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Karnataka Engineering
Company Limited(KECL)
Hasmukh Gajjar
About KECL
Established factory in year 1981 in Raichur, Karnataka
Launched Moped in the year 1981 and Scooter in year 1983
Initially it was sellers’ market, enough demand and few sellers
In the year 1987
Slump in two-wheelers market due to less spending from customers
Intense competition among few sellers
VP( corporate planning) identified efficiency of logistics and
physical distribution can be an effective tool for competitive
advantage in slump market
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Advantages of improved logistics
Savings in transportation Cost
Saving in Inventory Holding Cost
Improved responsiveness or decreased transportation time.
Improved customer service level
Broad objective of Logistics Improvement
Plan
Which states should have branches/warehouses?
Purpose is to save Central Sales Tax of 4% charged on products
brought from outside the state due to no branch warehouse
How many branches and their respective locations in a state is
better for the company?
KECL has picked Andhra Pradesh (AP) distribution channel as
a sample for this study.
Analysis applied for AP can be replicated for other states.
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Broad objective of Logistics Improvement
Plan
Which states should have branches/warehouses?
Purpose is to save Central Sales Tax of 4% charged on products
brought from outside the state due to no branch warehouse
How many branches and their respective locations in a state is
better for the company?
KECL has picked Andhra Pradesh (AP) distribution channel as
a sample for this study.
Analysis applied for AP can be replicated for other states.
Analysis for AP state only
Analysis applied for AP can be replicated for other states.
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Branch Warehouse Decision in AP
Branch Warehouse in AP No Branch Warehouse in AP
Branch Operating Cost 4% central sales tax
Monthly Cost from Exhibit-6
Approximately Rs.21,000
Let’s assume Monthly Sales Value = Rs. Y
Break-even Sales Value 4% of Y = 21000
i.e. Y = 4.5 Lacs
Decision
No branch W/H if monthly sales in AP is less than 4.5 lacs
Put branch W/H if monthly sales is more than 4.5 lacs
Now Look at Exhibit-6 and decide which states should have branch W/H
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Branch Warehouse Decision (Exhibit-6)
Branches to be dropped in the following states…
Jammu & Kashmir
Branches to be setup in the following states…
Goa
North-east
Orissa
Pondicherry
No change in the remaining states
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Costs consideration in Andhra Pradesh
Distribution Network
Monthly branch operating cost
Monthly primary(inbound) transportation cost
Monthly secondary(outbound) transportation cost
How to estimate these costs from the case data?
Estimating Monthly Branch Operating
Cost
Is it
reasonable?
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Estimating average primary
transportation cost
Which truck is to be used for primary transportation?
Large truck
Which Transporter is offering lowest rate?
Raichur Roadways and PC Rao Brothers i.e. 6 Rs. Per Km.
Avg. transportation cost for Moped =6/80 = 0.075 Rs. Per Km
Avg. transportation cost for Scooter = 6/50 = 0.12 Rs. Per Km
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Estimating average secondary transportation
cost
Which combination of trucks is to be used for delivering 106
moped-units to Chittoor?
One Large + One Medium trucks?
One Large + Two Small trucks?
Or any other combination?
Think of using Integer Programming here…
So what is the average secondary transportation cost for Chittoor?
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Current Distribution Network in AP
Factory in
Raichur, Existing
Karnataka Branch
Existing
Branch
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Existing Distribution Cost?
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Existing Distribution Cost?
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Existing Distribution Cost?
How much quantity brought from Raichur to Adoni and
M’nagar respectively?
How much is the associated primary transportation cost?
How much quantity brought from Adoni and M’nagar to different
dealers in AP?
How much is the associated secondary transportation cost?
How much is the branch operating cost at Adoni and
Mehboobnagar?
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Optimal Network Design
Apart from Adoni and M’nagar, the following other locations in
AP are also considered for branch
Cuddappah
Hyderabad
Kurnool
Vijaywada
Need to decide at which location(s) branch should be located
for minimizing the total logistics cost (Primary transportation +
Secondary Transportation + Branch operating cost)
Fixed Charge Problem can be used to arrive at optimal network
design..
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Fixed Charge Problem Formulation for
KECL Network Design
Parameters
Ci = Average cost of transporting one moped-units km from factory (Raichur) to
potential branch warehouse i
Cij = Average cost of transporting one moped-units km from potential branch
warehouse i to dealer j
Fi = Branch warehouse operating cost per month
di = Distance in km from factory (Raichur) to potential branch warehouse i
dij = Distance in km from potential branch warehouse i to dealer j
Dj = Demand at dealer point j
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Fixed Charge Problem Formulation for
KECL Network Design
Decision Variables
Xi = No. of moped-units transported from factory (Raichur) to potential branch
warehouse i
Xij = No. of moped-units transported from potential branch warehouse i to dealer
j
Yi = ‘1’ if warehouse( i ) is opened
‘0’ otherwise
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Fixed Charge Problem Formulation for
KECL Network Design
Formulation
Minimize Total Cost
= Branch operating cost + Primary transportation cost + Secondary transportation
6 6 6 22
= F Y Ci d i X i Cij d ij X ij
i 1 i i i 1 i 1 j 1
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Fixed Charge Problem Formulation for
KECL Network Design
Subject to: Constraints
22 Inflow = Outflow at every
X i X ij i
j 1 branch warehouse
22 ensures that outflow from
X ij M Yi i every branch warehouse
j 1 occur only when it is
opened
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X ij D j j Demand at dealer point
i 1
X ij , X i 0 Yi 1,0 i , j Others
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Optimal Network Design Microsoft Excel
97-2003 Worksheet
Look at the solver formulation in excel file.
Alt--> Alt-1 Alt-2 Alt-3 Alt-4
Optimal Solution
Current Practice Current Practice Optimal Solution (Kurnool (Kurnool Via
Alternatives --> (as per exhibit-9) (Optimized) Via not-good-road) good-road)
Branch Location Adoni, M'nagar Adoni, M'nagar Kurnool M'nagar
Monthly Ops.
Cost 118634 118101 96868 104020
Branch
Operating Cost 60110 59634 57974 65126
Primary Transp.
Cost 16524 16467 17894 17894
Secondary
Transp. Cost 42000 42000 21000 21000
Best Alternative? Why?
22
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Further Saving opportunity through
Vehicle Routing…
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Further Saving opportunity through
Vehicle Routing…
Optimal Solution from Alternative-3
Types
Cost per Distance Secondary
From Demand in of Trucks
Dealer moped- In km transp.
Kurnool moped-unit
unit km cost
One Large
20 Vizag 124.6 0.09 590 6616
One Medium
21 V'nagaram 38 One Medium 0.13 640 3162
Total secondary transportation cost to Vizag and V’nagaram from Kurnool 9778
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Further Saving opportunity through
Vehicle Routing…
Improvement through Vehicle Routing…
Demand Carried in Distance
Secondary transp.
Routing moped-unit by truck In km
cost
(Point to point)
Route-1 (one large truck)
Kurnool –Vizag
Pick–drop
590 =6 * 590 = 3540
80 – 80
Route-2 (another large truck)
Kurnool –Vizag –V’nagaram Pick–drop–drop
590 + 50 =6 * 640 = 3840
80 – 44 – 36
Total secondary transportation cost using routing 7380
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Questions?
[email protected]
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