1. Network Design and Facility Location
Chapter 14:
Network Design and Facility Location

2. Management of Business Logistics, 7th Ed.
Learning Objectives - After reading this chapter, you should be able to do the following:
Identify factors that may suggest a need to redesign a logistics network.
Structure an effective process for logistics network design.
Be aware of key locational determinants and the impact they may have on prospective locational alternatives.
Chapter 14
Management of Business Logistics, 7th Ed.

3. Management of Business Logistics, 7th Ed.
Learning Objectives
Understand the different types of modeling approaches that may be used to gain insight into logistics network design and facility location.
Apply the simple “grid” or center-of-gravity approach to facility location.
Have knowledge of certain ways in which transportation and transportation costs affect the location decision.
Chapter 14
Management of Business Logistics, 7th Ed.

4. 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 14
Management of Business Logistics, 7th Ed.

5. The Need for Long-Range Planning
In the short run, the logistics managers must work with the current facility locations.
Site availability, leases, contracts, and investments make changing facility locations impractical in the short run.
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.
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Management of Business Logistics, 7th Ed.

6. 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 14
Management of Business Logistics, 7th Ed.

7. 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
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Management of Business Logistics, 7th Ed.

8. Management of Business Logistics, 7th Ed.
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.
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Management of Business Logistics, 7th Ed.

9. Management of Business Logistics, 7th Ed.
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. (the collapse of economic and political walls in Eastern Europe, plus the unification initiatives of the European Union)
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.
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Management of Business Logistics, 7th Ed.

10. Management of Business Logistics, 7th Ed.
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 14
Management of Business Logistics, 7th Ed.

11. 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.
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Management of Business Logistics, 7th Ed.

12. Management of Business Logistics, 7th Ed.
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.
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Management of Business Logistics, 7th Ed.

13. Management of Business Logistics, 7th Ed.
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.
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Management of Business Logistics, 7th Ed.

14. 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
Aware of overall corporate and business strategies
Establish design parameters and objectives
Issues pertaining funding, people, and systems must be understood at an early stage
Establish availability of resources and potential involvement of 3PLs.
Chapter 14
Management of Business Logistics, 7th Ed.

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

16. Logistics Network Design
Step 2: Perform a Logistics Audit
Forces a comprehensive perspective
Helps to gather essential types of information
Customer requirements and key environmental factors
Key logistics goals and objectives
Profile of the current logistics network and the firm’s positioning in respective supply chain(s)
Benchmark, or target, values for logistics costs and key performance measurements
Identification of gaps between current and desired logistics performance (qualitative and quantitative)
Key objectives for logistics network design, expressed in terms that will facilitate measurement
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Management of Business Logistics, 7th Ed.

17. Logistics Network Design
Step 3: Examine the Logistics Network Alternatives
Use modeling to provide additional insights
Applying suitable quantitative models to the current logistics system as well as to the alternative systems and approaches under consideration
Develop preliminary designs
By optimization, simulation, or heuristic
Test model for sensitivity to key variables
“What if” types of analysis
Chapter 14
Management of Business Logistics, 7th Ed.

18. Figure 14-2 Key Steps in a Logistics Audit
Chapter 14
Management of Business Logistics, 7th Ed.

19. Logistics Network Design
Supplier networks
Land costs and utilities
Company preference
Apply screening to reduce alternative sites
Eliminates areas that are uneconomical from a logistics perspective
Step 4: Conduct a Facility Location Analysis
Analyze attributes of candidate sites
Quantitative and qualitative aspects
Labor climate
Transportation issues
Proximity to markets and customers
Quality of life
Taxes and industrial development incentives
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Management of Business Logistics, 7th Ed.

20. Logistics Network Design
Step 5: Make Decisions regarding Network and Facility Location
Evaluate sites for consistency with design criteria.
Confirm types of change needed to the firm’s logistics network
Feasibility of involving third-party suppliers should have been incorporated into the alternatives that were evaluated in the two preceding steps,the decision to involve external suppliers will have cost and service implications as well as strategic ones.
Chapter 14
Management of Business Logistics, 7th Ed.

21. 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 14
Management of Business Logistics, 7th Ed.

22. Major Locational Determinants
The focus of step 4 is on analyzing the attributes of specific regions and areas that are candidates for sites of logistics facilities.
Major Locational Determinants are summarized in Table 14-1.
These determinants are subcategorized into regional and site specific factors.
Take a minute and review these factors now.
Chapter 14
Management of Business Logistics, 7th Ed.

23. Major Locational Determinants
The importance varies among industries and among individual companies within specific industries
Such as textile (織品), furniture and household appliances place significant emphasis on the availability and cost of labor
Computers and peripherals, semiconductors, and engineering and scientific instruments place great emphasis on assuring the availability of a highly qualified workforce with very specific technical skills and proximity (接近) to customer markets
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Management of Business Logistics, 7th Ed.

24. Table 14-1 Major Locational Determinants
Regional Determinants
Site-Specific Determinants
Labor climate
Transportation access
Availability of transportation
Truck
Proximity to markets
Air
Quality of life
Rail
Taxes & other incentives
Water
Supplier networks
Inside/outside metro area
Land costs and utilities
Availability of workforce
Company preference
Utilities
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Management of Business Logistics, 7th Ed.

