Case Study

Balancing Distribution Centers and Transportation

Llammasoft Article

Business Issue

Companies with extensive distribution networks struggle todetermine the correct number and placement of distribution centers for optimaloutbound distribution. This involves finding the proper balance between transportationcosts, which are lower with more distribution centers, and facility fixed costs,which are lower with fewer distribution centers.

Supply  Chain Design Approach

Using existing store locations and demandas the primary input, network optimization and transportation optimization

engines can solve for the lowest cost distribution network quickly and easily.Network optimization performs an analysis to determine the number ofgeographically optimal distribution centers, as well as determining the optimallocation. The transportation optimization program develops multi-stop routes forinbound or outbound transportation. It considers multiple variables to form costeffective transportation routes.

Example and Benefits 

A US-based retailer with approximately 600 stores in theeastern half of the US wished to evaluate the fixed distribution center operatingcost and transportation route cost by varying the number of distribution centersfrom 1 to 8.With a single distribution center, the facility operating cost is at minimum. (Note:fixed DC costs do not grow linearly with size - a 400,000 square foot building

doesn’t cost twice as much as a 200,000 square foot building -- there’s a non-linearrelationship between the size and the fixed cost.) As distribution centers are addedinto the network, the outbound “last mile” transportation costs decrease -- thelowest
outbound transportation cost occurs with the most DCs, because they are
closest to the end customers. In network optimization, each DC network is its ownscenario allowing maps and summary statistics to be viewed side-by-side.