Chapter 14:
Network Design and Facility
Location
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.
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Management of Business Logistics, 7th Ed.
2
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.
3
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 14
Management of Business Logistics, 7th Ed.
4
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 14
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5
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 14
Management of Business Logistics, 7th Ed.
6
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.
7
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 14
Management of Business Logistics, 7th Ed.
8
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 14
Management of Business Logistics, 7th Ed.
9
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 14
Management of Business Logistics, 7th Ed.
10
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 14
Management of Business Logistics, 7th Ed.
11
Figure 14 – 1 Key Steps in the
Logistics Network Design Process
Chapter 14
Management of Business Logistics, 7th Ed.
12
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 14
Management of Business Logistics, 7th Ed.
13
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 14
Management of Business Logistics, 7th Ed.
14
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 14
Management of Business Logistics, 7th Ed.
15
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.
16
Major Locational Determinants



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.
17
Table 14-1
Major Locational Determinants
Regional Determinants
Labor climate
Site-Specific Determinants
Transportation access
Availability of transportation
Proximity to markets
●
●
Truck
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
Chapter 14
Management of Business Logistics, 7th Ed.
18
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 14
Management of Business Logistics, 7th Ed.
19
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 14
Management of Business Logistics, 7th Ed.
20
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.
21
Figure 14-4 Supply Chain
Scenario for Network Analysis
Chapter 14
Management of Business Logistics, 7th Ed.
22
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 14
Management of Business Logistics, 7th Ed.
23
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.
24
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 14
Management of Business Logistics, 7th Ed.
25
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.
26
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 WheelingParkersburg area.
Chapter 14
Management of Business Logistics, 7th Ed.
27
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 14
Management of Business Logistics, 7th Ed.
28
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 14
Management of Business Logistics, 7th Ed.
29
Table 14-5 Locational Effects of Tapering
Rates with Constant Rate Assumption
Miles from S
Transport
Rate from S
Miles to M
0
$0.00
200
$3.70
$3.70
50
2.00
150
3.50
5.50
100
3.00
100
3.00
6.00
150
3.50
50
2.00
5.50
200
3.70
0
0.00
3.70
Chapter 14
Transport Total Trans Rate from M
port Rate
Management of Business Logistics, 7th Ed.
30
Figure 14-7 Locational Effects of Tapering
Rates with Constant Rate Assumption
Chapter 14
Management of Business Logistics, 7th Ed.
31
Table 14-6 Locational Effects of Tapering
Rates without Constant Rate Assumption
Miles from S
Transport
Rate from S
Miles to M
0
$0.00
200
$5.20
$5.20
50
2.00
150
5.00
7.00
100
3.00
100
4.50
7.50
150
3.50
50
3.50
7.00
200
3.70
0
0.00
3.70
Chapter 14
Transport Total Trans Rate from M
port Rate
Management of Business Logistics, 7th Ed.
32
Figure 14-8 Locational Effects of Tapering
Rates without Constant Rate Assumption
Chapter 14
Management of Business Logistics, 7th Ed.
33
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.
34
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 14
Management of Business Logistics, 7th Ed.
35
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.
Chapter 14
Management of Business Logistics, 7th Ed.
36