Optimization Models for Restructuring BASF North America's Distribution System

By 1995, annual distribution costs for BASF North America's packaged goods were nearly $100 million. The firm explored trade-offs between customer service and operating costs in a redesign effort using linear-programming-based models. The project team adapted formulations to the extensive available data and used a series of formulations to cope with the scale of the project. A flexible modeling tool aided the team in implementing these formulations. The resulting revised distribution system reduced costs and improved customer service, and the modified distribution network took next-day deliveries from 77 percent to 90 percent. Although the team expected reduction in annual costs of 10 percent, subsequent customer service initiatives reduced the potential savings. In studies following the initial distribution changes the team estimated annual costs savings at six percent, but also identified a one-time nine-percent improvement in cash flow from inventory reductions. BASF also applied the models to operations in Scandinavia, Europe, and the Asia-Pacific area.