25. Key Factors for Consideration
Labor Climate
The cost and availability of labor are major issues of concern
Workforce’s degree of unionization (組織化)
Skill level
Work ethic (倫理)
Productivity (value added per employee)
Enthusiasm of local public officials
The rate of unemployment in the local areas
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Management of Business Logistics, 7th Ed.

26. Key Factors for Consideration
Availability of Transportation
Interstate highway access
Availability of intermodal or local rail facilities
Convenience of a major airport facility
Proximity to inland or ocean port facilities
Chapter 14
Management of Business Logistics, 7th Ed.

27. Key Factors for Consideration
Proximity to Markets and Customers
Usually considers both logistics and competitive variables
Availability of transportation
Freight cost
Geographical market size that can be served, for example, on a same-day or next-morning basis.
An overly complex logistics network can be disadvantageous from a cost perspective.
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Management of Business Logistics, 7th Ed.

28. Key Factors for Consideration
Quality of life.
Affect the well-being (福利) of employees and the quality of the work they are expected to perform.
Rates the quality of life in metropolitan areas in terms of climates, housing costs, health care and environment, crime, passenger transportation, education, recreation, the arts, and economic opportunities.
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Management of Business Logistics, 7th Ed.

29. Key Factors for Consideration
Taxes and Industrial Development Incentives (招商).
Revenue or income taxes, inventory taxes, property taxes, and so on will have a significant impact on the cost of operating a business.
Personal taxes that may affect the attractiveness of a particular region or local area
Entice companies to locate in some area:
Tax incentives (reduced rates or tax abatements (減稅))
Financing arrangements (state loans)
Reduced water ans sewage rates
Rent-free buildings
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Management of Business Logistics, 7th Ed.

30. Key Factors for Consideration
Supplier Networks
For a manufacturing facility, the availability and cost of raw materials and component parts, as well as the cost of transporting these materials to the proposed plant site, are of significance.
The cost and service sensitivity of the inbound movements from suppliers will be important to consider.
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Management of Business Logistics, 7th Ed.

31. Key Factors for Consideration
Land Costs and Utilities
Local building codes and cost of construction are important to consider
The availability and expense of utilities such as electrical power, sewage, and industrial waste disposal need to be factored into the decision-making process.
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Management of Business Logistics, 7th Ed.

32. Key Factors for Consideration
Company Preference
A company may prefer to locate all new facilities in rural ares within fifty miles of a major metropolitan area
A company may wish to locate its facilities in areas where competitors already have a presence
A firm may wish to locate facilities in an area where it may enjoy common access with other firms to benefits such as a skilled labor supply, excellent marketing resources, or proximity to key supplier industries.
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Management of Business Logistics, 7th Ed.

33. 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 that serve as transfer points for consolidated shipments that need to be disaggregated or mixed into typically smaller shipments for delivery to individual customers..
Use of third party logistics companies which negate the need for the firm to maintain or establish its own distribution facilities.
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Management of Business Logistics, 7th Ed.

34. On the Line: Tennessee---Choice Site
Dell Computer selected Nashville, Tennessee as its production site for a new line of computers.
Tennessee has the transportation infrastructure, business tax reforms, and telecommunications capabilities that firms consider when they need to locate a facility.
Dell will be responsible for an additional 11,000 jobs and $690 million in economic output.
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Management of Business Logistics, 7th Ed.

35. Management of Business Logistics, 7th Ed.
Modeling Approaches:
The techniques discussed here are applicable to a wide range of issues pertaining to the locations of plants, distribution centers, and customers and to the flows of product and information to support the functioning of the logistics network.
Comparison => select => identify if it is consistent with the key objectives => “what if” types of analyses conducted to test the sensitivity
Chapter 14
Management of Business Logistics, 7th Ed.

36. 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 14-3.
One approach is Linear Programming (LP).
Useful in linking facilities in a network.
Defines optimum distribution patterns.
Modern computers facilitate LP modeling.
Chapter 14
Management of Business Logistics, 7th Ed.

37. Figure 14-3 Strategic Issues Relevant to Logistics Network Modeling
Chapter 14
Management of Business Logistics, 7th Ed.

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

39. Figure 14-5 Example “Geographical-Mapping” Representation
Chapter 14
Management of Business Logistics, 7th Ed.

40. 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.
The modeling requires extensive data collection and analysis to determine how system factors such as transportation, warehousing, inventory, materials handling, and labor costs interact.
Chapter 14
Management of Business Logistics, 7th Ed.

41. Modeling Approaches: Simulation Models
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.
Although simulation models are not designed to produce optimum solutions, they are very capable in terms of their ability to incorporate relatively comprehensive and detailed problem descriptions.
Chapter 14
Management of Business Logistics, 7th Ed.

42. 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 14
Management of Business Logistics, 7th Ed.

