Last-Mile Distribution Network Optimization in Emerging Markets: A Case Study in São Paulo, Brazil

Abstract

As more of the world’s population moves to cities, urban logistics becomes increasingly important to a company’s distribution operations. Urban distribution network studies must address the same strategic questions as traditional large-scale distribution networks including sizing and locating distribution facilities and determining which facilities should serve which customers. These studies are more complex, however, because they must also address operational problems including vehicle routing and daily scheduling. In our case study, we analyze a business-to-business, last-mile distribution network and evaluate how network performance changes in response to combinations of input parameters like vehicle and facility costs, facility availability, and average travel speeds. We extend a mixed-integer linear programming model, incorporating vehicle-routing and location-allocation problems, to determine the appropriate network design and weekly delivery-route schedule to serve customers in a cost-effective manner. Our analysis shows that a multi-echelon distribution model is not always necessary in urban settings; a single-echelon system is preferred when second-tier facilities are relatively expensive. With respect to labor, significant cost-savings, as high as 35%, can be realized by increasing service time of vehicles through overtime or sub-contracting labor. Common urban problems, including traffic; access to infrastructure; and vehicle travel restrictions tend to increase network costs by small amounts, approximately 10%, and in some cases lead to cost savings of approximately 5%.