The encyclopedia · Strategy & Leadership · Operational decision · 1995–2001
BASF restructures its North American distribution network with models
BASF used linear programming to redesign its distribution network, lifting next-day deliveries from 77% to 90%.
BASF
the move
By 1995 BASF North America's packaged-goods distribution costs were nearly $100 million a year, and the firm needed to reconsider its distribution network.
The team explored the trade-off between customer service and operating cost using linear-programming-based models, adapting formulations to the available data and using a series of formulations to cope with the scale of the project.
A flexible modeling tool helped implement these formulations, and the resulting revised distribution system reduced costs while improving customer service.
why it works
- The models made the service-versus-cost trade-off explicit rather than a manager's guess.
- A series of formulations let the team handle a problem too large for one model.
- Adapting to real data instead of idealized assumptions kept the answer usable.
- Flexible tooling made it easy to explore what-if network changes.
what transfers
A network redesign that only cuts cost usually raises service problems; model both sides of the trade-off and you can improve both.
what came after
The modified distribution network took next-day deliveries from 77% to 90%. Although the team expected a 10% annual cost reduction, later customer-service initiatives reduced the potential savings, and follow-up studies estimated annual cost savings at 6% plus a one-time 9% cash-flow improvement from inventory reductions. BASF applied the models to operations in Scandinavia, Europe and Asia-Pacific.
references
- Optimization models for restructuring BASF North America's distribution system
- Optimization Models for Restructuring BASF North America's Distribution System
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