Network Design with Excel vs a Commercial Tool

On Sept 21, on the Ops Rules Blog, David Simchi-Levi responded to a question about whether to make network design decisions with a spreadsheet or commercial tool.

He says the main reason is that Excel is not set up to handle the complexity of the problem and the mathematical optimization.  In addition, he cites several advantages of a commercial package:

  1. Ease of use of setting up the data and validating it
  2. Built in optimization and analytics which cannot be done with a spreadsheet
  3. Built in maps, graphs, scenario comparison and reporting capabilities
  4. Tested and stable platform for continued analysis – easy to transfer and share with other users

If you want to see a 15-minute video of commercial tool, here is a link.

I would add just one more point:  There is a lot at stake with network design.  You can be making decisions that impact significantly impact your costs and service.  You should make sure you understand, at least at a high level, the math involved in these before you do the project in Excel.  This way, you will have a sense of what you are giving up.

Nine Topics That You Can Teach With Network Design

While writing about supply chain network design, we realized that it touched many different subject areas.  We wrote the network design book so that you could use it in many different types of classes.

For example, here are nine different areas you could explore in more depth after an introduction to the topic through network design:

  1. Optimization.  When you solve a network design problem, the solver uses mixed integer programming (MIP).  The book provides the formulation to help the reader gain intuition from the math (click here for more on the value of understanding the math).  If you want to your class to focus on optimization, you can start with the formulations, and then have your students explore more about MIPs.  We have discussions on the knapsack problem and computational complexity you could cover in more depth.
  2. Transportation Markets.  Obviously, transportation costs are important to network design and facility location.  We introduce different modes of transportation like Full Truckload, Less-Than-Truckload (LTL), Parcel, Rail, and others.  You could use this as a staring point to discuss these markets in detail.
  3. Modeling.  We discuss how to map the real world into a mathematical model.  This is a skill that should be applied beyond network design.  Also relevant to other problems is a discussion about the level of precision and number of significant digits in a model.
  4. Activity Based Costing vs Standard Accounting.  When building a network design model, you need to carefully use cost information that will help answer the appropriate question.  Often, this cost information is not the same that gets reported by the accounting team.  The costs reported by the accounting team may have mixed fixed and variable costs together and may have assumptions about the throughput of a site.  It is important to understand these assumptions before using a cost figure in a model.
  5. Regression.  Regression can help you determine transportation costs for lanes you aren’t currently based on the lanes you are using.
  6. Vehicle Routing.  When you open new warehouses, your delivery routes will change.   You can use network design to introduce vehicle routing.
  7. Inventory Optimization.  Service level is an important concept in network design.  But, the location of facilities only covers some aspects of service level.  Inventory optimization covers other aspects.  Also, as you add or remove warehouses, you may have more or less system-wide safety stock.
  8. Debugging.  Network design models capture the entire supply chain.  This means you can build some complex model. Debugging is an important topic and it applies to much more than just network design.
  9. Multi-Objective Optimization.  Many other problems besides network design balance multiple objectives.  You can use network design to introduce the topic and then go into other problems.

Our course material can help you get started with each of these areas.

Top 3 Reasons You Should Use Pizza Deliver to Explain Supply Chain Strategy Concepts

I haven’t thought much about pizza delivery in the last 10 years.  However, it seems like a lot of people do.  And, efficient pizza delivery makes people happy.

So, maybe we should use pizza deliver to explain supply chain concepts to people who may not have thought much about the supply chain.  When we wrote the book, pizza delivery helped explain some concepts.  Within the last 48, I’ve seen two other examples with pizza delivery.

Here are my top 3 reasons why you should use pizza delivery to explain the supply chain:

  1. Our book has a good example that uses pizza delivery to define different uses of the term service level.  Service level can mean the time to get a pizza to someone’s house or the percent of time you have the ingredients your customers ask for.  You need good network design to locate your restaurants and good inventory control and forecasting to make sure you have what your customers will order.
  2. Yesterday’s blog post brought up the fact that you better have good processes in place to quickly get the order, make the pizza, and deliver it.  Specifically, yesterday’s post highlighted that you better be able to take orders from the phone, the web, and from mobile apps.  A good discussion on having the right IT strategy.
  3. The book, The Human Face of Big Data, used pizza delivery in Manhattan to show movement.  The picture at the top of the post shows the path’s of the Domino’s pizza delivery bikers on a Friday night.  From the picture, the very bright spots show the locations of the restaurants and you can see the areas with the most demand.  This highlights how a supply chain must deliver to its customers.  The article points out that these restaurants receive product from a warehouse in Connecticut (so, there is an infrastructure behind the local infrastructure).  Someone had to decide on this warehouse in Connecticut and how many cities it would serve.