43. Modeling Approaches: Heuristic Models
For example, the location team may consider an optimum warehouse site to be
Within twenty miles of a major market area
At least 250 miles from other company distribution centers
Within three miles of an interstate highway
Within forty miles of a major airpot facility
Chapter 14
Management of Business Logistics, 7th Ed.

44. Modeling Approaches: Heuristic Models
Potential Supply Chain Modeling Pitfalls to Avoid
Short-term horizon  significant suboptimization is likely to occur.
Too little or too much detail.
Too little  difficult to implement results due to insufficient information
Too much  create unnecessary complexity, making it difficult to understand the results and more difficult to implement effectively
Thinking in two dimensions
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Management of Business Logistics, 7th Ed.

45. Modeling Approaches: Heuristic Models
Using published costs
“published” costs tend to represent “list” prices that need to be modified to reflect what may result after significant negotiations occur between buyers and sellers of transport services
Inaccurate or incomplete costs
Analyses based on insufficiently accurate information lead to invalid results
Inaccurate cost forecasts result in suboptimal allocations of resources, typically leading to seriously flawed strategies
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Management of Business Logistics, 7th Ed.

46. Modeling Approaches: Heuristic Models
Use of erroneous analytical techniques
The selected techniques and approaches should be matched with the level of precision desired
Lack of appropriate robustness analysis
Since most or all model inputs have at least an element of uncertainty, it is important to understand the consequences that could result from variation in actual behavior of key model inputs
Chapter 14
Management of Business Logistics, 7th Ed.

47. 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 (center of gravity); that is, the geographic point where transportation costs are minimized.
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 14
Management of Business Logistics, 7th Ed.

48. 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 14
Management of Business Logistics, 7th Ed.

49. Example of a Heuristic Modeling Approach: The Grid Technique
The text example will attempt to locate a new plant receiving inbound materials from Buffalo, Memphis, and St. Louis, serving markets in Atlanta, Boston, Jacksonville, Philadelphia, and New York City.
Examine Figure 14-6 and Table 14-2 on the next two slides.
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Management of Business Logistics, 7th Ed.

50. Figure 14-6 Grid Locations of Sources and Markets
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Management of Business Logistics, 7th Ed.

51. Management of Business Logistics, 7th Ed.
Center of mass
Where
C = center of mass, or ton-mile center
Di = distance from 0 point on grid to the grid location of finished good I
Di = distance from 0 point on grid to the grid location of raw material I
Mi = weight (volume) of finished goods sold in market I
Si = weight (volume) of raw material purchased at source i
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Management of Business Logistics, 7th Ed.

52. Consider transportation rates
Assume that this company produces only one type of finished god, so that each finished good’s transportation rate is the same
Where
Ri = finished good transportation rate/distance unit for finished good I
ri = raw material rate/distance unit for raw material i
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Management of Business Logistics, 7th Ed.

53. Table 14-2 Grid Technique Analysis of Plant Location Example
Chapter 14
Management of Business Logistics, 7th Ed.

54. Table 14-3 Impact of Rate Change on Least-Cost Location
Sensitivity Analysis
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Management of Business Logistics, 7th Ed.

55. Table 14-4 Impact of Supply Source Change on Least-Cost Location
Sensitivity Analysis
Chapter 14
Management of Business Logistics, 7th Ed.

56. 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.
We can conclude from these sensitivity analyses that the rates, product volumes, and source/market locations do affect plant’s least-cost location.
Chapter 14
Management of Business Logistics, 7th Ed.

57. 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 (for transportation)
No consideration of topography
Does not consider direction of movement (straight line movement)
Chapter 14
Management of Business Logistics, 7th Ed.

58. 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(loading, billing, and handling) over a greater number of miles.
Tends to pull the location to either the source or market, but not in between.
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Management of Business Logistics, 7th Ed.

59. Management of Business Logistics, 7th Ed.
Table 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
$0.00
200
$3.70 50
2.00
150
3.50
5.50
100
3.00
6.00
3.70
0.00
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Management of Business Logistics, 7th Ed.

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

61. Management of Business Logistics, 7th Ed.
Table 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
$0.00
200
$5.20 50
2.00
150
5.00
7.00
100
3.00
4.50
7.50
3.50
3.70
0.00
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Management of Business Logistics, 7th Ed.

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

63. 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 14
Management of Business Logistics, 7th Ed.

64. Transportation Pragmatics
Commercial Zones
A specific blanket area that includes a municipality (當局) and the surrounding area.
Impact is at end of location process when a company picks a specific site.
Site outside the commercial zone reduces carrier availability, especially the availability of motor carriers that define their operating scopes in terms of point-to-point operations.
Chapter 14
Management of Business Logistics, 7th Ed.

65. Transportation Pragmatics
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.
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Management of Business Logistics, 7th Ed.

66. 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 (小麥粉))
This can make intermediate locations optimum rather than focus only on sources and markets.
Like the blanket rate, the transit privilege is not available at all locations or for all commodities – only those sites and commodities the carrier specidies.
Chapter 14
Management of Business Logistics, 7th Ed.

67. 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.

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

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

70. Network Design and Facility Location
End of Chapter 14 Slides
Network Design and Facility Location