Chap. 3 - Logistics Network Design

Question 1

What has the “Sisyphus Analogy” in common with the calculation of transportation costs?

Answer 1

Sisyphus is a character of Greek mythology that because of his misdeeds was condemned for eternity by the gods to roll a stone up a hill, only to see it roll back down.

The legend offers several analogies to introduce key concepts behind transportation, which are volume, distance, friction and effort.

• Volume represents a load of passengers or freight that can be carried as a single load.
• Friction is the difficulty of moving a volume per unit of distance. It can be related for instance to the quality of transport infrastructure.
• Effort is the amount of energy required to move the volume per unit of distance, considering the friction. It is commonly represented as the cost of transport.

Essentially, Effort = f(volume, distance, friction). If friction was reduced, it would require less effort to move the same volume over a distance. A core goal of transportation is consequently to reduce the friction of distance, mostly through infrastructure, capacity and technological improvements.

Another element of the myth is its repetitiveness, which applies to transportation. Commuting is an activity that must constantly be repeated as the effort spent for one commute cannot be transferred to another.

Question 2

Out of the “Sisyphus Analogy”, we derived four key problems in transportation networks. Name and explain in brief each of these generic problems!

Answer 2

There are four major types of problems that affect transport systems:

1. Capacity. A basic constraint concerns appropriate capacity, both along a transport route and at a terminal. The capacity of a transport system is often restricted by its circulation bottlenecks.
2. Transfer. Transfer points are crucial as they permit the interface between different transport systems, a role commonly served by hubs or gateways.
3. Reliability. A multidimensional problem that concern the expectation that a movement will occur within a specific time and cost range. While a route could be shorter, it may not be as reliable as a longer route. Congestion is a common factor impairing the reliability of a transport system.
4. Integration. Exploiting the benefits of each transport mode so that flows become more reliable and/or less costly. This goal is sought by intermodal transportation, but also by airline companies connecting different parts of the world.

Question 3

How would you define an “efficient” design of a logistics network?

How would you measure this “efficiency”?

Answer 3

Efficiency means “doing the things right”.

An efficient logistics network design deals perfectly with the trade-offs between the generic goals of a logistics system. The efficiency of the network design is measured by how good the network design deals with these partly conflicting goals:

• Low flow costs (of objects) and low tied-up capital costs (tied-up in resources) in providing the promised service
• Providing a high degree of product availability in space and time from the perspective of final consumer/customer
• Having a high degree of flexibility to adapt to environmental changes (seasonal fluctuations, fluctuations of customer demand in space, time and objects)

Question 4

What are the influencing factors on an efficient logistics network design?

Answer 4

The influencing factors on the efficiency of a logistics network are represented by the “Seven Principles of Network Design”:

1. Consolidation in inventory management → Risk Pooling Concepts
2. Consolidation of transports → Freight Consolidation Concepts (FTL)
3. Balancing planning vs. speculation in the definition of the “Order Penetration Point” → Postponement Strategies
4. Leveling of the demand flow → Instruments for reducing the Bullwhip Effect
5. Structural flexibility and robustness on environmental changes → Risk Management
6. Simplicity and responsiveness → Lean Management
7. Sustainability → Regulation and sustainable processes

Question 5

What are the positive effects of the centralization of inventory in a logistics transportation network?

Answer 5

Positive effects of the centralization of inventory are:

• Higher turnover of SKUs
• Ordering of complete “unit loads”
• Higher grade of load unit utilization
• Reduction of transaction costs
• Reduction of replenishment cycles in end consumer delivery

Question 6

What idea stands behind “Risk Pooling” in a supply chain?

Characterize the idea of “Inventory Pooling” as a specific method of risk pooling in SCs!

Answer 6

We define risk pooling in business logistics as consolidating individual variabilities (measured with the standard deviation) of demand and/or lead time in order to reduce the total variability they form and thus uncertainty and risk (the possibility of not achieving business objectives).

