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Chapter 12:
Network Design and Facility Location
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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.
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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.
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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.
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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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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.
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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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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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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.
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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.
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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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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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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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Logistics Network Design
Figure 12-1 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.
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Figure 12 – 1 Key Steps in the Logistics Network Design Process
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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
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Figure 12-2 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
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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
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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.
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Major Locational Determinants
Major Locational Determinants are summarized in Table 12-1.
These determinants are subcategorized into regional and site specific factors.
Take a minute and review these factors now.
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Table 12-1Major 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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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.
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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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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 12-3. One approach is Linear Programming (LP).
Useful in linking facilities in a network. Defines optimum distribution patterns. Modern computers facilitate LP
modeling.
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Figure 12-3 Strategic Issues Relevant to Logistics Network Modeling
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Figure 12-4 Supply Chain Scenario for Network Analysis
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Figure 12-5 Example “Geographical-Mapping” Representation
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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.
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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.
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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.
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.
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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.
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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 12-6 and Table 12-2 on the next two slides.
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Figure 12-6 Grid Locations of Sources and Markets
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Table 12-2 Grid Technique Analysis of Plant Location Example
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Table 12-3 Impact of Rate Change on Least-Cost Location
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Table 12-4 Impact of Supply Source Change on Least-Cost Location
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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.
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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
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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.
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Table 12-5 Locational Effects of Tapering Rates with Constant Rate Assumption
Miles from S
Transport Rate from
SMiles to M
Transport Rate from
M
Total Trans -port
Rate
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
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Figure 12-7 Locational Effects of Tapering Rates with Constant Rate Assumption
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Table 12-6 Locational Effects of Tapering Rates without Constant Rate Assumption
Miles from S
Transport Rate from
SMiles to M
Transport Rate from
M
Total Trans -port
Rate
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
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Figure 12-8 Locational Effects of Tapering Rates without Constant Rate Assumption
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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.
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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.
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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 12: Summary and Review Questions
Students should review their knowledge of the chapter by checking out the Summary and
Study Questions for Chapter 12.
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Study Question 12-9
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Case 12-1 Fireside Tire Company
End of Chapter 12 Slides
Network Design and Facility Location