NeLoC

Work Package 1
PLANNING OF LOGISTCS CENTRES

Final Report

Edited by
Ludwik Kondratowicz NeLoC Work Package 1
Leader

Volume I

Gdask, Poland 2003

 NETWORKING LOGISTICS CENTRES IN THE BALTIC SEA REGION
NeLoC
Work Package 1
PLANNING OF LOGISTICS CENTRES
Gdask 2003, Poland

The Maritime Institute in Gdask

Dugi Targ 41/42, 80-830 Gdask, Poland
Phone: +48 58 301 16 41 Fax: +48 58 301 35 13
e-mail: im@im.gda.pl

Authors:
Poland, Maritime Institute in Gdask
Ludwik Kondratowicz, Magorzata Somianko-Wasilewska
Iwona Szaucka, Wojciech Piotrowicz
Marcin Kalinowski, Barbara Szwankowska

Poland, Institute of Logistics and Warehousing - Pozna

Stanisaw Krzyaniak, Tomasz Dowgielewicz
Krzysztof Szamaski, Ireneusz Fechner
Finland
Hanna Perl, University of Turku, Centre for Maritime Studies
Antti Saurama, University of Turku Centre for Maritime Studies
Laura Aittonen, University of Turku Centre for Maritime Studies
Juhani Heikkinen, Centre of Expertise in Southeast Finland
Anu Karjalainen, Meri-Lappi Institute
Denmark
Kent Bentzen, FDT Association of Danish Transport Centers
Lars Bentzen, NTU Nordic Transport Development
Tobias Hoffmann, FDT Association of Danish Transport Centers
Germany
Steffen Nestler, Deutsche GVZ-Gesellschaft, Bremen
Thomas Nobel, Deutsche GVZ-Gesellschaft, Bremen
Raimund Mildner, TECHNIKZENTRUM Lbeck
Lithuania, Vilnius Gediminas Technical University
Algirdas akalys
Siiri Baiauskien

Poland, University of Gdask

Aleksandra Wrona, Wodzimierz Rydzkowski, Mirosaw Chaberek
Leszek Reszka, Zdzisaw Kordel, Karol Kreft
Poland, Maritime Academy in Gdynia
Piotr Jdrzejowicz

Poland, Port of Gdynia Authority

Mariusz Karbowski
Harris Mawusi
Poland, Port of Gdask Authority Co.
Maciej Matczak
Krzysztof Rozmarynowski

ISBN 83-85780-65-3
Published and printed by
Department of Scientific Publications
of the Maritime Institute in Gdask
 NeLoC PROJECT

PROJECT SUMMARY
NeLoC provides a networking forum for existing and planned logistics centres in the Baltic Sea Region.
Since there is a great number of newly established centres and plans for new ones, the project will
enable the exchange of experiences in planning and operating logistics centres.
The project promotes the role of logistics centres in regional development and national and international
logistics chains with emphasis laid on intermodal solutions. Furthermore, the project improves the
general competitiveness of the logistics companies through providing a setting for creating Pan-Baltic
partnerships and easy access to ICT-tools.

CO-FINANCING
NeLoC is a co-operation project between Community Initiative Programme Baltic Sea Region
INTERREG III B, Cross-Border Co-operation Programme PHARE Small Project Fund Lithuania and
National Committee for Scientific Research in Poland. The project has also been co-financed by the
Finnish Ministry of the Interior the Federal Ministry of Transport, Building and Housing of Germany.

Partners
Active partners
Centre for Maritime Studies, University of Turku, FI (Lead Partner)
Center of Expertise in South East Finland, Kymenlaakso Polytechnic, FI
City of Kemi, FI
City of Turku, FI
Turku Chamber of Commerce, FI
FDT - Association of Danish Transport Centres, DK (Work Package 2 Leader)
NTU Nordic Transport Development, DK
TECHNIKZENTRUM Frdergesellschaft mbH, DE (Work Package 3 Leader)
Deutsche GVZ Gesellschaft mbH, DE
Association Hoja Fondas, LT
Kaunas City Municipality, LT
Kaunas Regional Development Agency, LT
Vilnius Gediminas Technical University, Institute of Transport Sciences, LT
Maritime Institute in Gdask, PL (Work Package 1 Leader)
Institute of Logistics and Warehousing, PL
Advisory Partners
Ministry of Transport and Communications, FI
Danish Maritime Authority, DK
Ministry of the Environment, DK
Federal Ministry of Traffic, Building and Housing, DE
Ministry of Economy, LT
Ministry of Transport, LT
Ministry of Infrastructure, PL
University of Gdansk, PL
 TABLE OF CONTENTS

PREFACE .. 7
1. PLANNING PROBLEMS IN DEVELOPING LOGISTICS CENTRES ... 9
1.1. Semantic contents of the concept of logistics centre . 9
1.2. Methodological approach .. 13
1.3. Market analysis . 16
1.4. Financial feasibility analysis . 22
2. CLASSIFICATION OF THE CRITERIA IN PLANNING PROBLEM 26
2.1. The macro level criteria . 27
2.2. Criteria related to the logistics centre and its immediate environment . 31
2.3. Logistics criteria and measures . 36
2.4. Investment effectiveness evaluation criteria . 39
2.5. Appendix: example of a list of criteria and measures ... 46
3. FACTORS DETERMINING LOCATION AND SERVICE STRUCTURE
OF A LOGISTICS CENTRE 49
3.1. Location of a logistics centre 50
3.2. LC functional structure . 61
3.3. Configuration of a logistics network . 69
3.4. The supply chain management system .. 77
3.5. Policy of the authorities . 84
4. INTRODUCTION TO PLANNING METHODS OF LOGISTICS
CENTRES .. 98
4.1. An overview of planning models in logistics 98
4.1.1. Logistics center as a complex system 98
4.1.2. Choices for modelling 100
4.2. Selected mathematical models for planning location and functions
of logistics centres . 103
4.2.1. Logistics centre location models 103
4.2.1.1. Non-competitive location models 104
4.2.1.2. Competitive location models 107
4.2.2. Combined optimization of the logistics centre location and size .. 107
4.2.3. Supply chain design - combined optimization of the number
of logistics centres and vehicle routes 110

5
 4.2.4. Multi-criterion location models . 113
4.2.5. Optimization of the logistics centre location and size with
random centre operating costs .. 117
4.3. Application of neural networks in planning of logistics centre 117
4.3.1. Analysis of the usefulness of artificial neural networks
in logistics centre planning 117
4.3.2. Artificial neural network based logistics centre models 119
4.3.3. An example simplified neural network model
of the Pomeranian Logistics Centre (PLC) . 122
4.4. Digital simulation as a tool in planning logistics centres .. 129
4.4.1 The basic process of modelling and simulation
of logistics centre 129
4.4.2. Benefits of the use of simulation models in the logistics
centers planning process .. 132
REFERENCES 134

6
 PREFACE

Political, social and economic changes that have taken place recently in the Baltic Sea
Region are very significant. New European Union transport priorities in relation to the
Baltic Sea Region, new transport corridors crossing the Region, coming up enlargement
of the European Union are but a few important developments taking place in this Region.
Therefore new innovative transport technological, telematic and organizational solutions
are required to streamline the movement of goods and vehicles throughout the Baltic Sea
that became as if a lake inside of the European Union countries.
Under the circumstances, a very crucial role is to be performed by logistics centers as
modern multi-modal transport hubs that enable efficient and smooth functioning of
international supply chains. In view of these dynamic changes in the Baltic Sea Region,
planning of development of logistics centers and their networking based on innovative IC
Technology becomes an important and challenging issue.
Planning of logistics centers is the name of one of the three Work Packages of the
project NeLoC Networking logistics center in the Baltic Sea Region. The presented
study is a final report from the research carried out under Work Package 1 of this project.
The purpose of this research can be defined in short as reviewing and evaluating various
potential methods and procedures most suitable in planning logistics centers and
presenting selected methods in case studies.
The study is based on the following conceptual framework. The problem of planning of
logistics center is considered as a whole, consisting of the three interrelated elements:
(1) planning procedures (a set of systematic processes used at different stages of
planning),
(2) planning techniques (a tool box supporting decision-making), and
(3) planning criteria (a hierarchy of measures that direct selection of optimum
solution).
Another methodological assumption was investigating the process of planning of logistics
centers in five different dimensions (or aspects):
(1) Logistics network configuration
(2) Logistics centre location
(3) Logistics centre service
(4) Supply chain management
(5) Political and administrative policy on local, national and regional level.

7
Each of the above five interacting aspects of planning correspond with a number of
specific factors that are to be taken into account when analyzing, evaluating and
comparing logistics centres.
The report is divided into two volumes. The first one is devoted solely to methodological
issues that are considered according to the above listed rules. A number of potential
mathematical, heuristic, simulation and other techniques are discussed from the point of
view of their applicability in logistics center planning. The second volume contains a
number of case studies that demonstrate applications of different methodological
approaches as well as various planning problems.
The presented study was created as a joint effort of many NeLoC partners from Finland,
Denmark, Germany, Lithuania and Poland. Therefore I am very thankful to all the
Authors and Consultants for their valuable contributions included in this report that
hopefully will meet real needs of logistics center users, planners as well as public and
private decision-makers.

Prof. Dr. hab. Ludwik Kondratowicz

NeLoC Work Package 1 Leader
Maritime Institute in Gdask, Poland

Gdask, December 2003.

