Chapter 14: Network Design and Facility Location

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

Chapter 14Management of Business Logistics, 7 th Ed.5 The Strategic Importance of Logistics Network Design: 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.6 The Strategic Importance of Logistics Network Design: 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.7 The Strategic Importance of Logistics Network Design: 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.8 The Strategic Importance of Logistics Network Design: 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.9 The Strategic Importance of Logistics Network Design: 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.10 The Strategic Importance of Logistics Network Design: 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.11 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 the Logistics Network design 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.12 Figure 14 – 1 Key Steps in the Logistics Network Design Process

Chapter 14Management of Business Logistics, 7 th Ed.13 Logistics Network Design Step 2: Perform a Logistics Audit Forces a comprehensive perspective Develops essential information Step 3: Examine the Logistics Network 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.14 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.15 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.16 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.17 Major Locational Determinants Major Locational Determinants are summarized in Table These determinants are subcategorized into regional and site specific factors. Take a minute and review these factors now.

Chapter 14Management of Business Logistics, 7 th Ed.18 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.19 Major Locational Determinants: Current Trends Governing Site Selection Strategic positioning of inventories, with faster moving items located at “market-facing” logistics facilities, and slower moving items at national or regional sites. Direct plant-to-customer shipments which can reduce or eliminate the need for company-owned supply or distribution facilities. Growing need and use of “cross-docking” facilities. 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.20 RELEVANCE OF DELIVERED COSTS/LAID DOWN COSTS Location can influence “delivered costs” or “laid down costs” (production costs + transportation costs + other logistics and non-logistics costs) Innovative approaches may be used to compensate for weakness in a component e.g., the market boundary determination example (discussed in class)

Chapter 14Management of Business Logistics, 7 th Ed.21 Modeling Approaches: Optimization Models Based on precise mathematical procedures guaranteed to find the “best” solution from among a number of feasible solutions. Key issues are listed in Figure One approach is Linear Programming (LP). Useful in linking facilities in a network. Defines optimum distribution patterns. Modern computers facilitate LP modeling.

Chapter 14Management of Business Logistics, 7 th Ed.22 Figure 14-4 Supply Chain Scenario for Network Analysis

Chapter 14Management of Business Logistics, 7 th Ed.23 Modeling Approaches: Simulation Models Based on developing a model of a real system and conducting experiments with this model. In location theory, a firm can test the effect of various locations on costs and profitability. Does not guarantee an optimum solution but evaluates through the iterative process. Simulations are either static or dynamic depending upon how whether they incorporate data from each run into the next run.

Chapter 14Management of Business Logistics, 7 th Ed.24 Modeling Approaches: Heuristic Models Based upon developing a model that can provide a good approximation to the least-cost location in a complex decision problem. Can reduce a problem to a manageable size. This approach can be as sophisticated as mathematical optimization approaches. The “Grid Technique” is an example of a heuristic approach and will be demonstrated in the next few slides.

Chapter 14Management of Business Logistics, 7 th Ed.25 Example of a Heuristic Modeling Approach: The Grid Technique The Grid Technique attempts to locate a fixed facility such that the location represents the least-cost center for moving inbound materials and outbound product within a geographic grid. It finds the ton-mile center of mass; that is, the geographic point where transportation costs are minimized (as discussed in class) This simple approach works where all transportation rates are the same. However, we know that freight rates for raw materials are generally lower than those for finished goods.

Chapter 14Management of Business Logistics, 7 th Ed.26 Example of a Heuristic Modeling Approach: The Grid Technique When we use different freight rates, the grid model will tend to pull the location of our fixed facility toward the higher rated areas. Thus, the location of a production plant will tend to be nearer the market, reducing the overall transportation of the higher rated finished goods in favor of increasing transportation of lower rated raw materials.

Chapter 14Management of Business Logistics, 7 th Ed.27 Example of a Heuristic Modeling Approach: The Grid Technique In the example, the plant’s least-cost center is 655 in the horizontal direction, and 826 in the vertical direction. Both distances are measured from the grid’s zero point. The least-cost center is in southwestern Ohio or northern West Virginia in the Wheeling- Parkersburg area.

Chapter 14Management of Business Logistics, 7 th Ed.28 Example of a Heuristic Modeling Approach: The Grid Technique Advantages Simple to use Provides a starting point for further analysis Can accommodate “what if” questions Limitations Static approach Linear rates No consideration of topography Does not consider direction of movement

Chapter 14Management of Business Logistics, 7 th Ed.29 Transportation Pragmatics Tapering rates Rates increase with distance, but not in direct proportion to distance. Results from the carriers ability to spread certain fixed costs over a greater number of miles. Tends to pull the location to either the source or market, but not in between.

Chapter 14Management of Business Logistics, 7 th Ed.30 Table 14-5 Locational Effects of Tapering Rates with Constant Rate Assumption Miles from S Transport Rate from S Miles to M Transport Rate from M Total Trans - port Rate 0$ $

Chapter 14Management of Business Logistics, 7 th Ed.31 Figure 14-7 Locational Effects of Tapering Rates with Constant Rate Assumption

Chapter 14Management of Business Logistics, 7 th Ed.32 Table 14-6 Locational Effects of Tapering Rates without Constant Rate Assumption Miles from S Transport Rate from S Miles to M Transport Rate from M Total Trans - port Rate 0$ $

Chapter 14Management of Business Logistics, 7 th Ed.33 Figure 14-8 Locational Effects of Tapering Rates without Constant Rate Assumption

Chapter 14Management of Business Logistics, 7 th Ed.34 Transportation Pragmatics Blanket rates Rates do not increase with distance, but remains the same from one origin to any destination in the blanket area. Results from the carriers desire to maintain competitive prices for a product in a given area. Is a mutation of the basic rate-distance relationship.

Chapter 14Management of Business Logistics, 7 th Ed.35 Transportation Pragmatics Commercial Zones A specific blanket area that includes a municipality and the surrounding area. Impact is at end of location process when a company picks a specific site. Foreign Trade Zones Geographic zone into which importers can enter a product and hold it without paying duties, only paying when product enters U.S. customs territory.

Chapter 14Management of Business Logistics, 7 th Ed.36 Transportation Pragmatics Transit Privileges Permits a shipper to stop a shipment in transit and perform some function that physically changes the product’s characteristics. (e.g., wheat to flour) This can make intermediate locations optimum rather than focus only on sources and markets.