DISTRIBUTION NETWORK DESIGN : Optimization & simulation of an international supply chain.

Abstract: Höganäs AB's current distribution network for iron powder in the Asia Pacific (APAC) region is subject to high costs incurred by large inventories and high cost of capital. As a result of increasing demand and service level requirements from customers, inventories have steadily increased. Keeping a high inventory level has enabled high service levels irrespective of supply disruptions or changes in demand. It is important that the distribution network incorporates a balance between robustness and cost efficiency and not only focuses on one of these aspects. The purpose of this project is to provide Höganäs AB with scientific data on how the distribution network can be improved in terms of lowering the total cost of warehousing and distribution while maintaining or improving customer service. There are several goals for this project. The first goal is to optimize the flow of material in the distribution network given empirical data of customer demand. The intended model is a linear program. The linear program will solve a multi echelon, period, product, location and transportation mode instance of the distribution network design problem. The second goal is to test the robustness of the optimal solutions resulting from the linear program by stochastic simulation. The simulations utilize the optimal network designs generated by the linear program and is done for a set of possible scenarios where key parameters are changed. By adjusting key parameters and measuring the effect on cost and service level, the goal is to evaluate the robustness of each configuration. By keeping the existing nodes of the distribution network and changing the flow of material and distribution strategy, lower inventories can be maintained and service level kept high regardless of demand growth and supply disruption. The optimal distribution network design is one from the linear program, configured with a 14 day inventory level and 10 day reorder point for warehouses. The optimal design shows that distribution is made more robust and efficient by allowing for distribution between warehouses or supplying customers normally affiliated with other warehouses. It also suggests that a central redistribution warehouse is a possible improvement to the current network design.