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Logistics Network Design: why and how to optimize?

26 July 2022
Article by Joana Moreira, consultant in Industrial Engineering and Management at INEGI.

The delivery time of a product is, today, a very important factor for the customer, so the design of a logistics network is extremely important for the optimization of costs and the fulfillment of the expected level of service.

Therefore, many of our customers challenge us to understand and adjust the design of this network to the needs of the business. An example of this was the challenge of the portuguese company Delta, which had our support in the study of its national distribution network, with the objective of responding to the growth in demand for the coffee business, and also for the brands of which it is a representative in the national territory, such as beers, teas and waters.

Whatever the challenge, the answer involves an in-depth study of the design of the logistics network, in order to answer the following questions: how many warehouses should there be in the logistics network? What is their dimension? What is the location? Which warehouse should supply each customer?

Since each logistics network has its specificities, it's necessary to understand the impact that each of the factors has on the network, namely: location of factories and warehouses, location of customers (demand mapping), the level of service that one intends to offer, as well as the typology of the products sold.

Additionally, the logistics network must be dimensioned while thinking of future of the business, allowing it to accommodate changes in demand and its respective expected growth, as well as the inclusion of new products and markets that may arise in the future.

Companies must balance cost and expected service level

It is therefore important to understand the main decision factors inherent to the challenge of designing a logistics network. Since the aim is to optimize costs, the following can be highlighted: facilities (warehouses, distribution centers…), inventory and transport.

As for facilities, it is important to determine the optimal number of locations where stock is held or where cross-docking1 is performed. In this determination it's important to analyze the places of demand and the necessary proximity to customers in order to comply with the expected lead time. It's important to highlight that the reduction in the number of points with stock in the network allows a decrease in the global inventory, however it can compromise the delivery lead time if the necessary proximity to the customer is not obtained. At the same time, it may impact the cost of capillary transport, given the greater distance to the customer.

In facilities, one of the main aspects is the correct dimensioning of the different operations, namely: reception, storage, picking and dispatch areas, in order to ensure the required capacity. Storage structures (racks, shelving…) and handling (forklift trucks, stackers,…) must be adequate and adjusted to the reality of the operation, namely the typology of business products and the typology of customer orders.

Regarding transport, it is worth mentioning the suitability of the fleet for the intended transport (both in number and in typology), as well as the cost of the different routes, from primary transport (from the supplier to the distribution centers of the business) to distribution capillary.

In summary, the design of a logistics network encompasses the following phases:
  • gathering information to detail the current situation: locations of current facilities, mapping demand and building demand clusters and identifying current operating costs;
  • analysis of the location of factories / suppliers and calculation of the respective primary transport cost from these facilities to the warehouses of the logistics network;
  • analysis of inventories by installation, as well as the respective operation and associated cost;
  • assessment of the expected future growth perspective, as well as the response capacity / service level that is intended to be obtained at each point of the network;
  • definition of a set of scenarios to simulate different approaches, such as: existence of a single distribution center, greenfield scenario, relocation of inventories, change in the location of warehouses, among others;
  • modeling scenarios to test impact and associated savings both financially and qualitatively; evaluation of the investments to be made for each scenario, comparison and decision of the scenario to be implemented and definition of a roadmap for the implementation of the new logistics network design.

The «optimal» logistics network is a balance of options for facilities, transport and inventory, so decisions on these cost elements should not be taken in isolation, as it can determine the success or failure of the logistics operation.

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