Logistics optimization

Ph: +91 98406 18472/ +91 44 4501 8472 Bala. Padmakumar
Email : optimize@optiriskindia.com Director & CEO
Web: http://www.optiriskindia.com OptiRisk India
(A certified IBM partner)
© 2010-12 OptiRisk India (P) Ltd, All rights reserved

1. Business Challenges

2. Optimization

3. Supply Chain Management

4. SCN Analysis & Redesign

5. Inventory Analysis

6. Transportation Scheduling

7. Solution Approach

© 2010-12 OptiRisk India (P) Ltd, All rights reserved 2

Uncertain Demand Angry Investors Unnecessary trips

Regulatory Changes Too far from Suppliers Uncertain NPV

Lower ROI Shrinking Margins Competitive Pressure

Supply-Demand Gap LTL Fleets Too far from Customers

Stock Outage Higher Investment Delayed Deliveries

Higher Cost of Capital Unhappy Customers Escalating Cost

Subpar Revenue Growth Discounted Stock Price Bloated Inventory

Production-line stoppage Stressed Employees Quality Issues

Product Obsolesce


People Policy

Culture

Plan
Process

Quality

Integration Communication

Stock Price

NPV

Expenses
=
Revenues
ROA
Total Assets



2. Optimization







Capital Allocate
People Acquire, schedule,
To help make better decisions assign, Train
Equipment Acquire, schedule,
To reach Goals Locate
Facilities Locate, schedule
Vehicles Acquire, route,
schedule
While observing Requirements / limits Raw Material Acquire, assign

Determined by Analyzing Data
Using powerful, robust, scalable and diversified optimization software and services


(Courtesy - IBM)

SC Network optimization Production planning
Locate facilities Optimal production schedule
Match Supply & Demand Meet plant floor constraints.
Managing seasonality, and Benefits :
Reduce carbon footprint. Improved throughput
Benefits: Reduced costs,
5-15% reduction in SC costs Reduced inventory
Better service level Leaner plants

Revenue / Yield Management
Sourcing Selection Choose best price
Select Suppliers Indentify Optimal Commission
Determine Order Quantities Benefits :
Benefits : Higher sales volume
Enhanced S&OP capability, Better Margins
2-5% reduction in mfg costs

Transportation Scheduling Operational Inventory Management
Fleet Selection Order quantity
Route Plan / Schedule Order time
Benefits : Supplier identification
10-30% reduction in Transport Benefits :
cost Increased on-time deliveries 10-30% reduction in inventory
Improved service level



2. Optimization







Supply Chain Inventory Transportation
APPLICATION
Network Management Scheduling
Design

• Minimize investment(in facilities) • Sourcing Selection • Route Optimization
BENIFITS • Match Supply and Demand • Optimize order Levels • Fleet Selection
• Identify product mix and • Maintain Service Level • Load Consolidation; LTL to FTL
capacity mix

TIME SCALE Years Months Days

PLANNING Strategic Tactical Operational

NATURE Linear Combinational

TECHNIQUE LP LP/MIP/CP CP


Increasing customer Competitive Product proliferation
service requirements pressure shorter product life cycles

Pressure for improved
Regulatory financial performance
changes & inventory reduction

Changing materials Change in players &
handling & transport roles in distribution
technologies channels

Improved Pressures to develop
communications & supply chain vision and
information technology co-operation
Need to redesign and
improve efficiency of
logistics system



2. Optimization







Warehouse

Production Facility
Consumer
Highway

Production facilities
Warehouses
Retail stores

Current and future demand
Opening, Closing, and running cost
of the SC network nodes
Inventory cost at various nodes
Overall transportation cost

10 – 30% reduction in overall Supply chain and Logistics Cost


Most of the inefficiencies in operation comes from uncertainities

Sources of uncertainty in Structured, qualitative approach
SCND in manufacturing

1
6

4

Probability
3

2 5

Severity


Supplier Bankruptcy

Exchange Rates
Productivity
International conflict

Labour Costs
Demand Natural disasters

Act of Terror
Material Costs Transport Costs


Efficient Frontier (Optimal Solutions)
Logistics Cost

Current (Sub-Optimal)

