consumer packaged goods manufacturing industry
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Consumer Packaged Goods Manufacturing Industry
Strategies for the Distribution NetworkCase Study #2
Team: AymarasPan American Advanced Studies Institute
Simulation and Optimization of Globalized Physical Distribution Systems
Santiago, Chile August 17th 2013.
Outline
Company Presentation Problem statement Issues to be addressed Scope of the Problem Assumptions and baseline results Applications of milk runs Conclusion & Recommendations
St. OngeSupply Chain Engineering
Top 100 SC partners SC strategy & Logistics
http://www.stonge.com/default.aspx
Problem Statement
Operations
- Regional presence- Leases expiring for Western USA DCs & Canada. -Salt Lake City serves Western demand.- Consolidated plants.
Demand
Retailers across Canada and USA
Steady forcasted growth
The Problem
Optimize use of capacity of Distribution Centers to
serve Western customers
Reduce total supply chain costs and reduce delivery
times.
Locations
SLC
O
LAM
SLS
Al
ATu
T
NM
MDC
West DC
Mfg
Customers
Problem Statement
Operations
- Regional presence- Leases expiring for Western USA DCs & Canada. -Salt Lake City serves Western demand.- Consolidated plants.
Demand
Retailers across Canada and USA
Steady forcasted growth
The Problem
Optimize use of capacity of Distribution Centers to
serve Western customers
Reduce total supply chain costs and reduce delivery
times.
Demand for the Western Region by States
Issues To Be Addressed - Objectives
• Constraints:Problem bounded for Western distribution network (unknown total demand)
Define the scope of the problem : set of options to be compared and metrics to be used
Calculate and design the distribution network and its main indicators for the each options selected.
Select a distribution center according to the metrics esthablished
Scope of the Problem : The Network
SLC
M
F
SL
S
Al
A
Tu
TN
M
M
PlantsPlants DCs Customers
?
East andCentral NA
WesternNA
D = ??
D = known
Canada
? %
%
%
%
%
%
%
Scope of the Problem : Total Demand Calculation
• Toronto : 100% utilized• SLC = known (sum all western customers)• Assumption :
– Allentown, Atlanta and Tulsa 80% utilized
• Formula : – Turnover = Demand/ average inventory– Average *1.12% = peak inventory = 80% DC sft– DemandDCi =
DC DC Sq FtFixed Cost Per
YearFixed $/sf
Variable $/lb Estimated Demand
Allentown 650 000 4 500 000$ 6,92$ 0,120$ 577 719 156Tulsa 600 000 4 000 000$ 6,67$ 0,130$ 533 279 221
Atlanta 400 000 2 500 000$ 6,25$ 0,110$ 355 519 481Salt Lake City 500 000 3 300 000$ 6,60$ 0,100$ 401 959 872
Toronto 200 000 1 750 000$ 8,75$ 0,115$ 222 199 675total 2 090 677 404
Scope of the Problem : Optimization Model – Inbound Flows
• Inbound flows only– No information on eastern and central customers
• Minimize
• Plants capacity
• DC demand
• Non negativity
Scope of the Problem : Flows Between Plants and DCs (Inbound Flows)
Al
ATu
SLC
T
N
M
SLS
M
Scope of the Problem:Inbound + DC + Outbound
SLC
O
LAM
SLS
Assumptions for the Baseline
• Customers are served at least once a quarter• Square footage for Los Angeles and Oakland is assumed the same
as in existing Salt Lake City DC• Holding costs are the amount of money required to keep the product
in the warehouse– Capital cost, insurance, spoilage, utilities
• Outsourcing Transportation– Infinite fleet of trucks: we can ship as many product as required– Once the trucks deliver the product they do not belong to us anymore: The
cost of empty trucks is not consider
Baseline Results
$-$10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $60,000,000 $70,000,000 $80,000,000 $90,000,000
Salt Lake City
Oakland Los Angeles
Yearly Costs -- Baseline
Fixed and Variable Costs Based on 40 Days of Storage
Outbound Freight
Inbound Freight
14%
32%
15%
13%
26%
BaselineDays between deliveries
[0,1)
[1,7)
[8,14)
[15,30)
[31,120)
• Los Angeles is the best option to locate the DC based on minimal total cost• Transportation Costs account for about 90% of the total cost• Locating the DC in Los Angeles is 8.5% cheaper than locating the DC in Salt Lake City (as it
is done now)• More than half of the customers (about 60%) are visited at least twice a month
Application of Milk Runs
• Assumptions:– Transportation costs only include travel to deliver product (excludes
empty runs)– Customers were ordered based on geography– Distances between customers were determined by mileage on
Google map + 50 mile buffer (adjust for city-city & multiple customers)
– Customer routes based on logical clusters based on distance• Goal: – Group low volume with high volume customers to reduce
transportation
Milk Run Results
• Benefits:– Reduced time between deliveries for low volume customers– Reduced facility costs – only need 20 day supply
• Disadvantages:– Increased transportation cost due to high variation between low and high
volume customers
69.90%
20.39%
6.80% 2.91%
% of Customers in Each Delivery Frequency -- ALL Milk Runs
1+ Times / dayEvery 1- 5 DaysEvery 5 - 10 DaysEvery 10 - 15 DaysEvery 15 - 20 DaysEvery 20 - 25 Days
Salt Lake City Oakland Los Angeles $-
$10,000,000.00 $20,000,000.00 $30,000,000.00 $40,000,000.00 $50,000,000.00 $60,000,000.00 $70,000,000.00 $80,000,000.00 $90,000,000.00
$100,000,000.00
Yearly Costs -- All Milk Runs
Fixed and Variable Costs Based on 20 Days of StorageOutbound FreightInbound Freight
Application of Combination of Milk Runs & Direct Runs
• Assumptions:– All assumptions from milk runs still apply– For each milk run, there are only 300 deliveries/yr– Customers who have enough demand to send 300+ trucks/yr
will receive direct shipments for the remaining demand (“extra” trucks)
• Goals: – Group low volume with high volume customers to
reduce transportation– Reduce transportation costs by allowing high volume
customers to receive “extra” shipments
Milk Run Examples
SLCSLC
SLC
SLC
Example 1Example 2
Combination of Milk Runs & Direct Runs Results• Benefits:– Reduced time
between deliveries for low volume customers
– Reduced facility costs only need 20 day supply
– Reduced transportation costs
Salt Lake City Oakland Los Angeles $-
$10,000,000.00
$20,000,000.00
$30,000,000.00
$40,000,000.00
$50,000,000.00
$60,000,000.00
$70,000,000.00
$80,000,000.00
$90,000,000.00
Yearly Costs -- Some Milk Runs
Fixed and Variable Costs Based on 20 Days of StorageOutbound FreightInbound Freight
$14M/yr in Savings 19.4% Impr
Consider using this approach for Toronto, Allentown, Tulsa, Atlanta
Conclusions
• Los Angeles selected as the single Distribution Center.• Rough sizing for selected DC based on milk runs hybrid approach
(250,000 SqFt).• Inventory levels reduced by 50%• Inbound freight costs reduces from ~41M to ~33M.• Outbound freight costs reduces from ~72M to ~58M.• Impact to transit times more frequent delivery based on milk runs
approach• DC costs reduced by 50%• Savings of 14M a year will offset building costs.• Los Angeles DC for serving Western Canadian demand.• Investigate expansion Mexicali plant to serve Western demand.
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