Inventory pooling suggests that demand variability is reduced if one aggregate demand across locations because it becomes more likely that high demand from one customer will be offset by low demand from another. This reduction of variability allows a decrease in safety stock and therefore reduces inventory

Assumption: a negative correlation between the consolidated products; service level is stable

Question 7

Characterize the trade-off problem in logistics networks when you try to get the positive effects of consolidated transports?

Answer 7

The key trade-off is between minimizing inventory costs while at the same time minimizing transportation costs. Two situations are possible:

Truck waits until FTL is ready (pull)
→ Variabilization of delivery times for customer
→ compensation by higher safety stock

Truck leaves as FTL immediately (push)
→ over-stock at the delivery point
→ only economical if order policy is an integrated part of tour planning

Consequence for the network design:

When it comes to a total cost perspective: products with higher value density (e.g. high value per pallet) are not so transport cost sensitive than products with low value density → Products with low value density should be transported as part of a larger load unit (FTL)

Question 8

Please explain the “Rule of Ten” (in product development) and what does it mean for the design of logistics service networks!

Answer 8

The “rule of ten” specifies that it costs 10 times more to find and repair a defect at the next stage of assembly. Thus, it costs 10 times more cost to find a part defect at a sub-assembly; 10 times more to find a sub-assembly defect at final assembly; 10 times more in the distribution channel; and so forth. All parts must have reliable sources that can deliver consistent quality over time in the volumes required. (For more information click here)

The consequence for the design of efficient logistics service networks is that the biggest impact lies in improvements/corrections on the stage of “network configuration”, followed by improvements in the stages of “network programming” and “network mobilization”. Furthermore, the customization of objects and flows in logistics networks should be postponed downstream in the direction of the final customer.

Question 9

What is the “Order Penetration / Decoupling Point” in a supply chain?

Answer 9

Order Penetration/Decoupling Point: Point in the Supply Chain where a product is assigned to a particular customer. Before this point, the material flow is controlled by forecasts and plans (push), and afterward as deliveries according to customer needs (pull).

Question 10

Why and how could a “Postponement Strategy” help in saving transportation costs in a logistics service network?

Answer 10

A postponement strategy aims to find out where is the most located step in a supply chain where the WIP-inventory is customized according to the specific customer needs.

Before this step (the OPP), the transports are driven by a “push” (forcast driven) strategy of non-customized object flows searching for maximum consolidation (Economies of Scale) and turnover of freight flows; after this step, the object flow is customized and “pulled” by the specific order details. This last step should be minimized to minimize the total logistics costs.

Question 11

What is the “Bullwhip Effect” in a supply chain?

Answer 11

The “Bullwhip Effect” describes the phenomenon that the demand order variabilities in the supply chain are amplified as they moved up the supply chain. That increases the material stock from link to link in the SC. The longer the lead times of material and information the stronger the effect

Question 12

What are positive effects of reducing the “Bullwhip Effect” in a SC?
Reason your answers!

Answer 12

The most positive effects on reducing the “Bullwhip Effect” are the direct consequences of a leveled demand and production flow:

• Lower safety stocks in all resource nodes of the SC
• Because of the leveling of the demand-flow, the resource allocation (people, machines, etc.) is more efficient
• The quality of work is improved by a more continuous work-flow

Question 13

What are the key instruments for reducing the “Bullwhip Effect” in a SC?
Reason your answers!

Answer 13

Key instruments for reducing the “Bullwhip Effect” in a SC are:

• Information alignment among all partners of the SC by the usage of information and communication technologies (EDI, telematics etc.) This speeds up the information about changes in customer demand and in the consequence increase the quality of forecasting and production planning → substitution of stock by faster information
• Implementation of “Pull strategies” in production. This reduces the lead times for all partners by a flow of “lot size 1” and a “JIT” production and distribution
• Yield Management for a (production) capacity driven pricing. The idea is to level the demand peaks (and their fluctuations over time) by changing the attractiveness of a product with different prices.

Question 14

What are the main drivers of the “Bullwhip Effect” in a SC?

