Chapter 14: Network Design and Facility Location

Chapter 14Management of Business Logistics, 7 th Ed.2 Logistics Profile: Need for Speed… Globalization was supposed to mean that most of the world’s manufacturing jobs would shift to low cost locations in Asia. Technology companies cannot afford the two weeks transportation time from Asia, so NAFTA has empowered Guadalajara, Mexico to become the home to many highly efficient manufacturers. Tax breaks, low cost land and labor, and a friendly government have fueled the revolution.

Chapter 14Management of Business Logistics, 7 th Ed.3 The Need for Long-Range Planning In the short run, the logistics managers must work with the current facility locations. However, in the long run, the firm’s facility locations are considered variable, and are subject to change. Facilities design and location have become strategically important in today’s highly competitive business environment.

Chapter 14Management of Business Logistics, 7 th Ed.4 The Strategic Importance of Logistics Network Design Considering the rate at which the business environment is changing, logistics facilities are under pressure to keep current. In many companies, change has happened recently or is scheduled for the near future. With capital being both scarce and expensive, facilities decisions become more important.

Chapter 14Management of Business Logistics, 7 th Ed.5 The Strategic Importance of Logistics Network Design Critical variables in network design: 1. Changing Customer Service Requirements 2. Shifting Locations of Customer and/or Supply Markets 3. Change in Corporate Ownership 4. Cost Pressures 5. Competitive Capabilities 6. Corporate Organizational Change

Chapter 14Management of Business Logistics, 7 th Ed.6 1. Changing Customer Service Requirements A customer’s business has changed and the company may need to change some aspect(s) of its service to those customers. Some customers will be looking for new supply chain partners and the company needs to be responsive to these potential new business partners.

Chapter 14Management of Business Logistics, 7 th Ed.7 2. Shifting Locations of Customer and/or Supply Markets Geographic locations of markets often shift over time and the company needs to position its logistics network to be responsive to these shifts. Similarly, global competition often results in geographic shifts for not only new customers, but also new markets. Companies tuned to these changes have a head start in establishing new business.

Chapter 14Management of Business Logistics, 7 th Ed.8 3. Change in Corporate Ownership Mergers, consolidations and divestiture may mean new logistics and market patterns for the surviving entity. Once again, companies tuned to these changes have a head start in establishing new business.

Chapter 14Management of Business Logistics, 7 th Ed.9 4. Cost Pressures As competition increases, firms must seek ways to continue growth. One such way is to find areas where the costs of key business processes can be reduced. Often the pressure to reduce costs can be applied to areas for which the logistics department has responsibility. Inventory and transportation can be such sources.

Chapter 14Management of Business Logistics, 7 th Ed Competitive Capabilities Obsolete facilities signal the company that a logistics examination is necessary. Companies that have not analyzed the changes in their environment are risking both profitability and solvency. Many firms locate distribution facilities near hub operations of FedEx, UPS, Airborne, Emery and DHL so that access to time-critical, express transportation services is facilitated.

Chapter 14Management of Business Logistics, 7 th Ed.11 The 6. Corporate Organizational Change Downsizing and re-engineering cause the firm to reexamine its logistics division for potential savings. Many logistics facilities have faced various levels of change because of re-engineering efforts in the organization. Logistics functions can be provided by third party vendors (3PLs) where the firm cannot accommodate the necessary changes.

Chapter 14Management of Business Logistics, 7 th Ed.12 How to design these networks?

Chapter 14Management of Business Logistics, 7 th Ed.13 Logistics Network Design Figure 14-1 on the next slide identifies six major steps associated with the process of Logistics Network Design. Step 1: Define Process Form a design team Establish design parameters and objectives Establish availability of resources and potential involvement of 3PLs.

Chapter 14Management of Business Logistics, 7 th Ed.14 Figure 14 – 1 Key Steps in the Logistics Network Design Process

Chapter 14Management of Business Logistics, 7 th Ed.15 Logistics Network Design Step 2: Perform Audit Forces a comprehensive perspective Develops essential information Step 3: Examine Alternatives Use modeling to provide additional insights Develop preliminary designs Test model for sensitivity to key variables

Chapter 14Management of Business Logistics, 7 th Ed.16 Figure 14-2 Key Steps in a Logistics Audit Step 6: Logistics Strategic Plan Step 5: Strategic Logistics Issues Step 4: Logistics Provider Selection and Evaluation Step 3: Key Logistics Activities Step 2: Logistics System Step 1: Fundamental Business Information

Chapter 14Management of Business Logistics, 7 th Ed.17 Logistics Network Design Step 4: Conduct a Facility Location Analysis Analyze attributes of candidate sites Apply screening to reduce alternative sites Step 5: Make Decisions regarding Network and Facility Location Evaluate sites for consistency with design criteria. Confirm types of change needed

Chapter 14Management of Business Logistics, 7 th Ed.18 Logistics Network Design Step 6: Develop an Implementation Plan Plan serves as a road map in moving from current system to the desired logistics network. Firm must commit funds to implement the changes recommended by the re-engineering process.

Chapter 14Management of Business Logistics, 7 th Ed.19 Major Locational Determinants Major Locational Determinants are summarized in Table subcategorized into regional and site specific factors. Take a minute and review these factors now.

Chapter 14Management of Business Logistics, 7 th Ed.20 Table 14-1 Major Locational Determinants Regional DeterminantsSite-Specific Determinants Labor climateTransportation access Availability of transportation● Truck Proximity to markets● Air Quality of life● Rail Taxes & other incentives● Water Supplier networksInside/outside metro area Land costs and utilitiesAvailability of workforce Company preferenceUtilities

Chapter 14Management of Business Logistics, 7 th Ed.21 Major Locational Determinants: Current Trends Governing Site Selection 1. Strategic positioning of inventories, with faster moving items located at “market-facing” logistics facilities, and slower moving items at national or regional sites. 2. Direct plant-to-customer shipments which can reduce or eliminate the need for company-owned supply or distribution facilities. 3. Growing need and use of “cross-docking” facilities. 4. Use of third party logistics companies which negate the need for the firm to maintain or establish its own distribution facilities.

Chapter 14Management of Business Logistics, 7 th Ed.22 Modeling Approaches: Optimization Heuristics Simulations Grid technique

Chapter 14: Summary and Review Questions Students should review their knowledge of the chapter by checking out the Summary and Study Questions for Chapter 14.

Chapter 14Management of Business Logistics, 7 th Ed.24 Study Question 14-9

Chapter 14Management of Business Logistics, 7 th Ed.25 Case 14-1 Fireside Tire Company

End of Chapter 14 Slides Network Design and Facility Location