8
 1. PLANNING PROBLEMS IN DEVELOPING LOGISTICS CENTRES

1.1. SEMANTIC CONTENTS OF THE CONCEPT OF LOGISTICS CENTRE

The very meaning of the term logistics centre directly affects the process of
planning, its scope, choice of methods, and criteria for analysis.. Therefore an important
preliminary issue to discuss is what various dimensions are typical for the concept of
logistics centre.
The term of logistics centre is very popular. One may even maintain that it is even
overused if utilized as: distribution centre, warehouse-distribution centre, freight terminal,
central warehouse, warehouse base, or logistics platform. Proper use of relevant concept
depends first of all on definition and criteria applied to classification of logistics centres.
A number of basic concepts of logistics centres are known all over Europe1, for
example:
British: Freight Villages
French: Plate Forme Logistique and Plat Forme multimodales
German: Gterverkehrszentrum (GVZ)
Italian: Interporto
Dutch: Rail Service Centre (RSC)
Danish: Transport Centre
Differences exist not only in names, but as far as the concept and detailed solutions
are concerned as well. German concepts are based on the assumption of rationalization of
spatial and functional urban agglomeration systems. French and British solutions are
inspired by the desire to transfer technological innovations and telematic skills in arising
centers. Italian solutions have been connected with the strategy of liberalization of port
services and increasing competition between ports aiming at promotion of Italian export
and transit via Italian ports.
Variation in the definition of the term are partly an outcome of the evolution
process and new types of centres that have been developed in recent years; some of these
may have characteristics which do not always correspond to all typical features of what
has been understood as a logistics centre. Partly the variation is a result of the fact that, by
absolute terms, a logistics centre is very difficult to define. There are useful and detailed
definitions for certain types of logistics centres describing their functions, but the creation
of an overall definition of logistics centres has proved to be problematic. Therefore it is

1
D. Hldgen, Terminals, intermodal logistics centres and European infrastructure policy,
http://www.isl.org/projects/benchmarking-gvz/

9
common that instead of using of a general definition we more likely describe different
types of logistics centres.
From functional point of view logistics centres can be defined simply as
concentration points of logistics flows and operations at any scope; logistics centre is a
node that concentrates traffic flows. In more broader terms, a logistics centre can be
defined as a centre in defined area within which all activities relating to transport,
logistics and distribution are carried out by various number of operators and companies
on commercial basis. However, for instance the geographical scope of actions and the
internal uniformity of a centre are features that divide logistics centres into various types
making general definitions problematic. The geographical dimension of a logistics centre
can be anything between local and global. Internal uniformity of a logistics centre has two
extremities a concrete logistics centre which is very coherent and operates in a same
physical space and a virtual logistics centre that consists of several logistics service
providers and their facilities in a region (Ojala et al. 1999: 15).
Categorisation of logistics centres can be made in numerous ways. Typically three
basic types are assorted (see e.g. Ojala et al. 1999: 16; Vafdis & Ojala 1999;
Suunnittelukeskus 2000):
Concrete (physical)
Virtual
Network (sometimes also referred as regional).
A concrete logistics centre may be operated and owned by several logistics service
providers or just by one. Some companies in the field of logistics, e.g. land transport
companies and forwarders, have quite often their own distribution centres called as logistics
centres. These centres serve needs and transmit flows of a single company and are also owned
by and only by a single company. Some of the concrete centres are operated by multiple
companies providing a wide range of logistics and value added services to their customers.
The operators can either be owners or tenants of buildings and facilities.
A company operating a (concrete) logistics centre might have a different role in the
delivery chain of its customers. Only a minor part of companies offering logistics services
take care of all logistics activities of their customers. Though, customers buy willingly
services they need from the specialised service companies. For this reason it is an
advantage to a logistics centre to be able to provide a wide range of specialised services
within the same centre.
A concrete logistics centre is usually a company which practises clearly its own
business activities and its activities support the needs of the biggest logistics service
provider in the logistics centre. A concrete logistics centre can also be equipped with all
public facilities needed to carry out the above mentioned operations. If possible, it should
include public services for the staff and equipment of the users. Usually a concrete centre
serves as a multimodal centre linking together different transport modes.
A virtual logistics centre is usually a certain type of a rainbow organisation which
can, for example, support its member organisations in marketing but doesnt participate
actively in actual logistics operations. Whereas the legal status of a concrete logistics
centre is typically a company, a virtual logistics centre may be managed by a looser

10
organisational body like association or it can even operate on a project base. Like Vafdis
& Ojala (1999: 55) have pointed out, the division between concrete and virtual logistics
centre is mostly characterised by the ways through which companies in these centres
communicate and co-operate.
Along with the two perhaps most common types of logistics centres the third type
of a centre can be specified: a network. A network is a network of several logistics
centres or service companies. A network logistics centre supposes relatively deep co-
operation between several private companies, and possibly several individual logistics or
distribution centres, which might be located within a larger geographical area (town, city,
group of cities, region etc.). These companies seek mainly synergy benefits through co-
operation. A network promotes services of all its members, not only of a single physical
centre. A network is usually formally less organised than concrete centre in terms of
rules, and organisational and legal status. Sometimes network has no company to manage
its activities but only a loose co-operational body. Virtual centres sometimes share similar
characteristics to networks, which is the case in Finland for example.
The main differences between concrete, virtual and network logistics centres are
sometimes measured by the internal uniformity (referring to organisational mode, aims,
facilities, role of different partners etc.). From that perspective, concrete and virtual logistics
centres are seen as extremities whereas network is positioned between them. A virtual centre
is considered as loose co-operational organisation between companies that mostly promotes
and markets their services. A network is characterised by stronger links and modes of co-
operation between companies. Companies provide their services through their own facilities
but seek for synergy benefits through close co-operation. A concrete centre has its own
operational facility (infrastructure) and is most often a private limited company. (Levomki
1999: 21-24; Ojala et al. 1999: 15-16; Vafdis & Ojala 1999: 55-57).
The difference between a virtual logistics centre and a network is therefore not a
portal or services provided through the Internet but the depth of co-operation and the
mode of centres organisation.
One other perspective is also to see the three types of logistics centres as
development stages of a single centre. In certain period of time, a logistics centre may
develop from the looser virtual mode first to a network and then finally to a concrete
centre.
Making distinction between various types of logistics centres in practice is not
unproblematic. Many centres share similar features with each other, thus, making a clear
definition difficult. Many centres also have similarities with organisations that are not
used to be called as logistics centres. For example, networks and virtual logistics centres
tend to share many similar characteristics with pure regional marketing and development
organisations promoting logistics advantages of a region. What is then the ultimate
difference between them? Should some of the networks or virtual logistics centres be
considered more or less as regional or local promoters, not a form of logistics centre?
What is ultimately the difference between any node concentrating logistics flows and a
logistics centre? Are for example free competition rules, legal managerial body and

11
presence of several logistics service companies within the same block of infrastructure
characteristics that define logistics centre?
There are hardly any short and general answers to the above made questions.
However, all real life logistics centres, regardless of how they operate and to what they
aim at, share at least one connecting feature: they all call and market themselves as
Logistics Centres and have service concept for promoting logistics services. In some
(rare) cases that is the only possible and available feature to identify the centres.
According to EUROPLATFORM (European Association of Freight Villages)
definition of logistics center is as follows:
A freight village is a defined area within which all activities relating to transport,
logistics and the distribution of goods, both for national and international transit, are
carried out by various operators.
These operators can either be owners or tenants of buildings and facilities
(warehouses, break-bulk centres, storage areas, offices, car parks, etc...) which have been
built there.
Also, in order to comply with free competition rules, a freight village must allow
access to all companies involved in the activities set out above. A freight village must
also be equipped with all the public facilities to carry out the above mentioned operations.
If possible, it should also include public services for the staff and equipment of the
users.
In order to encourage intermodal transport for the handling of goods, a freight
village must preferably be served by a multiplicity of transport modes (road, rail, deep
sea, inland waterway, air). Finally, it is imperative that a freight village be run by a single
body, either public or private.
Further aspects of logistics center concept comes from Karl-Heinz Breitzmann and
Christian Wenske (University of Rostock, 1999) who describe logistics centre as a freight
village (GVZ) being a specific group of transport and warehousing centres. According to
the German understanding freight villages (literally: goods traffic centre, abbreviated
GVZ) constitute a specific group of logistic centres, clearly distinct tram others.
A working group of the Transport Departments Conference of the Federation and
the Lands elaborated the following definition2:
"A freight village (GVZ) is a transport businesses area where transport enterprises
of different orientation (transport, forwarding, warehousing, services, logistic services)
settle as independent enterprises, connected with several, at least two transport modes.
GVZ should facilitate the change of transport modes in the transport chain and thus
contribute to relieve the roads from long distance, regional and short distance traffic. Also
postal freight centres may be integrated. GVZ comprise a terminal for intermodal
transport rail/road or in land waterway shipping/rail/road, in doing so it is sufficient, that
this terminal is situated in close vicinity to the transport businesses area and
organisationally connected to it."

2
Bericht der Arbeitsgruppe GVZ der Verkehrsabteilungsleiterkonferenz, Bonn 29.Oct 1991.

12
 The following aspects should be stressed particularly:
(1) A GVZ is a transport businesses area where several transport enterprises have
their premises, all of them remaining independent. If e.g. a major forwarder erects a
distribution centre this does not constitute a GVZ. Also in case of the formation of an
uniform and centralised logistic organisation, where the participating transport enterprises
renounce their economic and juridical independence, the term GVZ does not apply, here
the designation "goods distribution centre" is proposed.
This in Germany preferred conception is the outcome of the strong influence of the
associations of forwarding and transport enterprises attributing great value to the
preservation of their members independence.
(2) A decisive element of the GVZ concept is the connection to several modes of
transport in order to facilitate the change of mode. The economic objective is to alleviate the
road traffic by railways and inland waterway shipping taking it upon to make the long
distance haulage. Therefore, the GVZ needs an intermodal transport terminal, where the
change of swap bodies, containers or trailers between lorry and railway wagon is possible.
Where this possibility does not exist, the establishment is a transport business area.
(3) In GVZ should settle enterprises dedicated to different ramifications of transport
and logistic services: forwarders, road hauliers, inland waterway shippers, railways, postal
and express delivery services, warehouses, cargo handling, container rental and various
services for these activities (filling station, garage, lorry washing, rental and repair of pallets
etc.). Suitable for settling in GVZ are also distribution centres of industrial and trading
companies with their activities of collecting, storing, sorting and even processing cargoes in
order to supply whole European regions. The spatial closeness of these various businesses
should it make possible to develop manifold forms of co-operation.
In the GVZ Bremen, the first in Germany and serving as example in many respects,
co-operation effects are distinguished in internal and external products. Internal products
serve for rationalisation (e.g. joint buying, joint training, joint security), while external
products are aimed at the market (e.g. joint city logistic).
The above discussed elements of definition permit the clear-cut deduction of
general and particular economic objectives of the installation of GVZ.

1.2. METHODOLOGICAL APPROACH

Design, planning, locating and managing of the logistics centres is a domain of the
so called economy supporting logistics [Barros, 1997]. The problems solved by that
branch of logistics include the transport policy, production process infrastructure,
logistics chain globalization and applying location incentives.
Organization of a logistics chain should be subordinated to the main goal, which is
ensuring a continuous and effective delivery of products to customers, assuming that
those products are competitive in quality, price, diversity and customer service. In order
to achieve that, the whole chain has to be flexible as its efficient operation depends on the
ability of adjusting itself to the continuous changes of the environment.

13
 Figure 1.1. Conceptual framework for planning of logistics centres

The logistics chain structure depends mainly on the size and value of product
streams and the quantity of added value the product streams generate for the customers
within the chain. The chain elements may be suppliers and receivers, products and their
streams, services, transport means and routes, warehouses, various cargo handling and
production facilities, logistics centres etc.. In an integrated logistics chain the control of
material resource, work and information flow is based on a uniform hardware-software
platform, common information system and shared information and knowledge resources.
An important step in the implementation of an integrated logistics chain conception
is its restructuring. A basis of it should be the operational research techniques enabling
the optimization or improvement of the logistics processes.
Successful logistic center development involves building the right property in the
right market at the right time; determining whether an investment should be made is a
critical decision that hinges on these factors.
The prospects for a projects success rest with its ability to meet its investor
financial objectives; that ability depends on the projected stream of income, which in turn
depends on the health of the broader competitive market over time and the developments
ability to attract and retain logistic and other companies.
Assessing an investment developments future profitability in its competitive setting
is the primary task of market and feasibility analysis. It is also crucial component in
planning a logistic park or freestanding logistic facility. Well-researched, realistic market
and financial feasibility studies can be valuable tools that developers and investors can
use as a guide for locating, planning, and designing a successful logistic park.

