Introduction to Logistics Systems Planning and Control

TLFeBOOK Introduction to Logistics Systems Planning and Control TLFeBOOK WILEY-INTERSCIENCE SERIES IN SYSTEMS AND OPTIMIZATION Advisory Editors Sheldon Ross Department of Industrial Engineering and Operations Research, University of California, Berkeley, CA 94720, USA Richard Weber Statistical Laboratory, Centre for Mathematical Sciences, Cambridge University, Wilberforce Road, Cambridge CB3 0WB BATHER – Decision Theory: An Introduction to Dynamic Programming and Sequential Decisions CHAO/MIYAZAWA/PINEDO – Queueing Networks: Customers, Signals and Product Form Solutions COURCOUBETIS/WEBER – Pricing Communication Networks: Economics, Technology and Modelling DEB – Multi-Objective Optimization using Evolutionary Algorithms GERMAN – Performance Analysis of Communication Systems: Modeling with Non-Markovian Stochastic Petri Nets GHIANI/LAPORTE/MUSMANNO – Introduction to Logistics Systems Planning and Control KALL/WALLACE – Stochastic Programming KAMP/HASLER – Recursive Neural Networks for Associative Memory KIBZUN/KAN – Stochastic Programming Problems with Probability and Quantile Functions RUSTEM – Algorithms for Nonlinear Programming and Multiple-Objective Decisions WHITTLE – Optimal Control: Basics and Beyond WHITTLE – Neural Nets and Chaotic Carriers The concept of a system as an entity in its own right has emerged with increasing force in the past few decades in, for example, the areas of electrical and control engineering, economics, ecology, urban structures, automation theory, operational research and industry. The more definite concept of a large-scale system is implicit in these applications, but is particularly evident in such fields as the study of communication networks, computer networks, and neural networks. The Wiley-Interscience Series in Systems and Optimization has been established to serve the needs of researchers in these rapidly developing fields. It is intended for works concerned with the developments in quantitative systems theory, applications of such theory in areas of interest, or associated methodology. TLFeBOOK Introduction to Logistics Systems Planning and Control Gianpaolo Ghiani Department of Innovation Engineering, University of Lecce, Italy Gilbert Laporte Canada Research Chair in Distribution Management, HEC Montre´al, Canada Roberto Musmanno Department of Electronics, Informatics and Systems, University of Calabria, Italy TLFeBOOK Copyright © 2004 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England Phone (+44) 1243 779777 Email (for orders and customer service enquiries): cs-books@wiley.co.uk Visit our Home Page on www.wileyeurope.com or www.wiley.com All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP, UK, without the permission in writing of the Publisher. Requests to the Publisher should be addressed to the Permissions Department, John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England, or emailed to permreq@wiley.co.uk, or faxed to (+44) 1243 770571. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the Publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Other Wiley Editorial Offices John Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USA Jossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USA Wiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, Germany John Wiley & Sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, Australia John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809 John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1 Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloguing-in-Publication Data Ghiani, Gianpaolo. Introduction to logistics systems planning and control / Gianpaolo Ghiani, Gilbert Laporte, Roberto Musmanno. p. cm. – (Wiley-Interscience series in systems and optimization) Includes bibliographical references and index. ISBN 0-470-84916-9 (alk. paper) – ISBN 0-470-84917-7 (pbk.: alk. paper) 1. Materials management. 2. Materials handling. I. Laporte, Gilbert. II. Musmanno, Roberto. III. Title. IV. Series. TS161.G47 2003 658.7–dc22 2003057594 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0-470-84916-9 (Cloth) 0-470-84917-7 (Paper) Produced from LATEX files supplied by the authors, typeset by T&T Productions Ltd, London. Printed and bound in Great Britain by TJ International, Padstow, Cornwall. This book is printed on acid-free paper responsibly manufactured from sustainable forestry in which at least two trees are planted for each one used for paper production. TLFeBOOK To Laura To Ann and Cathy To Maria Carmela, Francesco and Andrea TLFeBOOK TLFeBOOK Contents Foreword xiii Preface xv Abbreviations xvi Problems and Website xix