A Research Proposal on

Distribution Network Design Under Uncertain Conditions

Supervisor: Dr. Mohd. Nasir Bin Tamin

Student name: Le Tran Trung Kien (MM101176)

Table of Contents

1.1. Introduction...............................................................................................................1 1.2. Background and Rationale........................................................................................2 1.2.1. Ideal case............................................................................................................2 1.2.2. Current situation................................................................................................2 1.2.3. Problem situation...............................................................................................3 1.3. Objective...................................................................................................................3 1.4. Research Problem and Hypotheses...........................................................................3 1.4.1. Statement of Research Problem.........................................................................3 1.4.2. Research Questions............................................................................................4 1.4.3. Research Hypothesis..........................................................................................4 1.5. Significant of Findings..............................................................................................4 2.1. Independent variables...............................................................................................4 2.1.1. Transportation....................................................................................................4 2.1.2. Demand pattern..................................................................................................5 2.1.3. Facilities.............................................................................................................5 2.2. Dependent variables..................................................................................................5 2.2.1. Network configuration.......................................................................................5 2.3. Conceptual model.....................................................................................................5 2.4. Scope of study...........................................................................................................6 3.1. Research design........................................................................................................7 3.1.1. Data collection...................................................................................................8 3.1.2. Model the existing network...............................................................................8 3.1.3. Validate data......................................................................................................8 3.1.4. Generate potential solutions...............................................................................8 3.1.5. Determine the uncertainty of data......................................................................9 3.1.6. Simulate potential solutions...............................................................................9 3.1.7. Identify the most suitable network.....................................................................9 3.2. Sampling design........................................................................................................9 3.3. Research instruments..............................................................................................10 3.4. Data collection........................................................................................................11 3.5. Data analysis...........................................................................................................11 4.1. Research Schedule..................................................................................................12 4.2. Key milestones........................................................................................................12 References.....................................................................................................................13
Chapter 1. 1.1. Introduction A supply chain involves all activities in fulfilling customer demands and requests as show in figure 1.1. There are four stages in a supply chain: the supply network, the internal supply chain (which are manufacturing plants), distribution network, and end customers. This research focuses on the segments of distribution network. The right-hand side of

figure 1.1 describes a typical distribution network which is responsible for the actual movement of materials between locations. [1] Distribution mentions to the activities requires to deliver and to store goods from the shipper/supplier stage to the consignee/customer stage in the supply chain. It is a main driver of the total profitability of an organization because it impacts concurrently the customer experience and the cost incurred overall the supply chain. Furthermore, there are many uncertain factors affect the distribution network such as demand, political issue, and macroeconomic. As a result, the distribution network should be designed in a manner that can provides high responsiveness and absorb uncertain factors.

1.2. Background and Rationale 1.2.1. Ideal case Regardless of the nature of the products, an optimal distribution network should directionally provide customers the lowest possible cost and best possible service of delivery. In most instances, this is an exercise at trade-offs. Responsive deliveries come at the price of meeting time-to-service requirements. On the other hand, cheaper delivery modes may not align with customers service expectations. Its a balancing act that requires a disciplined approach to determining the proper distribution network for the job. [2]

1.2.2. Current situation Based on the companys industry, there are six methods for approaching the design of distribution networks, which are listed as follows:

Manufacturer storage with direct shipping (or drop-shipping). Product is shipped directly from the manufacturer to the end customer. Manufacturer storage with direct shipping and in-transit merge. Pieces of order combined from different locations so that the customer gets a single delivery. Distributor storage with package carrier delivery. Distributors/retailers in intermediate warehouse hold inventories and products are transported from the intermediate location to the final customer by package carriers. Distributor storage with last-mile delivery. Instead of using a package carrier, product is delivered to the customers house by distributor/retailers. Manufacturer/distributor storage with customer pickup. Inventory is stocked at the manufacturer or distributor warehouse, customers submit the orders online or on the phone, and then collect their merchandise at designated pickup points.

Retail storage with customer pickup. Inventory is stored locally at retail stores, customer can place an order via internet, telephone, or directly at the store, and then pick it up in person.

The largest disadvantage of drop-shipping, and manufacturer storage with direct shipping and in-transit merge is long response time, normally from 1 to 2 weeks, because the order has to be delivered from the retailer to the manufacturer, and average outbound distance to the ultimate consumer is large.[3] As a result, it increases the transportation costs as well. With regard to distributor storage with package carrier delivery, facility costs of warehousing and processing costs are higher with distribution storage because of a loss of aggregation. Among all the methods of distribution, transportation costs are highest for last-mile delivery because of the small scale economies. Delivery costs which include transportation and processing can be approximately from $30 to $40 per consignee in the grocery industry. The major hurdle of manufacturer/distributor storage with customer pickup is hard to implement a system that is able to inform the customer when the order has arrived, and to identify easily once customer arrives to pick it up. It requires integration of several stages in the supply chain. With respect to retail storage with customer pickup, the major disadvantage is the increased inventory and facility costs. Furthermore, product variety stored locally is much lower than under other options, thus it reduces the level of customers satisfaction.
[4]

1.2.3. Problem situation These disadvantages become more complicated as day by day, there are more and more parties, or intermediaries, involve in the supply chain. Moreover, customers also respect to receive better products, or service, in terms of response time, price, quality, and after-sales services. All of these things provide organizations opportunities to enhance and optimize their distribution network. If an organizations distribution network is designed properly, it will have a large impact on the success of that firm because they significantly influence both the revenue generated and the cost incurred.