14
 Figure 1.2 Main phases in planning of logistics centre
Source: Deutsche GVZ-Gesellschaft mbH

The concept of planning of logistics centres is based on the interaction of three

main elements (see Fig. 1.1):
(1) Planning procedures: a systematic sequence of activities that lead to final design
of logistics centre,
(2) Criteria for evaluation, analysis and comparisons: Quantitative and qualitative
measures that direct the search for optimal or at least sub-optimal plans
(3) Planning techniques: a large population of various tools - mathematical,
heuristic, simulation etc. that support decision-making
The above approach serves as a conceptual framework in further parts of this study.
Planning of logistics centre, analysing its feasibility, is a multi-phase process (see
Fig. 1.2) that consists of a number of activities: (1) traffic analysis, (2) location analysis,
(3) preparing a master plan, (4) cost-benefit analysis, and (5) working out proposals.
Various methods and techniques are used at different steps to support decision-making.
They are discussed in further chapters of this study.
There are two major components of project feasibility investigation: market
analysis and financial feasibility analysis.
Market analysis, highlights the steps taken in screening for the best location,
selecting a site, and then analyzing its marketability for the proposed development. The

15
discussion on financial feasibility analysis covers the tools used to determine the
profitability of a proposed development.
Financial feasibility analysis integrates the projects income and expenses, testing
whether they, in combination, can achieve the developers, lenders, and investors
financial objectives. Financial feasibility is used as an internal decision-making tool to
evaluate various alternatives and suggest possible alterations in the nature, phasing,
financing, or marketing of an individual development project. Similar to market analysis,
financial feasibility analysis is an ongoing process that should be continually updated
throughout the development period, taking into account new information and any changes
in existing or projected market conditions.

1.3. MARKET ANALYSIS

Market feasibility is fundamental to a developments financial success. No matter
how resourceful or innovative, the numbers will not work without a viable market for the
product. The process of market analysis is a logical one that starts with a screening of
locations to determine the most supportive for the development anticipated. It then moves
to evaluating specific sites and analyzing demand and supply in the area where the site is
situated. Supply analysis requires collecting data on similar existing and proposed
facilities in the market area. Demand analysis relies on a variety of economic indicators to
help predict demand for the proposed project.
Unless developer already controls a site suitable for development, a market
screening or macroeconomic analysis is undertaken to identify areas with strong potential
for a proposed logistic center. Market dynamics in two or more locations are compared to
set the stage for the next step, site selection.
The screening process also helps identify the types of users that should be targeted
and the type of product that would best meet the needs of those users. Market screening
generally focuses on elements such as the market arreas underlying economy and its
prospects for growth. Several criteria are most relevant to the market screening for
potential locations:
Growth Trends. Logistic areas witnessing increases in population, employment
opportunities, and trade are preferred over markets with no growth. Attention should be
directed to the types of businesses and industries that are emerging, expanding, or
moving into the area and the likelihood that growth trends will continue.
Development Climate. Both a communitys regulatory climate and its attitudes
can influence a projects schedule and its eventual size and appearance. In fact, an
assessment of a possible locations development climate is so important that some
developers consider it a first step in market screening. Local efforts to guide
developments can vary, but they typically include general plans, zoning and building
controls, design standards, development impact fees, and environmental regulations.
Infrastructure. Well-developed infrastructure such as motorway systems, ports,
rail service, and fully developed utility networks is fundamental to a competitive market.
Available Land at a Suitable Price. An adequate supply of developable land at a
reasonable price is necessary for development to proceed.

16
 Labour. An expanding and well-qualified labour force is critical to logistic
development. Wage rates are an important consideration as well.
Development Incentives. Communities have become more inventive in using
development incentives to promote the type of development considered desirable for a
specific location. Supply-side incentives available in selected areas may include tax
abatement programs, tax increment financing, payroll tax credits, public subsidized
measures, public infrastructure loans, state and federal enterprise zones, and assistance in
employee recruitment and job training. The availability of such incentives not only
indicates a positive attitude toward development but also can help make a project
financially feasible.
Current Leasing Activity. Locations that are already attracting the types of
businesses targeted for an new development are preferable to those with no track record.
Selecting the correct site is crucial to the success of the project, and it is important
to ensure that as many criteria possible are satisfied. The site where a development is
located directly influences the projects attractiveness to potential users, the rate at which
space can be absorbed during leasing, and the rents that can be achieved.
In a perfect world, market screening would clearly reveal the best location for
logistic development. The next logical step then would be to identify sites in that area
based on a clear set of locational criteria. In reality, the process is seldom so
straightforward. Prime sites may be available in less than ideal areas, and, conversely,
few attractive sites may be available in the area chosen during market screening.
Leftover sites that are approaching buildout and excess or underused land
surrounding exiting buildings should also be considered as potential sites. Infill sites offer
developers the advantages of readily available streets, utilities, public services, and a local
workforce. On the downside, space for new development may be constricted, and streets
may be at or near capacity.
A variety of critical factors must be considered when evaluating alternative
locations. These site criteria are often given different weights, depending on the type of
logistic project proposed and the developers goals. Warehouse distribution facility more
or less only needs easy motorway access and sufficient space for truck loading and
unloading and parking. Large logistical centers targeting a range of users-may place
greater emphasis on different transport modes, telematic infrastructure, cooperative
buildings use etc. The sites aesthetic characteristics, is surroundings, and the availability
of business services and community facilities can also take on added importance.
Certain criteria should be considered in site selection:
Site Configuration and Size. The size, dimensions, and shape of a land parcel
have important implications for the type and scale of any project. For a logistic park, the
ability to subdivide the site into smaller parcels is also important and should be
considered at an early stage.
Land Topography and Soils. An analysis of topography and soils is important in
site selection, although detailed information may not be necessary at the initial stages of
research unless serious issues are evident.

17
 Transportation Access. Logistical sites should of course have direct access to the
regional and national as well as trans-national motorway system. Sites having good
access to major transportation and freight-handling centers, including airports railway and
deep-water ports, are highly favoured.
Utilities. The availability and capacity of utilities on or near the site - water supply,
electricity; and telecommunications services, etc - should be investigated early. Utility
rates should be ascertained, and it should be estimated the cost of installing necessary
services to accommodate the development.
Future Expansion Capacity. When feasible, selected sites should provide excess
land to accommodate future expansion.
Public Policy. Planning and zoning regulations applying to the site under
consideration should be examined as soon as possible to determine the development
capacity of the site. If it appears that changes are necessary for the anticipated
development, extra time and costs must be factored into the feasibility analysis. Before
land is acquired, possible development entitlements, allowable contiguous uses, and site
density restrictions should be reviewed.
Development Impact Fees. Development impact fees intended to cover the costs
of infrastructure improvements and other public service resulting from development
projects are increasingly common. Because impact fees can be asked for by different
agencies, a review of potential fees should be completed before executing the project.
Adjacent Uses. The areas adjacent to and surrounding the site should be
considered for their compatibility with the proposed project.
Links with Other Industries. Certain industries - food distribution, for example -
tend to cluster together. This clustering often results from the distribution of time-
sensitive products such as perishable foods or from the interdependency of firms in a
particular industry.
As a follow-up to site selection, logistical sub-market analysis explores the
dynamics of a local and regional logistic market area as it relates to a specific site
concerning specific framework conditions for different transport modes for diverse goods
of relevant industries.
Examining current and past market trends is a necessary first step. Arriving at an
understanding of how different logistic companies function in a sub-market is required
before projections can be properly formulated. A review of economic conditions and
trends lays the groundwork for future space demand, which in turn establishes the
groundwork for future space supply. The reconciliation of projections for space demand
and space supply then serves as the backdrop for projected changes in sub-market rents
and an individual propertys future income stream.
This phase of market analysis has several objectives:
to provide information on the current logistic market, including rental rates and lease
terms;
to identify current and future supply, with a focus on competitive projects;
to estimate demand for the proposed project and identify target users;

18
 to collect sufficient background data from which to develop assumptions, such as
achievable rental or absorption rates to be used in the financial analysis.
Whether the project is large or small, developers need to consider future prospects
for the particular logistical sub-market and the propertys potential to generate positive
cash flow. The level of detail may be less for smaller projects, but a study of future
market conditions is nonetheless essential to ensure that financial goals can be met.
Conditions in the logistical sub-market can vary widely within a area. Land costs,
transportation access, users current space preferences, historical rental rates, and image
can make a great deal of difference in the future performance of similar properties. A key
step analysis of the logistical sub-market is to clearly define the market area to be
analyzed. A variety of factors can be used to define the market sub-area for a site under
consideration for development. Jurisdictional boundaries are starting point in establishing
the area to be studied, but other factors to consider are road systems, land use patterns,
and physical boundaries such as rivers, railroads, and motorway. Another important step
before beginning market analysis is defining the property type or types most likely to be
developed at the site in order to focus the research and determine which other properties
constitute potential competition. This often overlooked step can help narrow the amount
of research and reduce unnecessary effort. For example, if the proposed development is to
consist of a large multitenant property with minimal office space, high ceilings, and
multiple dock doors, then the market study should focus on multitenant offers in the sub-
market. Single-use developments such as one-firm distribution facilities are
straightforward in this regard, but logistic center with a mix of uses and types of buildings
may require more analysis. For example, if the development is planned as a logistic park,
the research should focus on similar park developments but should also consider
distribution-only developments that potentially attract the same users.
Economic data should be collected and analysed:
current inventory by logistical subtype;
annual additions to supply in the recent past and projected for the future;
historic absorption rates;
historic vacancy rates;
current space available;
rental rates and lease terms.
Ideally, the development team will be able to acquire and segment historical
market data for at least five years for both the area and the sub-area. The longer the
historical time series, the more able the team will be to fully understand the nature of the
markets real estate cycles.
Secondary sources are good places to begin analysing existing logistical supply. If
possible, the market data should be segmented by property subtype. Even though uses
may all logistical they have very different functions, leading to very different spatial
configurations, physical improvements, and economic performance. A related issue, with
so many businesses today requiring flexible space to accommodate a wide range of
activities, is the blurring of differences between the types of spaces.