Acknowledgements xxi About the Authors xxiii 1 Introducing Logistics Systems 1 1.1 Introduction 1 1.2 How Logistics Systems Work 6 1.2.1 Order processing 6 1.2.2 Inventory management 6 1.2.3 Freight transportation 9 1.3 Logistics Managerial Issues 14 1.4 Emerging Trends in Logistics 16 1.5 Logistics Decisions 18 1.5.1 Decision support methods 18 1.5.2 Outline of the book 20 1.6 Questions and Problems 20 1.7 Annotated Bibliography 22 2 Forecasting Logistics Requirements 25 2.1 Introduction 25 2.2 Demand Forecasting Methods 28 2.2.1 Qualitative methods 28 2.2.2 Quantitative methods 29 TLFeBOOK viii CONTENTS 2.2.3 Notation 30 2.3 Causal Methods 30 2.4 Time Series Extrapolation 33 2.4.1 Time series decomposition method 34 2.5 Further Time Series Extrapolation Methods: the Constant Trend Case 41 2.5.1 Elementary technique 42 2.5.2 Moving average method 44 2.5.3 Exponential smoothing method 48 2.5.4 Choice of the smoothing constant 49 2.5.5 The demand forecasts for the subsequent time periods 49 2.6 Further Time Series Extrapolation Methods: the Linear Trend Case 50 2.6.1 Elementary technique 50 2.6.2 Linear regression method 51 2.6.3 Double moving average method 52 2.6.4 The Holt method 53 2.7 Further Time Series Extrapolation Methods: the Seasonal Effect Case 54 2.7.1 Elementary technique 55 2.7.2 Revised exponential smoothing method 56 2.7.3 The Winters method 58 2.8 Advanced Forecasting Methods 61 2.9 Selection and Control of Forecasting Methods 64 2.9.1 Accuracy measures 64 2.9.2 Forecast control 65 2.10 Questions and Problems 67 2.11 Annotated Bibliography 72 3 Designing the Logistics Network 73 3.1 Introduction 73 3.2 Classification of Location Problems 74 3.3 Single-Echelon Single-Commodity Location Models 77 3.3.1 Linear transportation costs and facility fixed costs 79 3.3.2 Linear transportation costs and concave piecewise linear facility operating costs 90 3.4 Two-Echelon Multicommodity Location Models 95 3.5 Logistics Facility Location in the Public Sector 107 3.5.1 p-centre models 108 3.5.2 The location-covering model 111 3.6 Data Aggregation 115 3.7 Questions and Problems 118 3.8 Annotated Bibliography 119 TLFeBOOK CONTENTS ix 4 Solving Inventory Management Problems 121 4.1 Introduction 121 4.2 Relevant Costs 121 4.3 Classification of Inventory Management Models 123 4.4 Single Stocking Point: Single-Commodity Inventory Models under Constant Demand Rate 123 4.4.1 Noninstantaneous resupply 124 4.4.2 Instantaneous resupply 128 4.4.3 Reorder point 130 4.5 Single Stocking Point: Single-Commodity Inventory Models under Deterministic Time-Varying Demand Rate 130 4.6 Models with Discounts 132 4.6.1 Quantity-discounts-on-all-units 132 4.6.2 Incremental quantity discounts 134 4.7 Single Stocking Point: Multicommodity Inventory Models 136 4.7.1 Models with capacity constraints 136 4.7.2 Models with joint costs 138 4.8 Stochastic Models 141 4.8.1 The Newsboy Problem 141 4.8.2 The (s, S) policy for single period problems 142 4.8.3 The reorder point policy 143 4.8.4 The periodic review policy 145 4.8.5 The (s, S) policy 146 4.8.6 The two-bin policy 147 4.9 Selecting an Inventory Policy 148 4.10 Multiple Stocking Point Models 149 4.11 Slow-Moving Item Models 152 4.12 Policy Robustness 153 4.13 Questions and Problems 154 4.14 Annotated Bibliography 155 5 Designing and Operating a Warehouse 157 5.1 Introduction 157 5.1.1 Internal warehouse structure and operations 159 5.1.2 Storage media 160 5.1.3 Storage/retrieval transport mechanisms and policies 161 5.1.4 Decisions support methodologies 165 5.2 Warehouse Design 165 5.2.1 Selecting the storage medium and the storage/retrieval transport mechanism 166 5.2.2 Sizing the receiving and shipment subsystems 166 5.2.3 Sizing the storage subsystems 166 5.3 Tactical Decisions 174 TLFeBOOK x CONTENTS 5.3.1 Product allocation 174 5.4 Operational Decisions 180 5.4.1 Batch formation 181 5.4.2 Order picker routing 184 5.4.3 Packing problems 185 5.5 Questions and Problems 195 5.6 Annotated Bibliography 198 6 Planning and Managing Long-Haul Freight Transportation 199 6.1 Introduction 199 6.2 Relevant Costs 200 6.3 Classification of Transportation Problems 201 6.4 Fleet Composition 204 6.5 Freight Traffic Assignment Problems 206 6.5.1 Minimum-cost flow formulation 207 6.5.2 Linear single-commodity minimum-cost flow problems 209 6.5.3 Linear multicommodity minimum-cost flow problems 217 6.6 Service Network Design Problems 224 6.6.1 Fixed-charge network design models 225 6.6.2 The linear fixed-charge network design model 226 6.7 Shipment Consolidation and Dispatching 233 6.8 Freight Terminal Design and Operations 236 6.8.1 Design issues 236 6.8.2 Tactical and operational issues 237 6.9 Vehicle