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UPS slashed the time it takes to determine the least-expensive route from months to days to hours and wants to make that information available in real time By Beth Bacheldor, InformationWeek Feb. 9, 2004 URL: http://www.informationweek.com/story/showArticle.jhtml?articleID=17602194 In the mid-1990s, United Parcel Service Inc. decided it needed a software program to map its entire U.S. operationsevery pickup and delivery center and every sorting facility, totaling more than 1,500 locationsto find the best routes to move more than 10 million packages and documents daily. But there was a hitch. "It was thought to be impossible to model the UPS network and optimize it," says Jack Levis, project portfolio manager with the company's industrial engineering division. Impossible because there are 15.5 trillion options for calculating every possible route among just 25 pointsa job that would take the fastest computer in existence 500,000 years to compute. So a group of UPS researchers set about creating optimization software that would assess only the most-feasible options and over the years whittled down the time to figure out the least-expensive and shortest U.S. delivery routes from months to just hours today. Now, almost a decade later, UPS not only uses that homegrown software to help answer questions such as where to put a new distribution center, but it's planning by 2006 to give its 70,000 drivers unprecedented tools to fine-tune the supply chain. If successful, the plan would change supply-chain optimization from today's top-down, management-driven approach to one that's essentially bottom-up, giving more information to the people closest to the customer. UPS is investing $600 million in the initiative, which includes state-of-the-art handhelds and new software and is expected to save the company $600 million annually. Operations research has become more important to UPS, Levis says (foreground with Mohr on left and other team members). Photo by David Deal UPS says it has already reaped numerous payoffs from the millions of dollars it spent on operations research that led it to build the proprietary ground and air supply-chain-optimization technology, including saving hundreds of millions of dollars on its air deliveries. In the next two years, it expects more benefits, by giving drivers access to data from the supply-chain-optimization models in real time via wireless handhelds. That will let them adjust delivery schedules on the fly to deal with everyday problems such as traffic and bad weather. UPS's efforts are key in a fiercely competitive market. It holds the lion's share of the ground-delivery market, but FedEx Corp., a company about two-thirds the size of UPS with $33.5 billion a year in revenue, leads in overnight deliveries. UPS and FedEx constantly one-up each other in cost-cutting, service improvements, and new business ventures. (For more on FedEx, see Time To Deliver, Jan. 12.) Also a growing threat to UPS is DHL International Ltd., the leader in cross-border express deliveries. It's making a big play for the U.S. ground-delivery market, acquiring Airborne Inc.'s ground operations last August for about $1.1 billion. In this ultracompetitive environment, UPS has revised its company charter to cite as its mission "synchronizing global commerce." That means helping customers manage and coordinate the flow of goods, information, and money throughout their supply chains. UPS for years has been using operations research, a discipline that leverages mathematical algorithms to predict and help improve the behavior of complex systems involving people, machines, materials, and procedures. But the company's changing mission, which increasingly encompasses global service across more than 200 countries, has raised the importance of operations research. "There are 50 people doing operations research here, and they're doing things that have never been done before, that no one has ever accomplished," Levis says. "UPS's vision of synchronizing commerce means that operations research becomes more and more important as our customers ask us to do more and offer more specialized services, and to be more integrated into their businesses." For example, UPS has developed Web-based software for DaimlerChrysler AG so the automaker can centrally manage all parts moving to and from more than 4,500 dealerships. UPS is out front in developing its own high-powered systems, but more companies are showing interest in optimization software. That's because computers can now handle the massive number crunching that optimization requires, and there's a lot more usable datagenerated by applications such as enterprise-resource-planning or forecasting systemsthat can be used in an optimization program, says David Simchi-Levi, professor of engineering systems at MIT and co-author of Managing The Supply Chain (McGraw-Hill, 2003). That's led to more applications being written to solve specific business problems. UPS chairman and CEO Michael Eskew founded the company's corporate industrial-engineering operations research division in the mid-1980s. "It's vital that we manage our networks around the world the best way that we can," Eskew says. "When things don't go exactly the way we expected because volume changes or weather gets in the way, we have to think of the best ways to recover and still keep our service levels." When first presented with the challenge of modeling UPS's