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Operations Research

Highways, low costs

For most multichannel merchants, transportation of goods is the highest operational expense. Inbound freight costs for domestically sourced products typically range from 2% to 4% of gross sales, while for imported products, inbound freight costs 6% to 12% of gross sales. Outbound transportation costs typically on average 6% to 8% of net sales. So every business has to deal with high transportation costs nowadays.

City logistics

City logistics, also called urban freight distribution, is the system and process by which goods are collected, transported, and distributed within urban environments. The urban freight system can include seaports, airports, manufacturing facilities, and warehouse/distribution centers that are connected by a network of railroads, rail yards, pipelines, highways, and roadways. These networks enable goods to get to their destinations. Using all these components of a freight system, the aim of city logistics is to globally optimize logistics systems within an urban area by considering the costs and benefits of schemes to the public as well as the private sector. Therefore, by using city logistics in a smart way, transportation costs can be decreased.

There are several ways by which this aim can be met, among which the integration between public and freight transportation networks, cooperation in city logistics, cross chain control centers and the introduction of hubs.

Integrating public and freight transportation networks

Integration between public and freight transportation networks exists already in long-haul freight transportation. For example, passenger planes and ferries often carry freight as well. However, in short-haul transportation the integration between public and freight transportation networks rarely exists, although they largely share the same infrastructure, indicating potential efficiency gains for an integrated system. Whether it is efficient or not to integrate between different networks depends on the origin, destination, availability and due time of freight.

Cooperation in city logistics

In 2011 24% of goods vehicles in the EU were running empty, the average loading of the rest was 57% and the overall efficiency was 43%. Since flow imbalance can only explain half of this loss, there should be a way to optimize these numbers. This is where collaboration comes in. Therefore, cooperation in city logistics is seen as a fruitful path to optimize logistics systems, leading to a higher and more efficient utilization of resources. Cooperation can be done in two ways: vertically and horizontally. By vertical collaboration different parties in the supply chain are involved. Horizontal cooperation involves companies operating at the same level in the supply chain.

Cross Chain Control Centers

Another optimization tool within logistics are the Cross Chain Control Centers (4C). A 4C is a center from which multiple supply chains are controlled simultaneously, thereby aiming to exploit synergetic potential. 4Cs collate flows of goods and information across supply chains and balances on the interface between vertical and horizontal collaboration. The former referring to collaboration between entities of the same supply chain, e.g. retailers or suppliers, while the latter includes cooperation of two or more unrelated or competing companies, e.g. in sharing transport or storage capacity.

Groningen

In Groningen, there are a lot of businesses that get supplied every day by a truck. This means that all these trucks are coming to the city to supply just one or a few businesses. And since there are so called ‘window times’ applicable in Groningen, all these trucks enter the city in the same time slots. The ‘window times’ in Groningen are from 5:00 pm to 12:00 pm. The number of trucks entering the city could be less if the freight of the different businesses is combined. If the freight were combined in a smart way, the number of trucks could be minimized, which in the same time decreases the traffic in the city and is better for the environment.

Hubs

Besides the problem described in the example above, there are some other numbers that show the need for optimization in this area. Namely, the last few kilometers cause 40% of the transport costs and 30% of the freight volume causes 70% of the ‘traffic mess’ in the cities. By introducing the so-called ‘hubs’, these numbers can be reduced. In this case, a hub is located at the side of a city. All the trucks that need to deliver somewhere in the city some demand, can bring this to the hub. From the hub, all the freight is brought to the city by other trucks. Therefore, not all the trucks have to enter the city separately. This decreases the number of hubs entering the city and thereby the traffic pressure. Another advantage is that the way the freight is brought to the different businesses can be optimized: a store needs to be visited by only one truck and the trucks can be fully used, so no trucks will enter the city half empty. In the figure below the difference is shown, where in the left figure the situation without the hubs is shown and in the right figure with the hubs. It can be seen that the kilometers made and the amount of traffic in the city is much less with the hubs than without.

Facility location

Another concept that comes in with the minimization of transportation costs is the concept of facility location. The study of facility location problems, also known as location analysis, is a branch of operations research concerned with the optimal placement of facilities to minimize transportation costs.

One method that is used in facility location problems is the center of gravity method. If a business wants to open a new warehouse, the center of gravity method determines the best location for this new warehouse. This is done by using the coordinates of the location of the retailers or already existing warehouses that will supply the warehouses and the corresponding outbound volume of freight. The coordinates of the optimal location for the new warehouse can be computed by the following equations:

x-coordinate:

    \[C_x = \dfrac{\sum_i d_{ix}w_i}{\sum_i w_i}\]

y-coordinate: 

    \[C_y = \dfrac{\sum_i d_{iy}w_i}{\sum_i w_i}\]

where d_ix and d_iy are the x- and y-coordinates of location i and w_i is the volume of freight moved from location i to the new location.

Example

Suppose a company wants to expand its logistics network and wants to locate a new warehouse within a network of three existing warehouses. The daily outbound goods volume of warehouse 1, 2 and 3 are 2500, 1300 and 5000 units respectively. The coordinates of the existing warehouses are given in the figure below.

Using the equations given above and the information of the existing warehouses, the coordinates of the new location can be computed as follows:

C_x = \dfrac{200*2500 + 300*1300+100*5000}{2500+1300+5000} = 158

C_y = \dfrac{50*2500 + 100*1300+150*5000}{2500+1300+5000} = 114

The following figure shows the location of the new warehouse relative to the existing warehouses.

 

As stated in the beginning, multichannel merchants are making losses on their transportation costs. This article has shown some methods that can be used to reduce the transportation costs, making use of hubs or by smart placement of new warehouses. However, there are much more (complicated) methods for reducing transportation costs by smart optimization. If all businesses would use these methods, almost none goods vehicles will be running empty and the overall efficiency could be much higher.


This article is written by Lotte Post.

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