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Chapter 14:
Network Design and Facility
Location
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.
2
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.
3
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.
4
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.
Chapter 14
Management of Business Logistics, 7th Ed.
5
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.
6
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.
7
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
Management of Business Logistics, 7th Ed.
8
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.
Chapter 14
Management of Business Logistics, 7th Ed.
9
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.
10
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.
11
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.
12
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.
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 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.
14
Figure 14 – 1 Key Steps in the
Logistics Network Design Process
Chapter 14
Management of Business Logistics, 7th Ed.
15
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
Chapter 14
Management of Business Logistics, 7th Ed.
16
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.
17
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.
18
Logistics Network Design

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
Chapter 14




Supplier networks
Land costs and utilities
Company preference
Apply screening to reduce
alternative sites
 Eliminates areas that are
uneconomical from a
logistics perspective
Management of Business Logistics, 7th Ed.
19
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.
20
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.
21
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.
22
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
Chapter 14
Management of Business Logistics, 7th Ed.
23
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.
24
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
Chapter 14
Management of Business Logistics, 7th Ed.
25
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.
26
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.
Chapter 14
Management of Business Logistics, 7th Ed.
27
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.
Chapter 14
Management of Business Logistics, 7th Ed.
28
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
Chapter 14
Management of Business Logistics, 7th Ed.
29
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.
Chapter 14
Management of Business Logistics, 7th Ed.
30
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.
Chapter 14
Management of Business Logistics, 7th Ed.
31
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.
Chapter 14
Management of Business Logistics, 7th Ed.
32
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.
Chapter 14
Management of Business Logistics, 7 Ed.
33
th
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.
Chapter 14
Management of Business Logistics, 7th Ed.
34
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.
35
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.
36
Figure 14-3 Strategic Issues Relevant to
Logistics Network Modeling
Chapter 14
Management of Business Logistics, 7th Ed.
37
Figure 14-4 Supply Chain
Scenario for Network Analysis
Chapter 14
Management of Business Logistics, 7th Ed.
38
Figure 14-5 Example “Geographical-
Mapping” Representation
Chapter 14
Management of Business Logistics, 7th Ed.
39
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.
40
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.
41
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.
42
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.
43
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
Chapter 14
Management of Business Logistics, 7th Ed.
44
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
Chapter 14
Management of Business Logistics, 7th Ed.
45
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.
46
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.
47
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.
48
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.
Chapter 14
Management of Business Logistics, 7th Ed.
49
Figure 14-6 Grid Locations of
Sources and Markets
Chapter 14
Management of Business Logistics, 7th Ed.
50
Center of mass
m
dS
i
C 
i

1
DM
i
i
1
n
m
S
Where
n
i

1
M
i
1
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
Chapter 14
Management of Business Logistics, 7th Ed.
51
Consider transportation rates
m
Assume that this company
produces only one type of
finished god, so that each
finished good’s transportation
rate is the same
 rd S
i
C 
i
n
i

1
i
i
i
i
1
n
m
 rS
RDM
i

1
RM
i
i
1
Where
Ri = finished good transportation rate/distance unit for finished good I
ri = raw material rate/distance unit for raw material i
Chapter 14
Management of Business Logistics, 7th Ed.
52
Table 14-2 Grid Technique Analysis
of Plant Location Example
Chapter 14
Management of Business Logistics, 7th Ed.
53
Table 14-3 Impact of Rate
Change on Least-Cost Location
Sensitivity
Analysis
Chapter 14
Management of Business Logistics, 7th Ed.
54
Table 14-4 Impact of Supply Source
Change on Least-Cost Location
Sensitivity
Analysis
Chapter 14
Management of Business Logistics, 7th Ed.
55
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.
56
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.
57
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.
Chapter 14
Management of Business Logistics, 7th Ed.
58
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.
59
Figure 14-7 Locational Effects of Tapering
Rates with Constant Rate Assumption
Chapter 14
Management of Business Logistics, 7th Ed.
60
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.
61
Figure 14-8 Locational Effects of Tapering
Rates without Constant Rate Assumption
Chapter 14
Management of Business Logistics, 7th Ed.
62
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.
63
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.
64
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.
Chapter 14
Management of Business Logistics, 7th Ed.
65
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.
66
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.
Study Question 14-9
Chapter 14
Management of Business Logistics, 7th Ed.
68
Case 14-1
Fireside Tire Company
Chapter 14
Management of Business Logistics, 7th Ed.
69
End of Chapter 14 Slides
Network Design and Facility
Location
1/--страниц
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