Allocation Problems 239 6.10 The Dynamic Driver Assignment Problem 241 6.11 Questions and Problems 243 6.12 Annotated Bibliography 244 7 Planning and Managing Short-Haul Freight Transportation 247 7.1 Introduction 247 7.2 Vehicle Routing Problems 249 7.3 The Travelling Salesman Problem 252 7.3.1 The asymmetric travelling salesman problem 252 7.3.2 The symmetric travelling salesman problem 257 7.4 The Node Routing Problem with Capacity and Length Constraints 265 7.4.1 Constructive heuristics 269 7.5 The Node Routing and Scheduling Problem with Time Windows 273 7.5.1 An insertion heuristic 274 TLFeBOOK CONTENTS xi 7.5.2 A unified tabu search procedure for constrained node routing problems 278 7.6 Arc Routing Problems 281 7.6.1 The Chinese postman problem 281 7.6.2 The rural postman problem 286 7.7 Real-Time Vehicle Routing and Dispatching 291 7.8 Integrated Location and Routing 294 7.9 Vendor-Managed Inventory Routing 294 7.10 Questions and Problems 296 7.11 Annotated Bibliography 297 8 Linking Theory to Practice 299 8.1 Introduction 299 8.2 Shipment Consolidation and Dispatching at ExxonMobil Chemical 300 8.3 Distribution Management at Pfizer 302 8.3.1 The Logistics System 303 8.3.2 The Italian ALFA10 distribution system 305 8.4 Freight Rail Transportation at Railion 307 8.5 Yard Management at the Gioia Tauro Marine Terminal 308 8.6 Municipal Solid Waste Collection and Disposal Management at the Regional Municipality of Hamilton-Wentworth 312 8.7 Demand Forecasting at Adriatica Accumulatori 312 8.8 Distribution Logistics Network Design at DowBrands 314 8.9 Container Warehouse Location at Hardcastle 317 8.10 Inventory Management at Wolferine 321 8.11 Airplane Loading at FedEx 322 8.12 Container Loading at Waterworld 324 8.12.1 Packing rolls into containers 324 8.12.2 Packing pallets into containers 325 8.13 Air Network Design at Intexpress 325 8.14 Bulk-Cargo Ship Scheduling Problem at the US Navy 330 8.15 Meter Reader Routing and Scheduling at Socal 332 8.16 Annotated Bibliography 334 8.17 Further Case Studies 336 Index 339 TLFeBOOK TLFeBOOK Foreword Logistics is concerned with the organization, movement and storage of material and people. The term logistics was first used by the military to describe the activities associated with maintaining a fighting force in the field and, in its narrowest sense, describes the housing of troops. Over the years the meaning of the term has grad- ually generalized to cover business and service activities. The domain of logistics activities is providing the customers of the system with the right product, in the right place, at the right time. This ranges from providing the necessary subcomponents for manufacturing, having inventory on the shelf of a retailer, to having the right amount and type of blood available for hospital surgeries. A fundamental characteristic of logistics is its holistic, integrated view of all the activities that it encompasses. So, while procurement, inventory management, transportation management, warehouse management and distribution are all important components, logistics is concerned with the integration of these and other activities to provide the time and space value to the system or corporation. Excess global capacity in most types of industry has generated intense competition. At the same time, the availability of alternative products has created a very demanding type of customer, who insists on the instantaneous availability of a continuous stream of new models. So the providers of logistics activities are asked to do more transac- tions, in smaller quantities, with less lead time, in less time, for less cost, and with greater accuracy. New trends such as mass customization will only intensify these demands. The accelerated pace and greater scope of logistics operations has made planning-as-usual impossible. Even with the increased number and speed of activities, the annual expenses asso- ciated with logistics activities in the United States have held constant for the last several years around ten per cent of the gross domestic product. Given the significant amounts of money involved and the increased operational requirements, the planning and control of logistics systems has gained widespread attention from practitioners and academic researchers alike. To maximize the value in a logistics system, a large variety of planning decisions has to be made, ranging from the simple warehouse-floor choice of which item to pick next to fulfil a customer order to the corporate-level deci- sion to build a new manufacturing plant. Logistics planning supports the full range of those decisions related to the design and operation of logistics systems. TLFeBOOK