19
 Most secondary market data are lumped into a single category labeled logistical
making it difficult to assess the performance of individual subtypes. One method of
getting a rough picture of the various property types, however, is to segment properties by
size categories, such as for example under 10,000, up to 50,000 sqm, and larger than
50,000 sqm. Information should be collected on leasing trends, rental rates for the
pertinent logistical property subtype, and available concessions. Additional questions
may address leasing terms (including tenant improvement allowances), lease types (net or
gross) and duration, rent escalations, utility costs, operational expenses (taxes, insurance,
common area maintenance), and turnover. Other more general questions should address
issues related to tenants, such as expansion, moving in and departure.
In conducting the survey, it is especially important to obtain data on effective rents,
rather than asking or contract rents. Asking rents are those rents a landlord advertises and
would like to obtain, contract rents are those rents recorded in the lease, and effective
rents are contract rents minus any rent concessions. Contract and effective rents tend to be
the same when market conditions are healthy, but effective rents may be considerably
lower than contract rents in a weak market. As a follow-up to the more general market
analysis, a competitive analysis or marketability analysis should be undertaken to assess
the strengths of the propose project in comparison with its competition. This step involves
the collection of more detailed data on direct competitors, both existing and proposed.
Useful data on competing projects include:
transport connections;
site sizes;
building and lot sizes;
building description;
schedule, including when marketing was initiated and the status of leasing;
quoted and effective rents;
service charges;
major tenants;
typical lease terms;
vacancy and absorption rates; and
developer or current owner.
Demand analysis attempts to determine the level of demand for logistical facilities
(by type if possible) in the market area. With this information as background, the analysis
assesses the attractiveness of the proposed project in relation to its competition to
determine the pace of leasing and rents the development can achieve.
Econometric models used to project absorption can be powerful analytical tools,
but they do have serious limitations. To develop a properly specified econometric model,
sufficient time-series data must be available. Without adequate data, the problems of
misspecification and omitted variables can reduce the value of econometric forecasting.
Moreover, it is difficult to forecast with econometric models because the relationship
between variables can change as a result of factors not fully captured by the model.

20
 After space demand is calculated, a final step is to estimate what share of
absorption will be captured by the sub-market. Often, analysts simply calculate a
submarket capture rate by using a faire share approach. A fair share capture rate is
simply the proportion of space inventory located in a sub-market.
Other methods of determining absorption in the sub-market are largely subjective
and are accomplished by examining the historical share of net absorption in the sub-
market in the relation to area net absorption over time. Observing the sub-markets share
of annual absorption should provide the analyst with an idea of how well the area stacks
up against other locations. It is likely that the amount of logistical space absorption
captured by a single sub-market will vary from year to year. The analyst determine the
best capture rate to each year of the forecast period.
A comparison of the current rate of net absorption of space with the existing and
planned supply represents an expedient way of gauging the markets short-term balance
between supply and demand, but such a snapshot should never be relied on to predict
future trends. For a forecast to be of any real value, the market analyst must look for
factors that could affect absorption of space in the future and interpret current market
conditions accordingly.
The first task in analysing future supply is to identify properties that are currently
under development or construction. Proposed projects that have not broken ground may
already have received development approvals. These entitled projects can be identified
through a review of regional. Not all proposed projects are actually built, so once a
project has been identified, it should be assigned a probability of actual implementation
based of factors such as permit status and the development experience and financial
strength of its backers. Doing so helps calculate the amount of competing space that is
likely to enter the market in the near term. Comparing annual supply estimates with
demand projections leads to an assessment of future vacancy levels and market rental
rates.
Projecting additions to the supply of logistic space beyond two or three years
become more uncertain. Because logistical space is low rise and simply constructed, such
buildings take much less time to construct than offices. On other hand transport
infrastructure as for example railways are long term investments. As a result, smaller
warehouse markets can quickly become imbalanced than large logistic hubs.
The following information can be helpful in establishing how much logistical
development is likely to occur in the future:
The amount of land available for development;
An estimate of the number of years before the available land supply is exhausted,
given the likely pace of development;
Construction costs versus the rent required to support new development;
Public policy initiatives such as economic development incentives, zoning, and tax
abatements that encourage, preclude, or limit development in the sub-market;
The availability of utilities;
The time needed to gain the necessary entitlements for an logistical project.

21
 Clarification of these points does not reveal precisely how much space will be built
in the latter years of a forecast period, but it will provide a framework for making a more
credible long-term projection of the supply of industrial space.
A final step in the analysis is to present an outlook for the sub-market and a
projection of rents. To derive a projection of sub-market rents, the analyst must identify
both the direction and magnitude of rent changes during each year of the forecast period.
Annual absorption and construction of logistical space must be compared to
determine future vacancy rates. Vacancy rates provide a general assessment of the future
health of the sub-market and an indication of whether or not rents will change. A market
in equilibrium is often a market that will witness stable rents or some upward movement
in rents.
A review of historical rent changes can be helpful in trying to sort out a credible
rent projection. Looking at past increases or decreases in sub-market rents relative to
demand and supply may give some impression of how rents move in a particular sub-
market.
The extent to which rates can increase is also tied to difference between market
rents and economic rents. Economic rents are the rent levels needed to support new
construction for competitive space. A sub-market is more apt to see stronger rent
increases when market rents are well below economic rents. This situation typically exists
in the recovery stage of the market cycle when vacancy rates are falling and the gap
between market and economic rents is wide, allowing for significant rent spikes.
Projecting rents is a complicated task. Rent changes are influenced not only by
market fundamentals related to demand and supply but also by market perceptions.
A well-formulated market analysis assesses and measures the market fundamentals
that influence rent. Conversely, market perceptions are not readily measured and
therefore less easily addressed by market analysis, even though they may influence
changes in rent as much as a change in market vacancy.
Given the complexities associated with projecting rents, care must be taken not to
simply crank through a model and derive a point forecast of future rents. Point forecasts
convey the impression of a high degree of accuracy that is not attainable in market
analysis. More credible forecasts are those structured as a range, offering a best and worst
projection for any single year.

1.4. FINANCIAL FEASIBILITY ANALYSIS

With a completed market analysis the development project is ready to assess the
projects financial feasibility. Feasibility analysis is a systematic approach to determining
the profitability of a proposed real estate investment. It allows to ascertain whether the
development will generate enough cash flow to pay the debt service and provide an
adequate return to its investors.
The major decision making tool is a ten-year discounted cash flow (DCF) analysis
showing property operations from the completion of construction to sale. It is not unusual
for some developers/investors to revise the DCF analyses over the course of a

22
development project as new information is obtained and as changes are made to
underlying assumptions. A DCF analysis is often prepared before land is under option
and again after the signing of an earnest money contract but before closing on the land.
Financial feasibility analysis begins with a review of a projects development
budget. The development budget includes all potential costs related to the development of
the proposed project, including land, site improvements, construction (shell costs),
engineering, marketing, financing, and general project administration. A general
contingency factors is also included. A separate construction cost report is often included
in the analysis of project feasibility. It provides a monthly breakdown of the cost of
various categories of construction work and time line showing the percentage of total cost
in each category that should be completed in any given month. The construction
categories for which separate budgets and schedules are provided include site
improvements (grading, utility extensions), off-site improvements (roads etc), foundation,
framework, building systems and interior finishes.
With cost and revenue data available, the development team can prepare a pro
forma statement of before-tax cash flow from normalized operations. It includes a
forecast of income and expenses, usually during the first year of stabilized operations.
Like the development budget, the before-tax pro forma is a planning tool. It shows a one-
time picture of the results of a development, based on the findings of the market analysis,
actual operating results of similar projects, and the developers general expectations.
Once the development team establishes the development budget and Year 1
stabilized income and expenses, the next step is to extend this short-term view of the
project over a long-term period through a DCF analysis.
The calculation of internal rate of return (IRR) is similar to the calculation of
present value and can produce the same result. The main difference in the two is that the
calculation of present value is based on a pre-selected discount rate, while the calculation
of IRR searches for the discount rate that reduces future cash flows and the reversion on
the original equity investment. The IRR results in a discount rate that can be compared
with the yields offered by other projects and other investment opportunities.
Participants in the development process use different financial ratios to assess the
anticipated risks and returns of individual projects. Comparing financial ratios with
accepted standards and investors requirements for return can provide a picture of a
projects general feasibility. Three financial ratios are typically used to assess financial
feasibility: debt coverage ratio, return on cost, and break-even occupancy.
In addition to projected returns, investors and lenders are concerned with the risks of
development. One simple determinant of risk is the debt coverage ratio (DCR), which
illustrates the capacity of a property to generate sufficient revenue to cover mortgage
payments. Lenders generally require a minimum DCR when evaluating a loan application,
but this minimum ratio can change over time. It can move up the perceived risks of the project
or market increase or down as lending institutions compete for borrowers.
Calculation of net present value provides a way of comparing the present value of
the cash investment in a real estate development project with the present value of the cash
receipts from it.

23
 Present value analysis equalizes the time value of money. For example, because
one can earn interest on money, 100 today will be worth 110 in one year at 10 percent
interest and 121 in two years with annual compounding. Ten percent interest represents
the opportunity cost if one receives the money in, say, two years rather than now.
The present value of 121, received in two years, is 100. That is the discounted
value at a 10 percent discount rate of 121. If the discount rate (opportunity cost are) is 10
percent, then it makes no difference whether one receives 100 today or 121 in two years.
Calculation of internal rate of return allows an investor to determine the discount
rate that reduces a future stream of cash flow to the initial cash investment. In other
words, the internal rate is the rate that makes the present value of all the future cash flows
equal to the initial cash outlay. If the rate equals or exceeds a minimum desired rate of
return, then the project acceptable.
Return on Cost. Developers and investors anticipating a short-term hold often
look at a projects return on cost (ROC), calculated by dividing net operating income by
total development cost, which includes land costs, construction costs (building shell,
architecture and engineering, and so on), soft costs (legal, insurance, and other items),
and financing. A projects ROC is most often compared with the reversion cap rate. The
difference or spread between ROC and the reversion cap rate reflects the amount of risk
in the transaction. A spread of 125 to 150 basis point is generally acceptable for most in
developments with no pre-leasing.
Break-Even Occupancy. Lenders and investors sometimes structure a
development transaction based on its break-even occupancy (BEO) as measured by
income and expenses.
Conditions affecting financial feasibility change over time: development occurs in
a dynamic environment, and market conditions must be monitored to assess their impact
on a projects financial feasibility. One method for making such an assessment is
sensitivity analysis.
Sensitivity analysis allows the development team to assess the financial
implications of changes to a projects underlying assumptions. Will spending more on
office buildout improve the projects profitability? Will providing higher ceiling heights
allow the development team to raise rents, shorten the lease-up period, and improve the
financial feasibility. Sensitivity analysis is most often used to examine a projects upside
and downside potentials, accomplished by examining the effects of using both optimised
and pessimistic assumptions for key variables.
The process for successfully positioning a logistical project is determined, in part,
by two interrelated steps, market analysis and financial feasibility analysis.:
1. The market analysis explores and forecasts underlying demand and supply conditions
and current and future rents. Incorporating different levels of analysis from market
screening to site selection and sub-market analysis, market analysis helps determine
the marketability of a proposed project. It also provides the basic assumptions needed
to carry out financial projections.