Cost of stock outage
(Service Level)


• Ordered and
• Delivery time in • Delivered orderlines
hours or days

• Service time
• Response time
• Fastness (express, • Product range
normal weekly) and availability
• Delivery-lots • Claim procedure
• Post-deliveries • Method to inform
• Return policy about deviation
• Observe customer
requirements

• Shipped too later
or too early compared • Perfectly delivered
to shipped in vs. shipped lines
• Time lines • Number of claims



2. Optimization







90

85

80
Days in Inventory

75 Target Company
Competitor #1
70
Competitor #2
65
Competitor #3
60 Competitor #4
55 Peer Average

50
Q2-FY11 Q3-FY11 Q4-FY11 Q1-FY12 Q2-FY12

Reporting Period


10 15 10
22 24 Cost of capital
21
Storage and handling
23 23 26
Obsolescence

45 41 40 Damage and deterioration
Pilferage/shrinkage
Insurance
Management costs


India 14 % 14%

Japan 11%

Europe 10 %

USA 8%

0 5 10 15 20


Items FY11-12 -1 Day Peer Avg Best Competitor Units
Days in Inventory 71 70 61 53 days
Revenue 12,842 12,842 12,842 12,842 Cr
EBITDA 903 903 903 903 Cr
COGS + R&D expenditure 11,939 11,939 11,939 11,939 Cr
R&D expenditure (2%) 239 239 239 239 Cr
COGS 11,700 11,700 11,700 11,700 Cr

Capital tied up in Inventory 2,276 2,244 1,955 1,699 Cr
Inventory carrying cost 0.03% 0.03% 0.03% 0.03% per day
Inventory carrying cost per day 0.68 0.67 0.59 0.51 Cr
Inventory carrying cost per year 249 246 214 186 Cr
Capital freed-up 32 321 577 Cr
Reduction in Operating expense 3.5 35.1 63 Cr

Net Profit 607 610 642 670 Cr
Capital Employed 3656 3624 3335 3079 Cr
Net Profit Margin 4.73% 4.75% 5.00% 5.22% %
Asset Turnover 3.51 3.54 3.85 4.17 Times
ROIC 16.60% 16.84% 19.25% 21.76% %


21.76% 53 5.22% 670 4.17
19.25% 61 5.00% 642 3.85
16.84% 70 4.75% 610 3.54
* *
BC 16.60% 71 BC 4.73% 607 BC
*
3.51
RoCE DiI NPM NP Asset Turnover

Profit Profit Sales
RoCE = = x
Capital employed Sales Capital employed

Capital Employed
*
BC 3656
3624
Target Company FY11-12 3335
-1 day reduction in DiL
3079
DiI - Peer Average
DiI - Best Competitor
BC – Base Case
DiI – Days in Inventory


10% RoCE 15% RoCE 20% RoCE
8.0

Desired level of service
7.0
Reduced operation cost
Profit 6.0 21.76% Enhanced profitability
Sales 19.25% Increased asset utilization
(Margin) 16.84%
5.0 16.6%
Increased RoCE
Increased competitive
4.0 advantage

3.0 Target Company FY11-12 - 71 days
1.0 2.0 3.0 4.0 5.0 6.0 -1 day reduction in DiI – 70days
Sales
Cap Emp DiL - Peer Average - 61 days
(Asset Turn) DiI - Best Competitor – 53 days


Variability of Demand

Low Medium High

A • Change
Inventory Classification

Base and Safety Service Level
Stock Strategy •Postpone
•Made to
B Order

C • No Safety Stock
Exit
• Made to Order



2. Optimization







Key Questions

How many trucks to use from the set of fleet and
from which carrier?

Which shipment option to use for each order?

Which customer /vendor should be served by each truck
and in what sequence?

Are there ways to reduce cost and still maintain/ improve service level?


Should the company buy (or) lease (or) rent trucks?

What-if the truck capacities are increased/decreased?

What would be the impact of fuel price change to logistics cost?