1.3. Objective The objective of this research is to identify a distribution network which provides an optimum balance between responsiveness and efficiency under uncertainty. 1.4. Research Problem and Hypotheses 1.4.1. Statement of Research Problem In a dynamic environment, how does an organization distribute its products to ultimate consumers in a timely manner, and at the competitive cost?

1.4.2. Research Questions

1. What are dynamic factors affecting the design of distribution network?

2. What are the impacts of uncertain conditions on a distribution network? 3. How could uncertain conditions be integrated into the model?

1.4.3. Research Hypothesis There are a wide variety of factors that affect distribution network decisions. They include strategic factors, technological factors, macroeconomic factors, political factors, infrastructure factors, and competitive factors. Some of factors are very complicated to estimate and measure such as political factors, and macroeconomic factors. However, demand, logistics cost, distances, capacities, locations, service level requirements, and future demand are basic factor that need to be examined. Uncertain conditions affect significantly on distribution network in terms of design and operation. To deal with uncertainty in demand, the firms need to increase their inventory, and as a result, the cost of holding and ordering also rise. Information sharing becomes more and more vital for the firms to survive. Means of transportation are also required to be more affective in order to speed up delivery. Ideally, optimum solution allows the firm to achieve the best performance when using it. Unfortunately, optimum solution sometimes can not be utilized in the real cases and needs to be modified because some of the factors could not formulate and thus were not included in the model. 1.5. Significant of Findings Distribution design decisions are among the most important supply chain decisions. The research findings provide an indispensable framework used to design distribution network. The distributions configuration will allow supply chains players to respond to their customers requirement faster, and reduce the total cost across the network. As a result, the supply chain would probably increase its profitability and the level of customer service concurrently.

Chapter 2. 2.1. Independent variables Independent variables include transportation, inventory, facilities, and the level of demand and supply. They are identified via the following indicators. 2.1.1. Transportation Inbound/Outbound transportation cost Inbound/outbound transportation costs are the costs of bringing/sending product into a facility. The rates are linear with distance and with volume.

Distances Distance is the number of miles that a particular shipment travels from one facility to another facility. 2.1.2. Demand pattern Aggregate Demand Aggregate demand is annual demand for each product by customer location. Customer located in proximity to each other are aggregated using a grid network or other clustering techniques. Future Demand Potential changes in customer demand over the next few years because the decisions on distribution network have a long-lasting effect on the firm. 2.1.3. Facilities Capacity Capacity measures the maximum amount a facility can process. Service level Service level measures the fraction of orders completed on time and in full at a facility. Costs Facility costs include three main components: handling cost, fixed cost, and storage cost.

2.2. Dependent variables 2.2.1. Network configuration Locations Location refers to the place where the facility will be built, and is represented by longitude and latitude. Materials Flow The amount of materials moves between two facilities. Landed Cost The total cost is incurred by moving and storing materials.

2.3. Conceptual model Transportation, demand pattern, and facilities will govern the configuration of the distribution network.

Independent variables (the causes) Transportation Indicators Inbound/Outbound transportation cost The cost of bringing/sending product into a facility. Distances The number of miles that a particular shipment travels from one facility to another facility. Demand Pattern Indicators

Dependent variables (the effects) Network Configuration Indicators Locations The place that facility will be built. Location is represented by longitude and latitude. Materials Flow The amount of materials moves between two facilities.

Landed Cost The total cost is incurred by moving and Aggregate Demand Annual demand for each product by storing materials. customer location. Future Demand Potential changes in customer demand over the next few years. Facilities Indicators Capacity Capacity measures the maximum amount a facility can process. Service level Service level measures the fraction of orders completed on time and in full. Costs Facility costs include three main components: handling cost, fixed cost, and storage cost.

2.4. Scope of study

1)

The impact of uncertainty in transportation costs, customer demand, and facility costs will be identified and measured.

2)

The study will determine the configuration of the distribution network via the following variables: locations (longitude and latitude), materials flows, and landed cost.

3)

The tools of probability and statistics will be utilized to formulate the uncertain conditions.

4)
distance.

Transportation cost grows linearly with the quantity shipped and the

5)

Industrial spare-part distributor is used a case study.