xiv FOREWORD There exists a vast amount of literature, software packages, decision support tools and design algorithms that focus on isolated components of the logistics system or isolated planning in the logistics systems. In the last two decades, several companies have developed enterprise resource planning (ERP) systems in response to the need of global corporations to plan their entire supply chain. In their initial implementations, the ERP systems were primarily used for the recording of transactions rather than for the planning of resources on an enterprise-wide scale. Their main advantage was to provide consistent, up-to-date and accessible data to the enterprise. In recent years, the original ERP systems have been extended with advanced planning systems (APSs). The main function of APSs is for the first time the planning of enterprise- wide resources and actions. This implies a coordination of the plans among several organizations and geographically dispersed locations. So, while logistics planning and control requires an integrated, holistic approach, their treatment in courses and textbooks tends to be either integrated and qualita- tive or mathematical and very specific. This book bridges the gap between those two approaches. It provides a comprehensive and modelling-based treatment of the complete distribution system and process, including the design of distribution cen- tres, terminal operations and transportation operations. The three major components of logistics systems—inventory, transportation and facilities—are each examined in detail. For each topic the problem is defined, models and solution algorithms are presented that support computer-assisted decision-making, and numerous applica- tion examples are provided. The book concludes with an extensive set of case studies that illustrate the application of the models and algorithms in practice. Because of its rigorous mathematical treatment of real-world planning and control problems in logistics, the book will provide a valuable resource to graduate and senior undergrad- uate students and practitioners who are trying to improve logistics operations and satisfy their customers. Marc Goetschalckx Georgia Institute of Technology Atlanta, May 2003 TLFeBOOK Preface Logistics is key to the modern economy. From the steel factories of Pennsylvania to the port of Singapore, from the Nicaraguan banana fields to postal delivery and solid waste collection in any region of the world, almost every organization faces the problem of getting the right materials to the right place at the right time. Increasingly competitive markets are making it imperative to manage logistics systems more and more efficiently. This textbook grew out of a number of undergraduate and graduate courses on logistics and supply chain management that we have taught to engineering, computer science, and management science students.The goal of these courses is to give students a solid understanding of the analytical tools available to reduce costs and improve service levels in logistics systems. For several years, the lack of a suitable textbook forced us to make use of a number of monographs and scientific papers which tended to be beyond the level of most students. We therefore committed ourselves to developing a quantitative textbook, written at a more accessible level. The book targets both an educational audience and practitioners. It should be appro- priate for advanced undergraduate and graduate courses in logistics, operations man- agement, and supply chain management. It should also serve as a reference for prac- titioners in consulting as well as in industry. We make the assumption that the reader is familiar with the basics of operations research, probability theory and statistics. We provide a balanced treatment of sales forecasting, logistics system design, inven- tory management, warehouse design and management, and freight transport planning and control. In the final chapter we present some insightful case studies, taken from the scientific literature, which illustrate the use of quantitative methods for solving complex logistics decision problems. In our text every topic is illustrated with a numerical example so that the reader can check his or her understanding of each concept before going on to the next one. In addition, a concise annotated bibliography at the end of each chapter acquaints the reader with the state of the art in logistics. TLFeBOOK Abbreviations 1-BP One-Dimensional Bin Packing 2-BP Two-Dimensional Bin Packing 3-BP Three-Dimensional Bin Packing 3PL Third Party Logistics AP Assignment Problem ARP Arc Routing Problem AS/RS Automated Storage and Retrieval