Sunday, 27 April 2008

Express netwORk design

The last view mounts I have been busy with several projects to improve, or design from scratch, the infrastructure of the domestic networks of an express company in several countries around the world. In infrastructure planning the number and location of hubs/depots and the network design are determined. In express networks (but also in passenger, freight and communications networks) hubs are used to reduce total cost because of more efficient vehicle/network utilization. With hubs a better match can be achieved between available capacity and requested demand for it. For sure, using a hub will increase the distance traveled between origin and destination depot, but the consolidation possibilities will offset this.

Infrastructure planning is quite a challenging puzzle and one that is of high strategic importance to an express company. Getting it wrong will cause the company to invest or disinvest in the wrong locations leading to a poor overall performance of the express supply chain. Apart from the complex puzzle to solve, performing these international projects is also challenging. Especially when it is not possible to talk to each other face to face frequently enough and cultural differences also influence the project. A prerequisite in any optimization project is to have a clear idea on the objectives and requirements. As I mentioned before, this is already hard when you are speaking the same language. Guess what happens if you have to take that hurdle first. A lot of effort goes into making sure that you understand each other before you even can get to optimization part.

Let us have a look at the supply chain of an express company to see how we can address the infrastructure planning problem. The supply chain starts when a parcel is offered to be transported to a certain end destination, within a given timeframe. For example, the parcel needs to go from Amsterdam to Liege and needs to be there at 9:00 in the morning. The parcel is picked up and taken to the depot assigned to the origin location. At the depot it is decided to which hub the parcel is sent to reach its final destination within the available service window.
Using either air or road the parcel is transported to the hub, were it is sorted and put on either a line haul to another hub or to its destination depot. From the depot it is taken to its destination location. To be able to deliver the parcel on time, an express company uses a time definite network schedule to plan the transportation of the parcel in advance. In that way the express company knows the time before which a parcel needs to be picked up in order to deliver it on time at its destination, so called cut off times.

In designing an infrastructure plan, one has to decide how many depots and hubs are needed and where they should be located. Besides that, the connections between depots and hubs need to be determined. These can either be depot-depot, hub-hub or depot-hub (or vice versa) connections. For the depots you have to determine which service areas it is assigned to. Opening a depot or hub will require investments, land needs to be acquired; a building is required to store parcels and parking/maneuvering space for the vehicles. Determining size and layout of the site is a puzzle in it self. I will come back on that in a later blog entry. With the connections between the depots and the hubs also costs are involved. These costs depend on the distance traveled and the vehicles used. Since we are designing the infrastructure of an express company we also need to take the service capabilities into account. To my knowledge there is no published research that solves this kind of puzzles, taking into account the fixed cost of opening a location, the variable cost of handling material at that location and the cost involved in operating a connection between two locations, either hub or depot. So we need to be pragmatic and creative to solve it.

Our approach is to split the hub and depot location decision. In a stepwise approach we can than start identifying the best infrastructure and network design. With our specially designed model, BOSS, we determine the best possible set up of the network. BOSS determines the best possible hub location set up, minimizing the cost of the line haul (connections between the locations). Line haul cost is the major cost driver for an express network. After optimization the (fixed and variable) cost for the hubs are added. Inputs for this kind of studies are expected volumes, service offerings and possible locations. We discuss these inputs with the local management. Since infrastructure is of strategic importance several scenario’s on service and volume are taken into account. Also possible locations are discussed since not all available locations are suitable. With our analysis results we support the management in their decision on the best infrastructure plan for now and in the near future, making the trade off on cost, service and volume. Next to these criteria also carbon emission is becoming an important decision criterion in these studies.