Chapter 3. 3.1. Research design

Data collection (1) Determine uncertainty of data (5) Validate data (3) Generate potential configurations (4) Simulate potential configurations (6)

Modeling the existing network (2)

Identify the most suitable network (7)

3.1.1. Data collection The goal of this step is to collect data related to the existing network and the expansion in future. Network configuration involves large amounts of data, including information on: aggregated demand, transportation rates, mileage estimation, plant costs, plant capacities, potential locations, service level requirements, and future demand. 3.1.2. Model the existing network The aim of this step is to model the existing network by using simulation tools. The existing network is reconstructed using the collected data. 3.1.3. Validate data To ensure that the data and model accurately reflect the current network, a comparison between the output of the model and existing data needs to be conducted. Valuable output of the model configured to duplicate current operating conditions includes all costs-warehousing, inventory, production, and transportation-generated under the current network configuration. Then, the data can be compared to the firms accounting information. 3.1.4. Generate potential solutions Once the data are collected, and validated, the next step is to generate the potential configuration of the logistics network. There are two techniques employed:

Exact algorithms that are guaranteed to find optimal solutions, that is, least-cost solutions. Heuristic algorithms that find good solutions, not necessarily optimal solutions.

3.1.5. Determine the uncertainty of data It is important to evaluate the level of uncertainty of the data because the data changes over time and is not static in reality. At this stage, the tools of probability such as fitting distribution and hypothesis testing will be employed with the confident of 95%. 3.1.6. Simulate potential solutions Each solution generated in the previous phase will be simulated with the purpose of valuating the solution in term of total costs incurred. Furthermore, the simulation also takes into account the dynamics of the system which are determined in the previous step. 3.1.7. Identify the most suitable network Based on a set of potential solutions and total costs incurred, the optimum network will be identified. However, it is vital to look back to the model of current network and then consider the ability to employ the chosen solution in reality. An optimum solution may require high investment in setting up a new facility, or may require closing or moving an existing facility which also incurred high cost. Therefore, a suitable solution may be more preferable than an optimal solution.

3.2. Sampling design

Identify 3 representative products

These products are representative of fast -moving products , medium -moving products , and slow -moving products , respectively .

Determine the related populations

Regarding to each product , populations of demand patterns , outputs at each facilities , frequency of stock out , supplier lead -time , and customer lead -time .

Withdraw samples from populations

One sample with the size of least 30 elements will be withdrawn from each population .

Identify sample parameters

Sample parameters such as mean , variance , and standard deviation are calculated by using statistics tools .

Estimate population statistics

Based on sample parameters identified on previous stage population statistics will be estimate with the assumption that all populations are normally distributed .

3.3. Research instruments Document review

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Information from records, files, or receipts about the background and historical context are gathered. This may be a major part of data collection.

Geographic information system This system stores and displays information which is linked between geographic locations. By combining population, traffic flow, longitude and latitude, and density, potential locations can be revealed. Time series A single variable is measured and projected over a period of time, for example monthly, annually. Check sheet Check sheet is used to record the demand and service level requirements. Questionnaire Questionnaire is employed to collect data on transportation rates, facilities cost, and facilities capacity. Software Witness, simulation software, will be employed to model and evaluate the landed cost.

3.4. Data collection Data on aggregated demand and future demand will be recorded form historical database, monitored and forecasted. Transportation rates, plant costs, plant capacities and service level requirements will be collected manually. Mileage estimation will be gathered by using computer and internet. All the data will be stored into computerized system.

3.5. Data analysis Data on demand, transportation rates, mileage estimation, plant costs, plant capacities, and potential locations will analyzed and simulated by using commercial software such as SPSS and Witness.

Chapter 4.

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4.1. Research Schedule

2011

2012 Dec Jan Feb Mar Apr May Jun Jul Aug

ID 1 2 3 4 5 6 7

Task Name
Sep O ct Nov

Data collection Model the existing network Validate data Generate potential solutions Determine the uncertainty of data Simulate potential solutions Identify the most suitable network

4.2. Key milestones Milestones Completion of data collection Completion of potential solutions Completion of simulation Completion of identifying the most suitable network Date of Completion 31 January 2012 15 June 2012 31 July 2012 31 August 2012

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References
[1]

Li, L., (2007), Supply Chain Management: Concepts, Techniques, and Practices, USA: Old Dominion University, www.scribd.com/doc/45194137/6273-chap01 access on 25 Jan 2011
[2]

Jader, J. J., (2010), Designing a responsive and efficient distribution network, Philipines: EntrepreNews, http://www.entreprenews.com.ph/inside.php? url_link=1280764800&id=24&article_type=columns access on 25 Jan 2011
[3]

Ferretti, I., Zanoni, S., and Zavanella, L., (2006), Distribution Network Design Under Uncertianty Demand, Department of Mechanical and Industrial Engineering, Universita Degli Studi Di Brescia, Italy.
[4]

Chopra, S., (2007), Designing the Distribution Network in a Supply Chain, USA: Northwestern University, www.kellogg.northwestern.edu/faculty/chopra/htm/.../deliverynetwork.pdf - access on 26 Jan 2010

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