Answer 14

1. First Reason: Demand Forecast Updating
   Every actor in the SC has a forecast process that is based on (personal) experience in customer demand. The consequence is a “addition” of uncertainty in the forecast along the SC. (long lead times -> higher fluctuations)
2. Second Reason: Order Batching
   The typical order process is weekly, biweekly or monthly because of fixed costs for ordering, high transportation costs (FTL!) and sales “end of quarter/year order surges”. That pushes the BE because of large order amounts.
3. Third Reason: Price Fluctuation
   Usually, the ordering process rewards ordering in larger batches for better prices – especially in the case of promotions (buyouts or seasonal reasons)
4. Fourth Reason: Rationing and Shortage Gaming
   When product demand exceeds supply, a manufacturer often rations its product to customers. Consequence: the customer is ordering a large amount to make sure he can get enough of the desired product

Question 15

What are the key objectives of “Risk Management”?

Answer 15

The key objectives of “Risk Management” are to get higher structural flexibility and robustness in a SC by:

1. Developing a common understanding of the existing risks
2. Building capabilities to respond effectively on the so identified risks
3. Achieving a better understanding for risks over time
4. Building safeguards against earnings-related surprises
5. Cost savings through the management of internal resources
6. Allocating capital more efficiently

Question 16

Name and explain the key steps for analyzing (transportation) risks in a systematic way!

Answer 16

1. Identify potential transportation disruptions by interviews, surveys, past records analysis or brainstorming sessions. Categorize the identified risks in case-specific clusters (product loss, contamination, product damage, delivery delay etc.)
2. Analyze the identified risks regarding:
   - the probability that the risk will occur in practice
   - the impact of the risk consequence on business objectives
   - the proximity when the risk will happen
3. Manage the ranked lists in a systematic “risk strategy” with the goals of
   - risk avoidance
   - risk transfer, so that the probability of risk occurrence will be reduced
   - risk reduction by e.g. shifting the risk to third party providers
   - risk retention for risks wich are minor or the cost of mitigating outweight the benefits
4. Review and monitor important risks on the base of risk scenarios and KPIs

Question 17

In which aspects is the “Toyota Production System” (TPS) a reference for the simplicity and responsiveness of logistics networks?

Answer 17

The TPS is a system-based approach for the “waste-free” resp. “lean” design of procurement-, production- and distribution-networks getting low costs, high quality and short lead time in parallel. In this context, the biggest kind of waste is the “overproduction” - you produce on stock without real customer demand.

In consequence, the TPS implements a “Just in Time” procurement, production and distribution of goods. Pre-requisite is a simple, often visual based design of all processes and value-adding activities steered by “pull” (demand-driven) triggers.

Question 18

How can we keep the responsiveness of a logistics network high at all times?

Answer 18

To keep the responsiveness of a logistics network high at all times, we have to adapt the logistics network “takt-time” according to the different demand patterns of the customer. Therefore you can find in practice different time patterns along a continuum from stochastic demand until continuous demand:

• “Calling”-Systems with high, expansive resource levels (taxi, charter, courier)
• A framework of disposition with ad-hoc injections (typical for forwarding services)
• Plan based systems (like for CEP, Deutsche Bahn)

Question 19

What are the main drivers of the need for a more “sustainable” network design?

Answer 19

Important drivers for a more “sustainable” network design are:

• Increasing energy costs and an increasing demand for “greener” production and or logistics-solutions
• Limitation of the existing infrastructure - driving the demand for efficient solutions in using the existing capacity constraints
• Increasing political pressure with more regulations about environmental impacts

Question 20

What is the function of the ETS System in Europe and how is it working?
Please explain first for what the abbreviation “ETS” is standing for?

Answer 20

ETS is the European Trading System for carbon emissions.

“The EU emissions trading system (EU ETS) is a cornerstone of the EU’s policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively. (…)

The EU ETS works on the ‘cap and trade’ principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. The cap is reduced over time so that total emissions fall.

Within the cap, companies receive or buy emission allowances which they can trade with one another as needed. They can also buy limited amounts of international credits from emission-saving projects around the world. The limit on the total number of allowances available ensures that they have a value.

After each year a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances.”

For the source of this citation and further information click here.