Estimating distribution costs in a supply chain network optimisation tool, a case study

Abstract

In a complex logistic environment it is critical to have efficient methods and tools to evaluate and improve the its efficiency. These tools must support the analysis with accurate results, but they must also be fast and easy enough to be used use in a complex practical setting. In this paper we present and discuss a deterministic single-period single-sourcing LP/MIP based method that the Linde Group has used for more than 100 projects for optimising the logistic network in the air-gas cylinder business. The model, called CSS (cylinder supply structure), includes a multi-echelon logistic network with transportation between plants and warehouses and distribution to several end-customers. The model allows deliveries to customers from all echelons in the supply network. Both the downstream flow of full cylinders and the upstream return of empty cylinders are included in the model. In general, more than 75 % of the total transportation- and distribution costs are caused by the final distribution to customers in a supply network as above. This paper will in particular analyse the distribution part of this model; how it is designed and how the cost is estimated. In order to evaluate the accuracy of the method we use empirical data to compare the model results with empirical results. The results showed that from the beginning the model overestimated the expected distances and costs for the distribution. With a rework and improved method to estimate the distribution cost, the model significantly improved its accuracy.