Logistics: mathematics and much more
How do you get the right things to the right place on time and at the best price? That – in a nutshell – is the question René de Koster grapples with on a daily basis. As Professor of Logistics and Operations Management at Erasmus University, he develops complex methods to solve logistics problems. But even with high-school-level mathematics, you can make significant progress, he explains.
His office windowsill is filled with models: trucks, cranes, aeroplanes, containers and everything you can imagine related to freight transport. A fitting backdrop for a man who knows everything about logistics.
Behind the term “logistics” lies a range of disciplines, explains René de Koster: inventory management, production planning, transport planning, network design, performance analysis and much more. He talks passionately about this broad field that relies heavily on mathematics. In this article, we’ll delve into some of his stories.
Transport and route planning
When a delivery person rings your doorbell to deliver an order, a lot of planning has already taken place. Where should the delivery go? Where should it come from? Which orders from which customers can be combined in one route?
“To plan a route, you work back to front,” explains René de Koster. “What time does a package need to arrive? What time should a lorry depart from the warehouse? How long does it take to load all the freight for a route? When and in what order should the orders be retrieved from the warehouse? And so on.”
Network design
Before you can deliver anything, it needs to be produced. When building a factory or warehouse, you can take into account the movements your end products will make. “We call this network design,” says De Koster. “It involves optimising the location and allocation of production resources and storage. Where are your customers? Where is the best place to set up your factories and how many? Where should you position your warehouses? And from where do you deliver to which customers? How much inventory should you have in each location?” Safety stocks, inventory costs: there’s a lot to calculate and optimise. Often, these are non-linear problems.
Inventory management
Retailers also have to deal with inventory management. When should you reorder and how much? The answer differs for a sock store compared to a butcher or a greengrocer. Inventory management for seasonal or perishable products is a complex decision-making problem.
“These kinds of problems are known as the ‘Newsboy Problem’,” says De Koster. “A New York newspaper boy must estimate how many newspapers he has to buy to maximise his profit. The optimal number depends on a series of factors: the day of the week, the weather, whether there’s spectacular news, and so on. He has to purchase wisely, because by the evening his unsold newspapers will be worth no more than waste paper.” The same mechanism applies to summer dresses and lettuce. While experience and intuition can go a long way for a buyer, maths proves to be a better adviser in optimising returns. Probability theory and stochastic models help optimise the outcome.
Revenue management
Fluctuations in demand make life challenging for suppliers. However, logistic instruments are increasingly being used to address this. De Koster explains, “An emerging speciality is revenue management, which is about the optimal use of available resources.”
For instance, an empty hotel room generates no revenue. By lowering the price, you generate extra demand. But a fully-booked hotel at rock-bottom prices doesn’t necessarily yield the highest profit. Revenue management focuses on determining the optimal occupancy at the optimal price.
This practice has been applied in the aviation industry for many years. A seat booked months in advance costs less than the same seat a week before departure. And if you don’t care exactly when you fly, you can get a last-minute deal. Revenue management is now being used in various areas: airline tickets, hotel rooms, meeting spaces, the timing of grocery deliveries; variable pricing optimises the use of available capacity.
Transshipment operations
And of course, De Koster’s story wouldn’t be complete without mentioning the Rotterdam ports. The cross-docking transshipment operations taking place there are incredibly complex. Ships with 14,000 containers – sometimes stacked up to 17 high – are not uncommon. For a strong competitive position, loading and unloading must happen as quickly as possible. This is accomplished with enormous cranes, often several per ship.
How do you prevent those cranes from getting in each other’s way? Which containers go on top, and which go on the bottom? And what are the fastest routes to and from the transshipment site? Where should the containers be placed and stacked so that they are easily accessible for subsequent transport? When the puzzle is solved perfectly, a ship with 3,000 containers can be unloaded and loaded within 24 hours.
Mathematics and more
Logistics and mathematics are inseparable, but the soft aspects also play a crucial role. “No matter how sophisticated your system is, it’s ultimately people who have to execute it,” says De Koster. This makes the field much broader than just mathematics and calculation models. Employee motivation, personal feedback, safety – these are all topics De Koster is passionate about. “Logistics management involves a continuous balance between costs, efficiency, flexibility, quality, safety and much more: all these different aspects make the field so fascinating.”
This article was published by NEMO Kennislink on 19 April 2011