ground network in software, operations research development manager Doug Mohr and his team near Baltimore tried to optimize a subset of the network. They quickly learned the network was too interconnected to tackle piecemeal. The team applied methodologies it had been refining for years, along with heuristics (a search procedure that attempts to find optimal solutions to problems), and ran that against mathematical equations representing business information (such as package volume and number of sorting hubs) as well as the company's business rules, and ultimately achieved a model of the entire UPS network that could be calculated on a Sun Microsystems Unix server. The problem was that the optimization calculations still took at least 90 days. It took yearsplus faster computer hardware, lots of trial and error, and researchers constantly improving their algorithmsfor the optimization software's computation time to drop, first to 30 days, then five, and finally, by late 2001, to hours. Today, the program can run in less than three hours. During the same period, and in much the same way, the other half of the operations research group, in Louisville, Ky., partnered with MIT in an effort to develop optimization software that would help it improve air-delivery operations. UPS rolled out that system, which cost about $2.3 million, in February 2000. "Both our air and ground networks are as cost-competitive as any in the industry," boasts Larry Subacz, industrial-engineering manager for UPS's air group, who's responsible for network planning for domestic and interna- tional airlines and facilities. "Without the capability to look at some of the options we've been able to look at in the past few years, I don't think I could have said that." The ground- and air-network-optimization systems leverage the real-time information coming in through UPS's extensive package-tracking system. That includes bar-code labels containing all the data the company needs to deliver packages on time. Wireless handhelds synchronized with UPS's back-end databases as well as state-of-the-art conveyor, sorting, and scanning systems also play a role. The tracking system incorporates new logistics software, being developed at a cost of $20 million, that will aggregate ZIP code information and map out how packages should be loaded onto trucks for the most efficient deliveries. UPS's Baltimore sorting operation is one of 1,500 U.S. facilities. Photo by David Deal The client-server system for optimizing the hub operations and delivery fleets of its ground network, called Hub and Feeder Network Optimization, is in the hands of five full-time planners. They set up problems on PCs by entering data from point-to-point volume files, which outline package origination, destination, and volume, and are built by various forecasting applications; data from sorting facilities' applications, which provide basics such as location and capacity, plus time and distance between sites; and data from a flow file that defines the paths packages take between different sortings. Once the problem is set up, it's transmitted to a Unix server, which runs the computations and downloads them back to the PC as reports. Hub and feeder network optimizations are typically done only a few times a year, and the answers they provide help UPS plan for five, 10, even 20 years out. "We're trying to answer things like, when will we run out of capacity with our current network? Where should we expand? What is the impact of changing our service level to our ground operations? What about changing costs?" Mohr says. There's an even more-ambitious goal: optimizing in real time. By 2006, UPS wants to use the software on the wireless handhelds so its thousands of drivers, who each average more than a hundred stops a day, can optimize their own routes in minutes within the context of UPS's overall operations. "That's where the magic happens," Levis says. "We will have merged all the demandsinformation about each package with information about customers' needs, wants, and demands with information from mapsand we'll put it in the hands of the drivers." UPS is testing early iterations of the system on the newest generation of its custom-developed handhelds, which incorporate local and wide area wireless connectivity, a Bluetooth link to communicate with peripheral devices and PCs, and links to global-positioning satellites. The handhelds' software will be synchronized with PC-based dispatch-planning-optimization systems being deployed to 1,600 delivery centers around the country. Those systems will churn data constantly, including all drivers' delivery schedules, package information, and up-to-date maps. UPS hopes its drivers will be able to juggle time conflicts on the fly, such as getting a certain package delivered first to meet a deadline while a raging snowstorm shuts down a major roadway. That's more evidence of UPS's pioneering spirit. "Almost everything UPS does now wasn't even conceivable five years ago," says Michael Trick, professor of operations research at Carnegie Mellon University and past president of the Institute for Operations Research and the Management Sciences, a professional organization. "They are definitely one of the leaders in taking the state of the art in optimization and expanding its boundaries, doing things faster, and solving bigger problems." Five hundred miles from the nondescript office building in a Baltimore suburb where employees, including Mohr