24
2. Financial feasibility analysis is the crux of the investment decision. It estimates how
much profit will be made from a real estate development, and it is a valuable aid to
investors in determining whether or not to proceed with a development project.
Market and financial feasibility analyses combine quantitative techniques and
qualitative approaches, market knowledge and experience, and judgement and intuition.
No foolproof methods exist, and no one can expect to foretell future market conditions or
project profitability with complete certainty. Nonetheless, the combined benefits of
market analysis and financial feasibility analysis can help investors identify
investment opportunities, market risks, and the profit potential of individual real estate
investments in light of realistic underwriting.

25
 2. CLASSIFICATION OF THE CRITERIA IN PLANNING PROBLEM

Different levels may be distinguished in the logistics centre planning (Figure 2.1).
From the highest level - the area of the whole European Union and neighbouring
countries - to the regional level (e.g. the Baltic Sea region centres) to national level (e.g.
centres in Poland) to local level (district, municipal) down to a logistics centre and its
close environment. Similarly, in comparing different centres, both the planned and the
existing ones, different evaluation criteria should be used. This is due to different
requirements concerning the level of detail or aggregation of information.

EU
National
Regional
Local (City)
Logistic Center Area
2.1. Figure 1 Levels of the LC planning

The analysis performed should take into account the needs of a future user. The
requirements are different depending on the purpose of an analysis. The differences are
not limited only to a report level of detail but may consist in emphasizing or only
signalling some criteria. Entirely different reports are required on a national government
level then those prepared for a local government or for a logistics centre management
board. Another element is presenting the dynamics of changes and the time span covered
by a study.

26
 Also analyses prepared from the economic, territorial planning or natural
environment point of view will all be different. But regardless of the purpose of a detailed
comparative analysis, there will always be similar categories of evaluation criteria, with
differences consisting in exposing some aspects, characteristic of only a certain field of
the centre activities. The reason is that the individual evaluation criteria are closely inter-
connected and a logistics centre analysis should be treated in a system way. Disregarding
an impact of one criterion may give a distorted picture of the situation and lead to false
conclusions.
In order to compare centres in a region or in a country, the socio-economic data
concerning the analysed area should be used. In these cases the quantitative and
qualitative data are not detailed and they allow to notice the differences and similarities of
the analysed regions. The necessary information may be obtained from published
statistics accounting for different comparative criteria:
1) Economic (e.g. GNP and its dynamics, trade volume and its directions)
2) Social (e.g. population, educational level, age)
3) Political (e.g. political stability, level of interventionism)
4) Geographical (e.g. location, climate)
5) Transport infrastructure (e.g. transport corridors, infrastructure quality and level of
utilization).
In connection with these ctriteria, other data directly related to the logistics centres
should be analysed, e.g. their number, location, distances between them, area they cover,
their mutual connections etc.
The local planning level analysis of logistics centres must be more comprehensive
and take into account more detailed information, although in connection with the regional
and national data. The subdivision of criterion groups remains unchanged (economic,
social, political, geographical, infrastructure).
The differences in comparison with the above mentioned levels are best visible in
the logistics centre functioning analysis. That analysis is performed both on the strategic
and on the operational level. Various business assessment tools may be used, with
financial or other evaluation criteria. The analysis accounts for the centre immediate
environment elements, such as customers and cooperating companies, connections with
regional and municipal government. Also criteria related to the centre operations should
be used, e.g. services offered, processes and their effectiveness, financial and legal
aspects, centre infrastructure characteristics.
It must be underlined that a full logistics centre comparative analysis process must
include all the levels and criteria because there are links between the macro and the
detailed level of a logistics centre operation. Omitting any of the comparison levels may
give a false picture and lead to incomplete or wrong conclusions.

2.1. THE MACRO LEVEL CRITERIA

This is the highest level of comparing logistics centres on the territory of Europe.
Depending on the centre cover area, we may analyse a region of Europe, a country or a

27
part of a country. Some centres may rely on their operation in a transport corridor or on a
trade route, which should also be taken into account in comparisons.
However, in all the mentioned cases account should be taken of the sociological,
economic and geographical criteria describing the environment where the logistics centre
operates or is planned to operate.
Economic criteria:
Gross National Product
National product against other countries / parts of the country
% participation in creating the national product
Dynamics of regional development
Economic forecasts
Value and directions of external trade
Industry structure
Local markets.
The economic criteria allow to determine current economic development level of
the country and the expected growth. Together with the increase of trade and production,
an increased demand for goods transport and logistics services may be expected, i.e. a
better chance of selling the logistics centre offered services. A similar role is played by
the export and import as well as the existing and planned industry structure evaluation
criteria. Those aspects are important both from the amount of cargo and from the
diversity of goods point of view. Also existence of local markets (e.g. in cities) gives a
development chance and influences creation of the centres.
An example of the evaluation criterion may be the gross national product, as
increased demand for transport services in the Baltic region depends on the economic
growth rate, which is expressed also by the gross national product indicator. Table 1
shows a particularly high GNP growth rate of the European Union candidate countries,
which in the future will stimulate transport development in the whole Baltic Sea basin.
Table 2.1. GNP growth rate in the Baltic Sea region countries
in the years 2002-2003
2002 2003 *
Denmark 2.1% 1.5%
Germany 0.2% 0.4%
Finland 2.2% 2.2%
Sweden 1.9% 1.4%
Estonia 6% 4.9%
Lithuania 6.7% 3.5%
Latvia 6.1% 5.5%
Poland 1.6% 3.2%
Norway 1.5 % 2.2%
Source: http://europa.eu.int , * estimates

28
 According to forecasts, the annual GNP growth rate in the Baltic region in the next
ten years will be maintained at the 3% - 5%. The transport growth level will be different
depending on the type of cargo. The greatest increase of turnover is expected in general
cargoes, the smallest in bulk cargoes. In the next ten years or so the containerised cargo
turnover will be doubled, from the present 3.5 million tons to approx. 8 million tons
annually.1 It may be expected that part of the transported goods will go through the
logistics centres but that will depend on the ability of attracting the companies to use
services offered by the logistics centres.
Geographic criteria:
Area covered by the centre (area of the country, region)
The covered area as % of the country or region
Location (location close to
frontier, on the sea coast)
Number of cities, size of cities
(Drawing 1)
Population density
Climate
Number of inhabitants
Population as % of the country
or region population
The geographic location
criteria include the location
characteristics of a country or
region. The effect of a location is
position in transit routes, trans-
border cooperation, access to sea or
inland waterway transport. The size
of a country and its population may
be one of the internal demand
indicators which may apply to the
products handled by the logistics
centre.

Figure 2.2. The most important ports and cities

in the Baltic Sea region
Source: Burchacz M., Macroeconomic environment of the Baltic
Sea transport infrastructure, Logistics and Transport
Infrastructure, Wroclaw 2003 (in Polish).

1
Burchacz M., Macroeconomic environment of the Baltic Sea transport infrastructure, Logistics
and
Transport Infrastructure, Wroclaw 2003 (in Polish)

29
Criteria related to the human resources:
Age structure
Education level
Migrations
Employment structure
Level of unemployment
Knowledge of foreign languages
An important logistics infrastructure element in the logistics centre creation and
functioning conditions is the qualified personnel potential. This is an important problem,
decisive for creation and functioning of the logistics centres and also for introducing the
logistics principles in the functioning of various enterprises.2 Shortage of properly trained
personnel may be a setback in the logistics centre development.
Infrastructure criteria:
Roads
Railway
Sea
Inland waterways
Pipelines
Airports
Border crossings
Telecommunications infrastructure.
Not only the quantitative infrastructure criteria should be taken into account but
also those related to its quality, costs of use, congestions, and also connections of
different transport modes necessary for multimodal transport. Important is also position in
transport routes, particularly in the transport corridors, best at the corridor crossings. In
practice, the transport infrastructure is one of the more important evaluation criteria and
has a significant influence on the logistics centre operation.
Additionally, the analysis should take political and legal criteria into account,
which may have significant influence on the final logistics centre location decisions.
Evaluation should consider here the state of law in a country, convenient business activity
conditions and support given to the logistics centre development on various decision
making levels - European, national, local and municipal.
Rankings of development forecasts and investment attractiveness, prepared by
firms and institutions, may be helpful in evaluation of a country or region. However, they
should be treated as a supporting material for the analysis and not as main comparison
making base for the centres.

2
Kordel Z., Logistics infrastructure in the supply chain processes. University of Gdansk, 2003 (in
Polish)

30
Table 2.2. Transport modes in the logistics centres
Inland
Centre name Country Railway Road Air Sea waterway
Nordic Transport Centre (NTC) Denmark X X X
Bothnia Logistics Centre Finland X X X X
Straightway Finland X X X X
Logisforum Finland X X X X
Turku Region: Finland X X X X
Logistics Turku Region
Turku Logistics Centre
Klaipeda Logistics Centre Lithuania X X option X
FV Bremen Germany X X X X
Aarhus Logistics Centre Denmark X X
Pomorskie Logistics Centre Poland X X X X X
Zachodniopomorskie Logistics Poland X X X X
Centre
Logistics Platform Port of Gdynia Poland X X X
Poznan Logistics Centre Poland X X X
Kaunas Logistics Centre Lithuania X X
Vilnius Logistics Centre Lithuania X X

2.2. CRITERIA RELATED TO THE LOGISTICS CENTRE

AND ITS IMMEDIATE ENVIRONMENT
Criteria related to the logistics centre itself and its immediate environment may be
divided into groups.
Criteria related to the centre area:
Size of the area
Shape and territorial arrangement
Access roads and use of different modes of transport
Warehouse, service, office etc. infrastructure
Media available
Internal and external telecommunication infrastructure
Development and extension capability
Distances from industrial and residential regions.
Organizational criteria:
Legal form
Rules of cooperation between partners
Management system and board nomination procedure
Financing

31
 Initiators and organizers of the centre development
Involvement of authorities in the centre creation stages
The centre area management system
Marketing and promotion rules.