What-if alternate transportation options are used?


Software and What It Does for YOU

USE OPTIRISK / IBM SOFTWARE to get Optimized Vehicle Routes

Software used custom OR models + CPLEX solver.
Software is customized to YOUR BUSINESS needs.

Software helps client to achieve :
Reduced fleet travel distance / time / cost (5 to 30% saving)
Reduced Customer-Response-Times
Extra Carriage Capacity with same fleet (3 to 10% saving)
Improved service Levels
Significant Planning Man-Hours Saving (70% to 90% saving)
Helps in long Term Planning


On-Time Delivery Increased Visibility
Reduced Stock-outs Greater visibility and control
Improved Service Level Increased Planning Productivity
Satisfied Customers Enabled Employees
Increased Business

Optimized Delivery Routes Ease of Use
Fewer Fleet requirements Visual Displays
Lesser driving distance / time. Ready to print customized reports
Lower cost & Investment Visual Performance dash boards
Increased ROI for KPI tracking

Payback in months
Less than six months ROI
1: 30 to 70 times (in 5 years)


Shareholder Value

ROI

Profit Investment

Cost Revenue # Trucks

Less mileage Business
(10 to 30% )

Service Level .

Planning Lead time
Errors (5 to 10%)


Web based application; access from anywhere.

Seamless integration with ERP systems.

Planning generated in minutes.

Custom views and reports for planner,
dispatcher, manager, and top-management.

Integration with maps for real-time tracking
and planning.

Manual over-ride on routes to take care of
unforeseen change in traffic and routes.


OptiRisk Route Planner & Scheduler Studio (ORPSS)


The client is one of the multinational fuel distribution
companies having wide presence in India.

The aim was to develop a automated planning
tool which would reduce total cost incurred on out-bound logistics

23%+ reduction in total out-bound delivery transport cost.
Total planning time is reduced to minutes.
Payback of investment was less than a month
Improved service level and increased customer satisfaction.


Average saving of 23% per day

70000

60000

50000 Savings
Cost Incurred

40000

30000

20000

10000

0
02.06.2012 04.06.2012 09.06.2012 11.06.2012 23.06.2012
Original cost 50,868 47,513 44,271 45,518 62,448
New planned cost 37,784 42,645 30,664 33,651 38,204
No of deliveries 47 43 43 46 51



2. Optimization







Data driven Approach
Robust solution for uncertain environment Observe
• Expected variation,
• Rare events (Tail Risk)

Identify optimization opportunities Optimize Analyze
Prioritize it
Implement one or a group
Stabilize solution
Go to the next opportunity

IF


Other RDBMS

Database DB2

Top Management
.
.
.
.
Web Server Intranet

Firewall Planning & Execution
External Staffs
SPSS Server Router
(Optional)

Optimization
Server

Dealers
Internet

External Data Server
(Optional) Suppliers

Agile Logistics

Integrated
Logistics

Stochastic
Knowledge Optimization
Logistics
From 2008
Internet
Information
From 2005
Logistics Knowledge
Management

From 1999
Data Data Sizes
Logistics
From 1998
Work Flow

Documents From 1992
Management
System
From 1990
Electronic
Archive
From 1988


• Lower resource
consumption
• Reduced Carbon Emission
• Greener Earth

• Better Returns
• Higher Satisfaction
• Superior Value
• Happy Customers

• Lower Stress
• Improved Employee
satisfaction
Dealers
• Higher Morale

Suppliers


___________________________________________________________________________________________________________________________

Achieve more with less

Bala. Padmakumar
Ph: +91 98406 18472 / +91 44 4501 8472
Email: optimize@optiriskindia.com
Web: http://www.optiriskindia.com/

Asia Pacific, Africa, Australia & Middle East : Europe & America :

No 12, Ground Floor, 25th Cross Street OptiRisk R&D House One Oxford Road,
Thiruvalluvar Nagar, Thiruvanmiyur, Uxbridge Middlesex, UB9 4DA,
Chennai - 600041, India. United Kingdom.


Logistics optimization

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