and his team, ply their trade, you'll find the other 25 members of the optimization group. They're in Louisville, home of Worldport, UPS's 4 million-square-foot automated package-sorting facility, which can sort 304,000 packages per hour, and air hub, which opened in fall 2002. The system used for optimizing air operations at Worldport, called Volcano (which stands for volume, location, and aircraft network system), takes into account all the delivery routes for the 265 UPS-owned and 316 chartered aircraft. It delivers answers about optimized routes, fleet assignments, and package allocations in days or even hours. That's important because, according to pilot-scheduling work rules agreed upon by UPS and the pilots' union, UPS must update its air-operation schedules at least 45 days before new ones go into effect, and it does 13 such updates each year. UPS executives expect the system to save the company more than $200 million over the next 10 years by helping it better plan and schedule air deliveries, which total as many as 2 million packages and documents each day in the United States alone. Next, the team is building an air-optimization system for packages that come through the air network sorting facilities and travel on the aircraft. It's still a relatively early prototype, says Keith Ware, manager of the air operations group in Louisville, whose team is also trying to develop a system that would produce optimal aircraft rotations by considering both next-day and second-day services simultaneously. UPS planners also consult Volcano when deciding whether to bring on new aircraft. Shortly after Volcano went live, the planners in charge of preparing for peak season used it to determine whether the company should lease additional higher-capacity aircraft or find another way to handle the increased shipping volume between Thanksgiving and Christmas. Daily delivery volumes can more than double during peak timeson Dec. 23, UPS air express deliveries can top 4 million, twice that of an average day, and the number of flights that take off the week before Christmas can jump 45% to more than 1,300so routing and capacity decisions are critical. A misstep could put deliveries in jeopardy or cost the company millions of dollars more than necessary for last-minute flight additions. The system calculated that by changing the routes of some flights in the existing fleet, UPS could get by leasing just one more aircraft instead of several planes that could have added up to $3 million in costs. UPS planners tap optimization applicationsincluding those for ground and air routes, plus others for its tractor-trailer and delivery fleetsas the company expands its footprint throughout the world. Last year, the team ran 1,500 optimizations to help determine where and how UPS should build out its European operations. Compare that with 1986: When UPS was planning to put a new facility in the Chicago area, it took four people three months to run one such calculation. "Today you can make a much more fine-tuned decision with few people," Levis says. Planners use the software to test scenarios such as the best location for a new sorting facility in Germany or how big that facility should be. "For every one of those questions, you need to know how much each answer will cost," Levis says. There's precedent. UPS used the software in 1999 when the company decided to expand the Louisville facility into the Worldport hub. "That was a billion-dollar decision," Levis says, referring to the $1 billion price tag for Worldport. UPS had considered multiple options, including building a new hub elsewhere or modifying volumes through regional hubs, but the software showed a Louisville expansion made the best sense, considering costs, how long it would take to complete the job, future growth, and the makeup of the air fleet, among other things. "The answer always generates more questions, and you can compare quantitatively which idea was better," Levis says. Relying too much on instinct can be costly. Levis says a VP once approached him with an idea for a new building as part of a plan to redo where and how packages flowed through UPS's sorting facilities. "Intuitively, it made sense to me," he says. "But we decided to model the problem in the system, and when we did that, it put almost no packages in the building." The software showed the building wasn't needed and avoided what could have been a $100 million-plus mistake. UPS's optimization software regularly helps improve service to customers. Just recently, UPS cut at least a day off guaranteed delivery times for certain shipments. For example, shipments between Los Angeles and New York are now guaranteed to arrive in four business days instead of five. UPS credits changes to railroad service for some of the improvement, but it also modified its interstate trucking network and package-sorting times and locations with the help of the optimization tools. UPS's aim is to stay at the forefront of supply-chain optimization. "Optimization has allowed us to make each transaction and each customer a one-to-one experience," CEO Eskew says. "It's going to keep our service the best in business today." --~--~---------~--~----~------------~-------~--~----~ TELECOM-CITIES Current searchable archives (Feb. 1, 2006 to present) at http://www.mail-archive.com/[email protected]/ Old searchble archives at http://www.mail-archive.com/[email protected]/ -~----------~----~----~----~------~----~------~--~---
