Designing an Optimal Logistics Network

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Minimizing time and resource use are the common motives of using logistics in a company. In designing an optimal logistics network consisting of only one warehouse, there are considerations that need to be made. Optimum network determination requires a hierarchical approach in which decisions on network design, inventory positioning and management, and resource utilization are combined to reduce cost and increase service level.

Designing a network involves making decisions on the number, locations, and size of manufacturing plants and warehouse. Major sourcing decisions also are made at this point and the typical planning horizon should be a few years.  Inventory positioning includes identifying stocking points as well as selecting facilities that will produce to stock and thus keep inventory, and facilities that will produce to order and hence keep minimal inventory. In resource allocation, an effective manager determines whether production and packaging of different products is done at the right facility. What should be the plants’ sourcing strategies? How much capacity should each plant have to meet seasonal demand? (Kaminsky & Kaminsky, 2007).

An optimal logistics network requires that the supply chain be established. Normally, the chain is as follows:

Suppliers -----> manufacturers -----> distributors -----> final customer

After manufacturing of products, or their receipt from the supplier, they are commonly kept in the warehouse. The stock of goods in a warehouse may include work in progress (WIP), raw materials and finished goods. Since one warehouse means having less space for all these kinds of inventory, a competitive manager should effectively manage inventory. The goal of having effective inventory management and control mechanisms is to have the right inventory at the right place and at the right time. This also helps build an optimal logistics network that minimizes system costs such as transportation and holding costs while still satisfying customer service requirements. If only one warehouse is available, an effective manager will come up with an inventory policy. A firm’s inventory policy is the approach used to determine how to optimally manage a firm’s inventory. In arriving at an effective inventory policy, characteristics of the firm’s supply chain need to be taken into account. The management must know the level of customer demand. The management can forecast the demand using historical data as well estimate possible variations. Through determination of replenishment time, managers should consult each other and decide how much to produce, stock and distribute considering availability of only one warehouse. Overstocking of a product in one warehouse may create less space and budget for other raw materials, work in progress and finished goods. Above all, there is need to know the length of the planned period and the likely costs to be incurred. These costs include holding, maintenance, insurance and transportation costs.

An optimal logistics network requires that the warehouse manager performs periodic inventory review. This means that inventory will be reviewed at a fixed time interval and every time it is reviewed, a decision is made on the order size. The periodic inventory review policy makes it possible to identify slow-moving and obsolete products and allows management to continuously reduce inventory levels. This facilitates maximum use of the available space of the warehouse. An effective manager will need to practice tight management of usage rates, lead times, and safety stock. This allows the firm to make sure inventory is kept at the appropriate level. Such an inventory control process allows the firm to identify, for example, situations in which usage rates decrease for a few months. If no appropriate action is taken, this decrease in usage rates implies an increase in inventory levels over the same period of time. There is need to reduce safety levels by focusing on lead-time reduction. An optimum inventory policy introduces or enhances cycle counting practice. This process replaces the annual physical inventory count by a system where part of the inventory is counted every day, and each item is counted several times per year. There is need to have a frequent review policy for products that have the largest profit margin for the business. To reduce the amount of finished goods in the warehouse, a manager may shift more inventory ownership to suppliers. Overall, these approaches should take into consideration the best cost reduction strategy (Malik & Bidgoil, 2010).

An efficient manager should secure long-term contracts with distributors that eliminate financial risk. These contracts specify a fixed amount of supply to be delivered at some point in the future; the supplier and the buyer agree on both the price and the quantity to be delivered to the buyer. Thus, in this case, the buyer bears no financial risk while taking huge inventory risks due to uncertainty in demand and the inability to adjust order quantities. It also allows warehouse and production managers determine the necessary amount of stock to hold.

A manufacturer that has a competitive management team is flexible to their customers’ needs and changing demands. Manufacturers should be able to match supply and demand. This depends largely on their ability to change supply volume as information about demand arrives. Purchasing and distribution managers should use historical analysis and distribution contracts to determine how much to order and stock.

Even when demand is known precisely (e.g., because of contractual agreements), the planning process needs to account for demand and cost parameters varying over time due to the impact of seasonal fluctuations, trends, advertising and promotions, competitors’ pricing strategies, and so forth. These time-varying demand and cost parameters make it difficult to determine the most effective supply chain strategy, the one that minimizes system wide costs and conforms to customer requirements (Hines, 2004).

When only one warehouse is available, the management will need to determine the location and size of plants and allocate space for products in each facility. It will then determine the sourcing requirements and the distribution strategies, that is, placement of goods to the customer or distributor. In order to facilitate transfer of goods to distributors and customers, their location, and demand for each product will be established. As indicated earlier, determination of demand will be through analysis of historical data and supply contracts. The preferred transportation mode/modes will be established. This will be possible if product information such as durability, fragility and transportation costs is available (Cooper, Lambert, & Pagh, 1997).

When a firm experiences seasonal demand for its products or limited capacities, competitive promotions, or high volatility in forecasting, very competitive managers will be needed. For such a product, the management may consider to lease additional warehouse space. If the firm has limited capacities or experiences high volatility in forecasting, it may use a make-to-order technique. This facility allows it to manufacture when the order arrives. This happens in Meditech organization where raw materials pass through production and become finished goods without being inventoried.

The firm needs to decide on a monthly, quarterly, or annual basis how to utilize resources effectively. Through a chain master plan, the firm considers forecast demand for the entire planning horizon. Through resource allocation, managers determine where each product should be produced during the planning horizon, production quantities, shipment size, and storage requirements by product, location, and time period. From the supply chain master plan, an effective management team may propose a detailed manufacturing sequence and schedule. This allows the planner to integrate the back end of the supply chain (Jr. & Hult., 2006).

Tactical planning tools will be employed to help analyze demand plans and resource utilization to maximize profit. This enables balancing the effect of promotions, new product introductions, and other planned changes in demand patterns and supply chain costs. 

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