With these three examples, you can explain a lot about supply chain strategy with a business that people can relate to.

Pizza Delivery and Service Level

Service level is an important concept in network design.

However, the term “service level” has many different meanings within a supply chain.

So, while writing this book, we needed a good example to help explain the different definitions of service level and how they do or don’t impact network design decisions.

One of the authors (who we won’t name) came up with the great idea to use pizza delivery as an example.  She thought that after a long week at work, being able to quickly get a pizza delivered to your home can bring pure happiness.  Everyone can relate to this example.

This example, which we expand on in the book, is easy to explain and describes the different types of service levels and how network design can help.  For example, network design can help locate your restaurants close to customers, but it can’t help you quickly take an order and bake a pizza.

Apparently, others are also using pizza delivery to discuss service level.  This blog post by Clay Richardson uses this example:

…I needed to order a pizza for my family after a very hectic Saturday afternoon. When I picked up my mobile phone to call the pizza delivery place, a light bulb went off over my head. Instead of dialing the pizza delivery company and waiting on hold for 15 minutes, why not download its mobile app in two minutes and order my pizza within another two minutes. I figured I could shave off ten minutes of wait time by simply downloading the pizza delivery company’s mobile app.

Take a guess how long it took me to order the pizza? A whopping 20 minutes! Why? Because the pizza delivery company did not invest time optimizing its order process for the mobile experience. “

This example again proves the difference between operational service level measures and those related to network design problems. Similar to our example in the book, in this situation the restaurant was located where the customer had already proven the pizza could be delivered in a time that was acceptable but the service level related to the order process causes an unsatisfied customer in the end.  Both types of service are important to the delivering a pizza on time.  And what else provides more satisfaction than a hot pizza delivered quickly to the customer’s while enjoying their weekend!


Geographic Scope of Network Design

We are often asked the question about the geographic scope of network design studies.

We have seen studies done at the global, continental, country, regional, and metro areas.  The last two are usually the ones that people question since they usually see examples of a national study.

However, when a firm makes home or local business deliveries within a metro area, they often have exactly the same trade-offs you would see in a national study.  These firms don’t want their expensive (and maybe small) delivery trucks to spend a lot of time in traffic or driving across the city.  They would rather these trucks spend time at customer sites.

Therefore, they will often need to set up hubs within the metro area.  The product moves from a central warehouse to these hubs.  Then, the delivery trucks pick up product from these locations and spend time serving customers in their area.

An on-line grocer would be an example of this.  The on-line grocer doesn’t want its delivery trucks fighting traffic.  Instead, a central location (where they can get economies of scale in processing and inventory) will truck the groceries to hub where multiple delivery trucks will take it from there.

In general, if you need multiple locations, network design can help you.

Top 3 Reasons You Should Understand the Math Behind Network Design

Commercial network design tools (like IBM’s ILOG LogicNet Plus XE) hide the math formulations behind an easy-to-use interface and take care of the sophisticated solve automatically.

This is how it should be.  You don’t want to think about the math when doing a project like this.  You want to successfully complete the project.

However, in the book, we cover some of the math behind these problems.  Why do we do this?

  1. To Help You Build Better Models.  You don’t need to write the math on your own or go into the details of how the solver works.  But if you understand the math, you will be better able to set up models to do what what you want them to do.
  2. To Help You Understand What Might Be Hard vs Easy.  If you understand the math, you will understand what may make your model hard to solve.
  3. To Help You Validate the Results.  Generating a solution to a network design problem requires an understanding of Mixed Integer Programming.  But, with commercial software, you are presented results.  By understanding the math, you will be able to validate the results and make sure the solution is valid.  This allows you to better manage projects and ensure good results.


Material for a Discussion on Oil Prices and Transportation Costs

Supply chain managers watch the price of oil carefully.  The price of oil is closely related to the price of diesel fuel and that is closely correlated to total transportation spend.  An IBM blog post provides additional information on how this impacts the supply chain and a link to a nice article in The Wall Street Journal on the same topic.

In the book, we provide a mini-case study showing how oil prices impact diesel costs.   The following scatterplot shows the raw data– the weekly price of oil vs the weekly price of  diesel for 300+ observations.

This case study as well as the links above provide a nice introduction to the impact of oil prices on the supply chain.