggregate damage costs caused by earthquakes and floods were measured using the averaged aggregate earthquake and flood damage costs multiplied by the ratio of natural disaster frequency over the last 30 years.

Exchange rate risk
Exchange rate risk may depend on foreign reserves, exchange law, and foreign debt. Therefore, this study estimated the exchange-oriented risk by approximating the corresponding comparative measures of exchange risk from BERI, which is similar to the concept of political risk cost for the three regions. Here, according to the proposed method, exchange risk can be expressed by the amount of foreign debt divided by the amount of foreign reserves. In this case study, statistics for foreign debt and foreign reserves for these three governments were used to estimate the corresponding exchange risk.
Personnel Skill Risk

Similar to risks induced by the government stability, personnel skill risk can be caused by either Democracy or Communism. Accordingly, was estimated using comparative measures of freedom developed by the Freedom House and BERI for workers and society. Notably, parameter may vary with race; particularly, whites currently have an advantageous position worldwide.

Cost and risk-related parameters estimation:
Parameters in the hierarchical GLs network based on cost-minimum function
Parameters in the hierarchical GLs network based on profit maximum function
Parameters in the hierarchical GLs network based on other primary parameters
ANALYSIS OF NUMERICAL RESULTS (1)

The numerical studies consider 2 different test scenarios: 1. Performance of proposed model VS Existing model
Express delivery enterprise case without coordination of three facilities, including hubs, distribution centers, and warehouse depots.
2. Sensitivity Analysis
Used to realize what the most important parameters are in the enterprise and assist in enterprise resource planning.
All other parameters preset in Tables 24 remain the same in both scenarios
LINGO 9.0 software package is employed to search for optimal solutions


First Scenario: Optimal solutions was generated using the proposed model, and then compared the resulting aggregate profit with existing operational performance.
The existing GLs network of DHL are primarily driven by operational strategies to maximize profit.
The weight (w2) associated with subobjective function of profit-maximization is set to 1
Proposed model is likely to outperform the existing strategy


Second Scenario: we conducted sensitivity analysis with respect to the following four parameters
1
The threshold (1) associated with the facility servicecompetence intensity index for determination of hub locations
2
Original demand ( Dj )
3
Upper and lower bounds of the satisfaction rate of customer demand ( , )
4
The weights associated with the three subobjective functions (w1, w2, and w3)
The combination of w1 = w2 = w3 = 1/3 was chosen for all cases except for the sensitivity analysis with respect to these weights (No. 4)

The threshold (1) Sensitivity Analysis
In this analysis, the authors tried to know the effect of a different company policy in terms of facility allocation threshold (1) on the number of hubs that can be located in certain area.
>
>
>
Implication: A GL enterprise is allowed to loosen the facility allocation threshold by choosing a hub locations if > the enterprise > lower value of >1 for deciding> has enough capital and human resources allocated in GL network configurations.
>
>
>
>

The Demand and Satisfaction rate Sensitivity Analysis
In this analysis, the authors tried to find out the effect of the change in number of demand and customer satisfaction rate for he proposed model.
Implications: The reduction of original demands may contribute significantly to the aggregate improvement in system performance. Given the necessity of increasing the satisfactory rate of customer may also improve the aggregate performance of proposed model.
We think that its more appropriate to show the improvement in terms of profit instead of in terms of cost

The Weights Configuration Sensitivity Analysis The authors want to find out the best configurations of the weights associated with the three sub-objective functions (w1, w2, and w3).
Implication:
Adjusting the corresponding weights associated with the three subobjective functions have a significant effect on enhancing overall improvement.
CONCLUSIONS (1)
This work has presented a novel approach that integrates hierarchical cluster analysis and integer programming to formulate a hierarchical GLs network model for dealing with the facility location problem by minimizing total costs and maximizing operational profit and the satisfaction rate of customers.
Compared to previous literature, the proposed method has 2 unique features:

The corresponding integrated supply & demand sides of the three-layer hierarchical GLs network are formulated using generalized mathematical form. Internal and external factors (e.g., fundamental investment cost requirements, basic requirements of operational costs, related operational and disaster risks, and the satisfaction rate of customers) are considered by the proposed model.
CONCLUSIONS (2)
Case Result for the most suitable site for locating a hub for international express delivery enterprises in each area.
Taiwan Taipei China Shenyang, Beijing, Shanghai, Chongqing, and Hong Kong
USA
Los Angeles, Phoenix, Dallas, Houston, Chicago, New York, and Boston
Managers of international express delivery enterprises can conveniently employ the proposed model as a decision-making support tool to assist in strategically determining precedence for locating the corresponding facilities, according to operational goals and overseas investment resources.
FUTURE RESEARCH
The proposed model can be extended to determine dynamic multiresource allocation based on hierarchical GLs network configurations problems. in-depth identification of qualitative and quantitative factors, such as demand variation, risk uncertainty, and the time difference between different zones, also warrant further research.
Utilization of elaborate measures for demand data aggregation is suggested in further research to demonstrate the applicability of the proposed method.
THANK YOU
FOR YOUR ATTENTION
INVENTORY THEORY FALL 2013 NATIONAL TAIWAN UNIVERSITY OF SCIENCE AND TECHNOLOGY

Inventory Theory - Group 11 - Technical Paper

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THE BEST SUPPLY CHAINS AREN'T JUST FAST AND COST-EFFECTIVE. THEY ARE ALSO AGILE AND ADAPTABLE.

GROUP 11 TECHNICAL PAPER

GROUP 11 TECHNICAL PAPER

Challenges for GLs network design:

GROUP 11 TECHNICAL PAPER

LITERATURE REVIEW (1)

Pioneering Work Algorithm Paper Technique Paper

GROUP 11 TECHNICAL PAPER

LITERATURE REVIEW (2)

2. T.G. Crainic, Service network design in freight transportation

3. S. Melkote, M.S. Daskin, Capacitated facility location/network design problems

GROUP 11 TECHNICAL PAPER

LITERATURE REVIEW (3)

GROUP 11 TECHNICAL PAPER

LITERATURE REVIEW (4)

GROUP 11 TECHNICAL PAPER

LITERATURE REVIEW (5)

GROUP 11 TECHNICAL PAPER

LITERATURE REVIEW (6)

In short, this study contains:

GROUP 11 TECHNICAL PAPER

GROUP 11 TECHNICAL PAPER

SYSTEM COMPONENT DEFINITION

GROUP 11 TECHNICAL PAPER

SYSTEM COMPONENT DEFINITION

Where = + Specifically is used to determine the type of candidate facilities

GROUP 11 TECHNICAL PAPER

Considering several factors:

GROUP 11 TECHNICAL PAPER

GROUP 11 TECHNICAL PAPER

GROUP 11 TECHNICAL PAPER

SCHEME OF PROPOSED MODEL

GROUP 11 TECHNICAL PAPER

DEMAND-SPOT HIERARCHICAL CLUSTER ANALYSIS

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GROUP 11 TECHNICAL PAPER

FACILITY NETWORK CONFIGURATION

However, these three goals may be in conflict during the corresponding

GROUP 11 TECHNICAL PAPER

FACILITY NETWORK CONFIGURATION

GROUP 11 TECHNICAL PAPER

GLs NETWORK INVESMENT COST

RMC : Raw Material Cost LBC : Labor Cost LC : Land Cost

GROUP 11 TECHNICAL PAPER

PROFIT FROM HIERARCHICAL GLs NETWORK OPERATIONS

r : revenue oc : operational cost

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THE AGGREGATE SATISFACTION RATE OF CONSUMER DEMAND

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GROUP 11 TECHNICAL PAPER

EXPERIMENTAL DESIGN AND DATA COLLECTION (1)

TAIWAN CHINA USA

EXPERIMENTAL DESIGN AND DATA COLLECTION (2)

EXPERIMENTAL DESIGN AND DATA COLLECTION (3)

the three main regions (first tier)

sub-regions (second tier)

the local area (third tier)

original demand spots (fourth tier)

HIERARCHICAL CLUSTER RESULT OF PROPOSED MODEL

GROUP 11 TECHNICAL PAPER

SETTING PARAMETERS (1)

GROUP 11 TECHNICAL PAPER