7%
3%
21%
industrial
traffic area
ecological compensation
Wycinek 4
multimodal terminal

59%
10%

Figure 2.2. Division and functions of areas in the German centres

(FTC Freight Traffic Center)
Source: Synopsis of the FTC-development in Germany

The LC functioning evaluation criteria

The current centre functioning evaluation criteria are most useful to the centre
management personnel, centre designers or potential partners. They allow to compare the
operating effectiveness of different centres and to perform strategic management in a
centre. The individual criteria have measures assigned to them (as absolute or percentage
values) which can be used for analysis or comparison.
In selecting the evaluation criteria and their measures, one should pay attention that
they be:
Clearly defined and measurable.
Possibly expressed in percentage and proportion terms and not in absolute numbers,
which facilitates comparisons.
Established for actions and processes having actual influence on the measure value.
Covering different aspects of the same process to avoid increasing the value of one
measure at the expense of another (e.g. shortening time and simultaneous worsening
of quality).
Used both by workers and managers for work effectiveness evaluation.
Measures are divided into:
Internal measures their value may be measured inside the organization. These are
mainly internal process measures and measures from the science and development
perspective.
External measures require information from outside the company (from
customers, suppliers). We know through them how the company processes are
evaluated. They also allow to verify the internal measures. Questionnaires and other
marketing techniques should be used to acquire them. The customer perspective

32
 measures are external measures. Also the benchmarking values are external
measures.
One of the methods applicable in the logistics centre functioning evaluation is the
Balanced Scorecard. It provides evaluation not only by a financial criterion but takes also
other perspectives into account.
The Balanced Scorecard (BSC) was developed in the 1990s by Robert Kaplan and
David Norton. At the beginning it was mainly used as a Performance Measurement tool.
Later it became a management method without losing its performance measurement
function.
In the Kaplan and Norton conception, additional company evaluation perspectives,
other then financial, were introduced. Most often four perspectives are used, although
sometimes more are added, depending on specific needs:3
Balanced Scorecard perspectives (Drawing 3):
Financial
Customer
Growth and Learning
Internal Processes.
By the additional perspectives also the non-financial factors may be described and
measured.
Financial Perspective is the same as in a typical enterprise evaluation system,
i.e. financial results as of a given day or for a given period are taken into account. It
should be stressed that using additional perspectives does not change the basic business
objective and evaluation of a commercial company, i.e. profit making.
Customer Perspective - this perspective allows to evaluate how the company is
seen on the market, what values it provides to customers and what makes a customer to
choose or reject the company, who is the product and service receiver, are the customers
loyal and why.
Growth and Learning Perspective a more and more important factor; the
perspective includes: outlining the company development directions, its place on the
future market, product development, gathering and publishing knowledge in the
organization.
Internal Process Perspective concentrates on individual processes in the
company, their quality and duration time, inside the company and in the company-
environment interface.4

3
Atkinson A., Epstein M., Measure for Measure: Realizing the Power of the Balanced Scorecard
CMA
Management v.74(7) September 2000, p. 22-28.
4
Kaplan R.S., Norton D.P., Strategic Scorecard. How to translate strategies into actions. Warsaw
2001.
(In Polish)

33
 Financial

Customer Vision Growth and

Learning

Business
Process

Figure 1.3. Balanced Scorecard structure

Source: Prepared from: Kaplan R.S., Norton D. P., Strategic Scorecard. How to translate strategies
into actions. PWN, Warsaw 2001. (In Polish)

Examples of measures to be taken into account in the logistics centre evaluation are
presented below.
Customer Perspective measures
The basic measures in this perspective are the following:
Market share shows the part of market taken by the company. The company's
present or future target market (geographical, customer group) should be earlier
defined. The measure may be expressed by:
o number of customers
o % of customers from a region
o % of customers with certain features (e.g. size, branch)
o value or volume of sales.
Acquiring new customers measures the rate the number of centre customers
increases at, total number of customers and numbers in customer groups. The
customers may be companies located in the centre and companies served by the
service rendering companies in the LC. The measure may be the rate of increase of
the number of customers or a total number of customers served in consecutive years.
Satisfaction level of satisfaction at the offered products and, services.5
Profitability describes profit on a customer, service or a group of them.
Customer expectations what customer demand for product / service is fulfilled.

5
F. Teklitz, McCarthy R. I.: Analytical Customer Relationship Management, www.sybase.com

34
Growth and Learning Perspective Measures
This perspective contains the following measures:
Pertaining to the company human resources:
Employee satisfaction level
Rotation of employees
Training level of employees (number of training courses, exams, certificates
received)
Work efficiency.
Connected with the information and knowledge gathering and distribution in the
company
Databases used (e.g. customer databases)
Programs / information systems used
Process automation / computerisation
Computerisation level level of expenditures for that purpose
Use of modern communication channels (Internet, e-mail, EDI).
Connected with company and product development
Research and development expenditures
Number of new services developed
Number of new services brought into the market
Introducing new technologies (handling, storing).
Internal Process Perspective Measures
Measures in this perspective are concentrated on the effectiveness of basic
processes (supplies, sales, production, customer service) in the company.
They should determine the following aspects:
Length (duration) of a process:
Total time of a service
Standstill and waiting time (e.g. queues in warehouses)
Quality:
Production or documentation faults
Complaints and claims
Product reprocessing, returns
Products rejected in quality control versus all products manufactured6
Process costs
Simulation modelling of the centre processes is a tool helping to evaluate and
improve processes by identifying the possible improvement points and supporting process
optimization.

6
Brache A.P., Rummler G.A., The three levels of quality, Quality Progress, October 1988.

35
Selection of Measures
Introducing too many measures makes the analysis difficult and the evaluation
system less transparent. It is assumed that there should not be more than 40 measures
together with the financial measures (the recommended number is a few more than 30).
The non-financial measures should be limited to 15-20 most important ones in order to
avoid measuring factors not having any direct impact on the strategy and operation of the
company.7
The most frequent problem is selecting an optimum set of measures. Therefore,
measures should be eliminated which:
Do not ensure proper quality of information - it is not quite known what is measured
and how to interpret the obtained data;
Do not show the strategy implementation progress;
Do not indicate who is responsible for the effect measured;
Are duplicated, often the same parameter is measured by different measures, the
most adequate should be selected;
Use unavailable data - there may be a situation when data cannot be collected or their
collection causes excessive costs.
Some measures may be considered for later use, if e.g.:
Data are not available now but will be in a near future;
An additional analysis is required to determine the criteria of their use.8

2.3. LOGISTICS CRITERIA AND MEASURES9

The logistics criteria and measures may be treated as a separate group. As logistics
centre is a supply chain link, it influences the other links -- e.g. production and sales
companies. According to the assumptions, the centre should improve the logistics
processes of its customers and partners. Therefore, the influence of a centre on the
customer enterprise logistics should be taken into account in a full analysis of centre
operation. The enterprises may cooperate with the centre or decide to locate themselves
inside or close to a logistics centre. The use of logistics indicators and measures allows to
some extent to verify how much a cooperating enterprise has improved its operation in
terms of the logistics system elements.
The following logistics subsystems have been selected for the analysis:
Supplies
Production
Distribution

7
Leahy T., Budgeting the Softer Side, Business Finance, April 2001, internet version
www.businessfinancemag.com.
8
Tipping M., The Challenges of Selecting and Successfully Implementing a Performance Management
Solution, www.pbviews.com
9
The chapter based on: Twarog J.: Logistics measures and indicators, Logistics library, Poznan 2003 (in Polish)

36
 Transport
Stock management
The enterprise operation is measured in each of the subsystems.
Supplies
Number of ordered items and materials
Number of suppliers
Number of employees in the procurement department
Weight and volume of deliveries
Number of procurement documents
Supply costs
Supply cost share in total costs
Supply costs per supplier
Claim costs
Goods return costs.
Production
Number of material items transferred to production;
Number of documents issued;
Order execution time;
Number of logistics employees;
Number of disposition operations;
Production logistics costs;
Production order costs;
Logistics costs per order;
Logistics costs per disposition operation;
Production logistics personnel costs;
Production logistics fixed assets depreciation.
Distribution
Number of receivers;
Number of deliveries shipped;
Size of order;
Average distance between store and receiver;
Average delivery time;
Distribution costs;
Delivery costs;
Quantity and quality claim costs;

37
 Distribution cost share in total costs;
Average order execution costs per receiver;
Distribution costs per order.
Transport
Number of transport facilities;
Number of transport facility working hours;
Number of kilometres travelled;
Number of kilometres per transport facility;
Number of transport department employees;
Number of kilometres per driver;
Number of transport facility breakdowns;
Transport costs;
Transport facility depreciation costs;
Value of transport facilities;
Transport department personnel costs;
Transport cost share in total costs;
Transport costs per unit value of transported materials and products;
Transport facility maintenance costs per year, month;
Costs per ton-kilometre.
Stock management
Number of stores and storage area;
Number of stock assortments and items;
Number of warehouse workers;
Number of warehouse operations per warehouse worker;
Storage costs;
Value of stock;
Depreciation costs;
Warehouse personnel costs;
Employed capital costs;
Storage costs per stock unit;
Storage cost share in total costs;
Storage costs per operation;
Storage costs per unit area or cubature;
Storage cost share in turnover.
Additionally, the measurement should include such aspects as delivery time and
readiness or the distribution system flexibility.

38
2.4. INVESTMENT EFFECTIVENESS EVALUATION CRITERIA
Different forms of value may be calculated depending on the purpose of company
evaluation:
1) Market value a calculational value of property ownership takeover between seller
and buyer. It is assumed that both parties act of their own free will and without
pressure. The market value is a result of calculation based on a current market
situation, in the changing market situation the market value may change rapidly.
2) Standard value calculated by methods and standards approved by the state
authorities.
3) Investment value outlay of a business unit in order to achieve an investment goal.
Calculated for analysis of specific investment projects10. In the case of logistics
centres the use of standard value may be problematic as the evaluation standards in
the Baltic countries may differ significantly, so identical evaluation standards should
be accepted for all the centres. There are no such problems in the other forms of
value. As some centres are still in the planning phase, particularly useful is the
investment value showing the amount of necessary investment outlay for the centre
development, but the other criteria, not only financial, should also be taken into
account in the analysis to allow for the centre environment.
The investment project evaluation methods
The most often used investment project evaluation methods are three methods
described below. They contain the project planning, financing, evaluation and
implementation elements.
1) UNIDO Method11
2) World Bank Method
3) Value Based Management (VBM) Method12
UNIDO Method
This method has been developed by UNIDO specially for financial projects, it has
been evolving since 1969. Best known is the Manual for Evaluation of Industrial
Projects standard. The method analyses project profitability in two planes. The first
determines profitability for an individual investor, checks whether the project fulfils the
minimum profitability conditions. The second plane is evaluation of the project from the

10
Deluga W., Gietkowska-Abramek D., Iwanow A.P., Methodological foundations of the evaluation of
companies and their assets. Finance management. Measurement of enterprise results. Szczecin 2003 (in
Polish)
11
UNIDO - the United Nations Industrial Development Organization having its seat in Vienna, as a
specialised organization in the UN system supports the industrialisation processes and helps the
developing countries and countries in the economic transformation process to find their adequate place
in the more and more globalized world economy. It has a network of 36 agencies and 12 offices to
promote investments and technologies. http://www.unido.pl/
12
Czech M., Kolasa A., Algorithm and methods of the evaluation of investment effectiveness in the
industrial technological processes. Finance management. Measurement of enterprise results. Szczecin
2003 (in Polish)

