LTL logistics networks with differentiated services ...

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Feb 22, 2012 - the shipment route, transit times and processing times at logistics hubs, where ... A logistics service provider offering premium delivery services.

Computers & Operations Research 39 (2012) 2867–2879

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LTL logistics networks with differentiated services Rafay Ishfaq n Department of Information Systems and Operations Management, Loyola University Chicago, 1 E. Pearson Street, Chicago, IL 60611, United States

a r t i c l e i n f o

abstract

Available online 22 February 2012

This research addresses the problem of designing a LTL logistics network over individual lanes by offering different delivery services (1-day, 2-day, 3-day). A network design is proposed which links lane-specific delivery service choices and service profitability to the hub location-allocation decisions. A hybrid-heuristic is developed which uses a search interval reduction technique with a meta-heuristic. The performance of the hybrid-heuristic is evaluated in a computational study. A factorial experiment design with real world data is used to analyze the network structure, service choices and shipment flows, which results in managerial insights about the design and operation of a LTL logistics network with differentiated services. & 2012 Elsevier Ltd. All rights reserved.

Keywords: Logistics Service Delivery Hub networks

1. Introduction Logistics service providers offer different delivery services to their customers over many lanes (origin–destination pairs). These services have different delivery times (1-day, 2-day, 3-day) and pricing (standard, expedited, contract). When a customer orders a specific delivery service, the logistics company arranges to pick up the shipment and transport it to its destination within the promised delivery time. A customer’s shipment flows through a network of facilities (called hubs) operated by the logistics service provider. A logistics hub is a shipment handling facility where smaller, less-than-truckload (LTL) shipments from different customers are consolidated for truckload transfers to other hubs, located closer to the destinations. This consolidation of smaller shipments into larger loads allows for the economies of scale in transportation and logistics costs. In order to ensure a high customer service, logistics network design is a matter of critical importance. The design of a logistics network deals with decisions such as number of logistics hubs, location of these hubs, selection of service territories and service options. The available service options for a shipment depend on the shipment route, transit times and processing times at logistics hubs, where a shipment may have to wait for consolidation, breakbulk and delivery operations. A well designed logistics network ensures that customer shipments can be moved through the network in the promised delivery time. The different service options on a lane also reflect different service time requirements, service revenues and link-hub allocations. The selection of a service on a lane depends on the profit

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0305-0548/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.cor.2012.02.015

margin, level of market competition and the operational effort required to deliver that service. Generally, a faster service is available at a premium price and offer higher profit margin to the logistics service provider [1]. However, providing the premium service to all customers requires a large distribution footprint which results in high operational costs. Often times, logistics companies do not service every lane or offer same service on all lanes. A logistics service provider offering premium delivery services needs a network design which is capable of providing such services. This paper is focused on a road-based LTL freight logistics company which serves a regional customer-base. The logistics company seeks to design its logistics network to offer 1-day, 2-day and 3-day LTL delivery services to its customers. The network design decisions regarding the number and location of hubs and lane-hub allocations are made with considerations for different service options, cost of delivering such services and their revenue potential, so that the overall profit of the system is maximized. The research presented in this paper differs from other research in that: (a) it includes considerations for service profitability in the network design, and (b) it uses different service options for each lane rather than imposing a single system-level service guarantee on the entire network. The rest of the paper is organized as follows: Section 2 presents prior research in the area of network design with service considerations and discusses the contributions of this paper. Section 3 describes a modeling framework and the resulting mathematical model for a logistics network design with differentiated services. A hybrid-heuristic based solution approach is presented in Section 4 and its performance is evaluated in a computational study presented in Section 5. Section 6 presents the managerial insights developed from a study of a real-world 35-city logistics network. The paper is concluded in Section 7.

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