The objective of logistics network design is to create a logistics network where the material flow between source and demand points can move as quickly and as efficiently as needed. Of course, logistics is subject to a host of geographical and time constraints and the essence of good logistics network design is to build an optimal ‘path’ around these constraints.
In designing this path, the logistics network designer must consider the three ‘building blocks’ of the network – location strategy, transport strategy, and inventory strategy.
Location Strategy – where should facilities be located?
Location strategy is the first and most fundamental aspect of logistics network design. If the manufacturing plants, warehouses and distribution centres aren’t located in the optimal locations, according to the spatial and temporal requirements of the supply and demand points, then all the other building blocks of the logistics network will be compromised from the outset. Location strategy is the foundation stone of good logistics network design.
There are many challenges to determining where to optimally locate facilities within the logistics network. From a purely computational perspective, facilities should be located to minimise distance and/or time between the nodes of the network.
However, that’s only part of the story. Consideration must also be given to qualitative location issues such as the availability of suitable land or premises, skilled labour, transport links and any regional economic benefits in terms of labour costs or investment grants.
Typically, in a real-world environment, location decision modelling is not unconstrained. There are usually a pre-selected series of options to consider based on the qualitative factors. Options may have been pre-selected due to ownership of existing properties, location of existing staff or financial incentives to be within a specific target area.
If you would like to understand the analytical steps to take in developing a location strategy then read our article Warehouse Location – How Do You Decide Where to Locate a Warehouse?
Transport Strategy – what types of transport are required?
The transport strategy is the ‘web’ that connects all the locations in the logistics network. Whilst location strategy can be considered the foundation stone of logistics network design, transport is the biggest building block.
It’s not uncommon for transportation to incur up to 70% of logistics operating costs and consequently, all possible opportunities for optimisation need to be considered.
The first step in designing a transport strategy is to decide on mode – principally that’s road, water, air or rail, or an ‘intermodal’ combination. In some instances, the optimal selection of transport mode is very clear and needs no analysis.
For example, domestic deliveries in the UK would naturally be road. However, for international movements, the decision becomes more complex as you consider the comparative times, capacities and costs of road, water, air or rail.
Selecting the mode is only the first step – the second step is deciding how the selected mode should be configured. Within each mode, there is a host of varying sub-options for configuration, such as vehicle size and capacity.
The configuration options selected will very much depend on the configuration of material that you are sending through the logistics network. Large bulk movements of relatively low-value product, for example, bulk minerals, are most likely to be suited to tipper trucks and bulk shipping. However, higher value palletised goods may well be best suited to secure trailers and shipping containers.
In almost all logistics networks, road will play a dominant role in the movement of material. Even if a network uses shipping, rail and air, road is usually the primary access method to get material to rail terminals, ports and air terminals.
As road tends to be a dominant factor of many logistics networks, optimising road movements, through fleet profiling and route optimisation, is key to effective logistics network design. You can read more about transport routing and fleet optimisation in our section on transport routing.
Inventory Strategy – where does inventory need to be in the network?
In almost all logistics networks, there will be a variance between supply rates and volumes versus demand rates and volumes. It’s simply the case that end customers are unlikely to consume material at the same rate, and in the same quantity, as that material can be supplied upstream in the supply chain. This variance in demand and supply creates what are known as ‘decoupling points’ in the network.
Logistics networks may have many decoupling points. For example, a manufacturer is likely to have decoupling points between the supply of raw material and production, between production and packaging and between packaging and despatch to its customer. For every decoupling point, an inventory strategy decision must be made.
Predominantly, there are two methods of dealing with a decoupling point, either a Make-to-Order (MTO) or a Make-to-Stock (MTS) strategy.
The most cost-efficient method is deploying an MTO strategy. An MTO strategy means that material is only manufactured, or purchased, once an order is received. Assuming the order is for the equivalent amount that is supplied, then an MTO strategy avoids the need to hold inventory at a decoupling point.
However, this strategy is dependent on the demand lead time being equal to, or longer than, the supply lead time. This is rarely applicable at every decoupling point and every business is likely to also need an MTS strategy.
The MTS strategy means that a specific level of inventory is held at the decoupling point so that demand can still be met during the supply replenishment lead time. For example, if it takes 10 days to manufacture a product but customers want the product within 2 days, then the customer orders will need to be met from inventory.
Inventory at these decoupling points can be a major expense for any business, both in terms of working capital and the operational costs associated with storage. Consequently, optimising the level of inventory at each decoupling point is critical. This can be done through demand forecasting – estimating and producing what the customer wants before their order is placed, and/or the deployment of an inventory optimisation policy.
You can read more about inventory optimisation and management in our section on inventory optimisation.
Logistics network design can be undertaken as a whole, working through each of the three building blocks, or, as is more common, working to optimise the individual blocks in an existing logistics operation. If you would like support or advice on logistics network design, please contact our consulting team on 0121 517 0008 or email [email protected]