39
whole economy point of view, its impact on exports, unemployment, equalizing income
differences.13
Use of the UNIDO method is an interesting exercise in the logistics centre develop-
ment project evaluation as they are to be, by definition, profitable and stimulating to the
national or regional economy. Although the method was originally developed for industrial
projects, the two-plane analysis approach is suitable for the logistics centre project evaluation.
World Bank Method
The World Bank method is used for evaluation of various investment projects,
most often the analysis covers a long period of 15-20 years. The evaluation is made in
three stages. The first stage assesses the national and international market quantitative and
qualitative demand for the designed service. The competition, price level and sector needs
are taken into account.
The second stage is feasibility study taking into account the marketing, technical,
economic and financial, legal and social analysis. The last element is monitoring of the
investment project, verification of forecasts against an annual balance sheet, financial
plan evaluation, price, currency exchange rate and production volume sensitivity analysis.
The method is used worldwide, it has two advantages. First, it forces investors to
perform detailed and careful analysis of the intended investment conditions, economic
and technical justification of its effectiveness. Second, it allows a long term analysis
covering the construction and operation period.14
Value Based Management Methods
These methods, based on the idea of increasing a company value for shareholders,
include the Economic Value Added (EVA) and Market Value Added (MVA) methods.
EVA - Economic Value Added
The Economic Value Added method was introduced by Stern Steward & Co. as a
supporting tool for maximizing shareholder investment value in a business undertaking. It
is also used for supporting strategic decisions. The conception contains all the company
value increasing or reducing elements. EVA is a difference between the net sales value
and a sum of operating costs and the employed capital:
EVA = S KO T K
where:
EVA economic value added
S sales
KO operating costs
T taxes
K employed capital calculated as a product of mean weighted
capital cost
and the capital invested in an undertaking.

13
More on the subject may be found in: http://www.unido.org
14
Czech M., Kolasa A., Algorithm and methods of the evaluation of investment effectiveness in the industrial
technological processes. Finance management. Measurement of enterprise results. Szczecin 2003 (in Polish).

40
 Cost of ownership capital is the cost of lost benefits equal to a total return that the
investors could obtain from alternative comparable risk investments.15
The value management and company evaluation system assumes considering each
decision from the point of view of creating value added for shareholders, therefore all the
actions must be economically justified.
The following EVA method properties and advantages are put forward:
The result measure is directly connected, both theoretically and empirically, with
creating shareholder wealth. The EVA management aims at increasing the share
prices.
The higher the EVA the better it is for shareholders.
Easy way of communicating the objectives and achievements to investors.
Motivating the management staff for achieving the best possible results.
Used in evaluation of investment projects.
The economic value added (EVA) may in a given period be increased by:
Effective use of the possessed potential, i.e. increasing the difference between the
return rate and cost of capital.
Withdrawing the capital from a business where return rate is lower than the cost of
capital.
Investing new capital in business with a positive difference between the return rate
and cost of capital.
Keeping the company financing source structure such that the cost of capital is
minimized.16
Lack of evaluation of the non-financial elements, e.g. intellectual property, is
considered a drawback of the EVA method. But from a shareholder point of view, the
most important aspect is return on investment and not a long term company development.
In the case of private-public partnership logistics centres, EVA may undoubtedly be
supportive in the investment evaluation from a profit-making private partner point of
view, but from a public partner position more important are factors not accounted for in
the method, i.e. long term development or region activation.
Another question in the EVA method is the fact that it does not account for the
depreciation allowance, as the operating profit is not adjusted in it by the depreciation
allowances. The results may therefore be distorted by using different fixed asset
amortization methods. If EVA method is to be used, the amortization method used in the
logistics centre has to be known.
There is another version of the economic value added - EBO (Edwards-Bell-
Ohlson), based on the ownership capital only. It is calculated from the formula:
EBO = net profit (ownership capital x cost of ownership capital)

15
Urbanczyk E., Szczesna A., Cost of capital as an element influencing the choice of capital structure.
Finance management. Classic principles - modern tools. Szczecin 2002. (in Polish)
16
Rutkowska K., Economic value added a new conception of measurement and evaluation of company
results, Finance management. Classic principles - modern tools. Szczecin 2002 (in Polish)

41
 The EVA conception is supplemented by the market value added (MVA)
conception, presented as:
MVA = current market value of the company invested capital, or
MVA = (n x p) adjusted book value of ownership capital
where: n number of emitted shares
p market price of one share
MVA equals to the difference between the amount obtainable from sale of the
shares at a current price and the value of the so far invested capital together with the
accumulated profit. If MVA is positive then the company generates additional benefits to
shareholders.
In the present day business activity the intellectual capital is more and more
important and the EVA method allows for its financial element. Therefore additional
indicators have been introduced to take the human capital into account and its impact on
the results.17
Economic value added of human capital allows to determine the amount of
economic value added assignable to the labour unit:
EVA / real employment
The amount of human capital EVA will depend on the level of employment and that
depends on the implemented technologies, e.g. cargo handling technique, as well as on the
logistics centre process automation level. In the virtual centres, the small number of their
employees deal with the centre management and promotion and in normal centres there are
more employees to carry out the logistics operations. The above mentioned indicator must be
used with centres of a similar character, otherwise the results will not be conclusive.
Value added of human capital
Operating profit + remunerations and other employee benefits / real employment
In the case of value added of human capital, the indicator is influenced, apart from
the number of employees and automation level, also by the remuneration value, much
different in different Baltic Sea region countries.
Other financial criteria may also be used for the analysis and evaluation of the
logistics centres:
Sales increase rate maintaining competitive prices, attempts to increase the market
share in order to obtain the economies of scale.
Operating profit margin obtaining relative economies of scale for each value
creating activity, implementing the learning and standardization procedures,
improved schedules, overall cost reduction.
Acting capital investments minimum cash balance, managing the receivables in
order to shorten the encashment time, stock level minimization.

17
Skoczylas W., Niemiec A., New measures in current enterprise profitability evaluation, Finance
management. Measurement of enterprise results. Szczecin 2003 (in Polish)

42
 Fixed asset investments following the policy of maximum use of fixed assets,
acquiring the productivity enhancing fixed assets, selling the unused fixed assests,
acquiring fixed assets at a lowest possible cost.
Cost of capital attempts to achieve an optimum capital structure, finding the
cheapest financing sources. 18
Investment effectiveness evaluation methods
The investment effectiveness evaluation methods are divided into:
Static methods
Dynamic methods.
Static Methods
Outlay repayment time time necessary to receive back the initial capital outlays
for the enterprise from the financial surplus (net profit and depreciation), calculated year
after year of the enterprise functioning.
Simple profit rate determines the ratio of annual profit made in the enterprise
operation to the value of initial outlays:
R = (Zn+Od) / K x 100%
where: Zn net annual profit
Od credit interest per annum
K employed capital
Break-even point analysis consists in seeking the break-even point (BEP) where
the sales incomes cover exactly the actual costs:
BEP = Ks / (C-Kz) = P
where: P volume of products sold
Ks fixed costs
Kz unit variable costs
C product price
Dynamic methods
The dynamic methods use the discount technique which allows to compare outlays
and effects made in different periods of time. The evaluation becomes more and more
uncertain when the calculation period gets longer because of the increasing market
situation uncertainty.
Net present value
The net present value (NPV) allows to determine the current value of money
incomes and expenditures connected with running the evaluated business. NPV is a sum

18
Napiorkowski S., Palukiewicz W., EVA. Confrontation with reality, Finance management. Classic
principles - modern tools. Szczecin 2002 (in Polish)

43
of net cash flow, carried out in the whole accounting period and discounted separately for
each year, with a constant discount rate.19

where: FVi future value of income received in i-th year,

Io value of investments in the year zero,
K discount rate.
The NPV criterion application rules are the following:
1) Project should be rejected if its NPV is negative or zero.
2) If NPV is positive then project should be further analysed.
3) The highest NPV projects should be selected from the mutually exclusive options.
Internal rate of return (IRR)
The technique consists in seeking such interest rate at which the NPV reaches zero,
i.e. the expected incomes are in balance with expenditures.
The internal rate of return is calculated from the following formula:

where: Rn income in n-th year

In investment in n-th year
r interest rate
n undertaking life span
If the adopted interest rate is r (%) and the calculated internal rate of return is
IRR(%) then three variants are possible:
IRR > r suggests acceptance of the undertaking
IRR = r neutral operation
IRR < r suggests rejection of the undertaking.20

19
Czech M., Kolasa A., Algorithm and methods of the evaluation of investment effectiveness in the industrial
technological processes, Finance management. Measurement of enterprise results. Szczecin 2003 (in Polish)
20
Madyda A., Kozik R., Simple preliminary profitability analysis techniques for the building industry
undertakings, Building Technology and Organization Institute, Krakow University of Technology,
http://itob.wil.pk.edu.pl/zim_w_bud97/referat3/referat3.html

44
Table 2.3. Synthetic characteristics of the project evaluation methods
Criterion Advantages Drawbacks Remarks
Outlay repayment time Allows to evaluate It doesn't account for A modified version
Measures time project fluidity (projects the change of money is free of drawbacks
necessary to receive with shorter repayment value in time (1) (1), (2).
back the initial outlays time have higher Ignores flow after the Repayment time is not
for the undertaking, fluidity) repayment time. appropriate as a basic
from the earned Not suitable for project evaluation
financial surpluses analysis of different criterion.
risk class projects (2)
Simple profit rate Takes the whole It doesn't account for A modified, average
Determines the ratio functioning time into the change of money value based version
of annual profit made account in an indirect value in time. is free of drawback 2.
during functioning of way. Difficulties with An auxiliary project
the undertaking to the selecting a normal investigation tool.
initial outlay capital. (typical) enterprise
functioning year.
Break-even point Comparing the sales A great number of The method has also
analysis, includes curve and the total cost simplifying a graphic form.
seeking a break-even curve allows to assumptions, e.g. It is only an auxiliary
point (BEP) where forecast the profit level. production value in project investigation
sales incomes exactly an analysed period tool.
cover the total costs. is equal to sales value,
unit fixed and variable
costs are constant in
the whole analysed
period.
Net Present Value It accounts for the It doesn't contain risk NPV criterion is the
(NPV) Method change of money value margin information. best investment project
NPV is described as in time. Assumes flat evaluation and
a sum of discounted Allows to compare profitability curve. selection method,
money flow in the different (risk) class it has many drawback
Assumes discounted eliminating
whole accounted projects. cash flow rate equal
period. modifications.
to an average discount
rate.
Internal Rate of Return It accounts for the Assumes flat IRR is not appropriate
(IRR) Method change of money value profitability curve. as a basic project
IRR is an interest rate in time. Contains risk Assumes discounted evaluation and
at which the current margin information. cash flow rate equal selection criterion.
(adjusted) money to IRR.
expenditure stream
value is equal to the
current money income
stream value.
Source: Czech M., Kolasa A., Algorithm and methods of the evaluation of investment effectiveness
in the industrial technological processes. Financial management. Measurement of enterpri-
se results. Szczecin 2003 (in Polish.

45
2.5. APPENDIX: EXAMPLE OF A LIST OF CRITERIA AND MEASURES

46
47
48
 3. FACTORS DETERMINING LOCATION
AND SERVICE STRUCTURE OF A LOGISTICS CENTRE

A large scale of economic activity of individual countries as well as an increasing

importance of international and interregional cooperation create a demand for new
quality of transport system services, which are guaranteed by modern logistics centres.
Their development is not initiated by high level administrative decisions taken by
ministries, central or regional authorities or other public institutions. The policy of public
institutions may only support and promote construction of a logistics centre at a given
location, which is often the case in many European countries.
Logistics centres are created first of all as a response of entrepreneurship to a
demand for services of that type of business organization. Decision on setting up a centre
at a specific location is taken by a group of companies, supported by the central and local
government. They form a joint organization to promote and develop the centre and
sometimes one of them plays a leading role in the centre building and functioning
process.
In practice, many factors have an influence upon the location and service structure
of a logistics centre. As an effect of performed analyses, these factors have been
classified in 5 groups. The factors determine the following aspects:
location of a logistics centre,
functional structure of the logistics centre to carry out specific service tasks,
configuration of a logistics network (surroundings of the centre), including the
logistics centre customers,
management system of the supply chain the logistics centre belongs to,
policy of the authorities.
It should be remembered that a correct planning process, both in a macro- and
microscale, proceeds with a constant intertwining of those factors which should be
analysed in detail. These relations are shown in Fig. 3.1.
Planning of a new logistics centre is not an one-off action but more of a process in
which a vision of the centre itself and of its surroundings changes and becomes more and
more concrete. The logistics centre location is investigated, analysed and evaluated in
detail, taking into account e.g. the criteria of reduction of material flow costs, higher
standard of customer services, improved quality and punctuality of deliveries etc.

49
 BASIC RELATIONS IN PLANNING
LOGISTICS CENTRES

Governmental
policy

Logistics network Logistics centre

configuration service structure

Supply chain Logistics centre

management location

Figure 3.1. Basic relations in the logistics centre planning

3.1. LOCATION OF A LOGISTICS CENTRE

Logistics centre is an organization of a business unit character, rendering logistics
services and having:
specific infrastructure (buildings, yards, communication channels),
technological equipment for handling, storing and warehousing of cargoes,
operating personnel working in the framework of the organization.
Logistics services are situated in the time and territory, so location of a logistics
centre strongly influences the effectiveness of the whole logistics service system in the
region in question. It is therefore necessary to describe and characterise a logistics centre,
as a set of physical objects, from the viewpoint of its location.
Location of a logistics centre may be defined as determining the place where the
LC services will be rendered in an optimum way with repect to the area generated
demand. In other words, it is placing the logistics centre service structure in an existing
and planned configuration of logistics network. Therefore, the layout and density of the
logistics network is decisive in selecting a centre location. Factors influencing the choice
of LC location may be listed as follows:
Available and planned intermodal connections (road, water, air and railway
transport),
Area available (size of land, possibility of extensions),
Area topography and configuration,

50
 Local transport connections and transport networks,
Natural environment and urbanization (density of settlements),
Possible / existing environment pollution,
Labour market,
Telecommunication infrastructure.
A very important factor in the logistics centre location decision making is the
volume of services to be rendered by the centre. Depending on the volume and scope of
services, the following centre types are distinguished:
international logistics centres with the highest level of organizational and functional
development,
regional logistics centres an intermediate link in performing the regional logistics
tasks,
local logistics centres the beginning or end of a logistics channel,
branch logistics centres serving a specific industry branch or even a single company
of that branch.
They pose in many respects much different LC location requirements.
At present, the following tendencies are observed which usually have a strong
impact on the logistics centre location decisions:
Possible direct deliveries from a production plant to customer, if it is economically
and practically effective and allows to reduce the number of the company's field
stores or distribution centres.
Possible direct deliveries from suppliers to customers, omitting intermediate
distribution centres.
Cross-docking, which may consist in consolidation of cargoes from several suppliers
into full-trailer loads and sending them to retail outlets or users. This method, used
in procurement transport, may allow to eliminate the procurement delivery
consolidation stations.
Use of central or regional distribution objects (the strategy usually applied in
connection with the stock segmentation strategy).
Entrusting external logistics service providers with full responsibility for storing and
distribution of all or some products of a company.
In the classical location theories the greatest emphasis is put on the transport costs
as the main location choice factor. Those theories concentrate on selecting the location
that allows to minimize total transport costs and maximize profits. Although these
solutions are correct, they may appear insufficient. Also other location decision
supporting factors should be taken into account in considering the cost and logistics
service problems. Several additional factors influencing the potential logistics object
locations may be mentioned:
Growth tendencies
Development climate
Infrastructure

51
 Availability of land at a reasonable price
Development incentives
Current leasing activity.
Planning of a new logistics centre starts with identifying the most likely
configuration of a logistics network representing the logistics centre environment in the
region. Location of a logistics centre should take the following aspects into account:
Business activity in the region (area),
Analysis of the existing and expected cargo streams,
Existing and possible (or needed) telecommunications infrastructure.
Market research shoud be carried out to determine the demand for LC services and
its impact on the area. The research should provide justification for the LC location, also
from the point of view of a long term activity of the LC on the logistics service market in
the changing economic situation and changing expectations of an LC operations.

FV location analysis

Area design Location Connections Traffic links

surroundings (spatial position) Planning safety
1 2 3 4 5

Planning procedure
Area size Area uses Nearnesscity centre Trafficlink road Planning process
1.1 2.1 3.1 4.1 5.1

Conflicts /
Arealayout Nearness industry Trafficlink rail Property conditions
Protective measures
1.2 2.2 3.2 4.2 5.2

Free- and Nearness wholesale - Trafficlink (inland)

expansion areas and retail trade waterway
1.3 3.3 4.3

Access and Nearness(internat.) FV integration

connections transport networks ([supra-] reginonal)
1.4 3.4 4.4

Nearness logistics Conflicts, problems,

Development effort tasks
provider
1.5 3.5 4.5

Conflicts
1.6

Figure 3.2. Logistics centre location procedure

The transport infrastructure is one of the most important elements of the

logistics infrastructure. An LC should have an access to a well developed transport
infrastructure (convenient access by road / motorway, railway etc.). It means that the
transport infrastructure is one of the most important problems taken into consideration in
the LC location decision making process.
The difficulty and complexity of these problems consists in that, on one hand, the
infrastructure is a capital consuming sector of economy with relatively long term
economic effects and on the other hand it is a necessary element of the economic growth

52
of a country or group of countries and also an integrating factor for the logistics systems
and subsystems.
In the current Polish conditions, the new transport infrastructure planning
procedure is extremely complicated, which is an effect of a very strong influence of the
ecologist groups. For instance, only 65% of the motorway routes in Poland have been
agreed upon and construction may start, the other plans are controversial and
construction will be further delayed.
One of important transport infrastructure elements in the present economic
conditions of Poland and Europe is the road transport infrastructure. It does not mean that
the other transport modes (railway transport and inland navigation) are insignificant, but
they should be used much more. In general, over 80% of the supply chain cargoes in
Europe are transported by road. It is an interesting business situation where the most
expensive transport sector carries great majority of cargoes and all the supply chain
participants are economically satisfied.
In many countries the increasing road traffic is observed all the time, with
simultaneous reduction of public expenditure for transport (e.g. in Poland), which causes
systematic deterioration of the transport infrastructure condition. The following
tendencies have been observed in Poland in recent years:
dynamic increase of the number of cars and lorries (approx. by 70%),
great majority of transport is carried out by road,
on average, two-fold increase of traffic on the national roads,
increased border and transit traffic across the territory of Poland.
The first international logistics centres with the highest level of organizational and
functional development were based on sea ports in the West European countries. The
increased trade between Europe and the overseas countries caused organizational
changes introduced by the logistics operators to the conventional transport procedures.
The customer requirements, mainly connected with the Just in Time rule, caused the
European sea ports to become logistics centres with suitable technical infrastructure.
In order to perform the logistics tasks properly, the logistics centres, both those
located in sea ports and in land, must have access to a good land transport infrastructure.
It means first of all a good road and railway transport network. The land transport
infrastructure is a necessary element of the transport processes carried out by logistics
operators, therefore it has a direct impact on the economic effects.
The road transport is most often used to serve the logistics centres. The road
infrastructure is a decisive factor in the LC location from the transport conditions point
of view. Easy, well signed, logical and safe road access with parameters suitable for the
LC serving lorries, as well as good road connections with the most important LC
customers, are the conditions necessary for effective operation of a logistics centre.
The need for proper road transport planning and development, from the viewpoint
of the logistics centre location and throughput, is seen by many countries. An example
may be action taken up in Denmark. The Danish authorities have set up a transport task
team in order to ensure an integrated and coherent attitude to the transport problems in

53
the ministries and departments together with the respective organizations and companies.
A study was initiated of the existing roads connecting the logistics centres with
motorways, in order to accelerate the plans of access road efficiency and throughput
improvements and adjustment to the actual road transport and traffic needs. That will
link the motorway planning with the logistics centres and the road capacity requirements.
The European Union transport policy assumes moving a substantial part of the cargo
volume from the road transport to the railway transport in the coming years. It means an
effective use of the railway network in establishing new logistics systems and in serving
modern logistics centres. At present, the railway transport infrastructure is much less than the
road transport used in serving the centres. Considering the logistics centre location, the need
and workability of the use of railway transport should be analysed.
An important role in logistics centre functioning plays also the air transport. The
LC location close to an airport and a good access road network gives a possibility of
using that transport mode. The air transport plays an important role particularly in big
international LCs.
The inland waterway transport, although important for some European countries
or regions, plays a minor role from the logistics centre proper functioning viewpoint.
Most basic logistics activities connected with warehousing and distribution of goods,
multimodal transport, modern management and transport control methods may be carried
out in inland ports. They often have valuable land reserves and meet many other
requirements of a logistics centre location - usually they are transport nodes connecting
different modes of transport.
A logistics centre should have sufficient land area for possible extensions.
Regional and local land reserves should be created in the territorial planning processes.
For instance, the logistics centres in Finland have a strong regional dimension of their
functions and services, operating regions and strategies. Therefore, there is a common
expectation that the centres will promote the strengths of their respective regions and
support the local and regional development. The biggest existing and planned logistics
centres in Finland make use of a good location, availability of large land areas for
extensions and convenient connections. The experience of Denmark shows a significant
influence of the integrated territorial planning on the logisitcs centre location and
development. Territorial planning plays an important, sometimes decisive role in the
centre location preparation process. That may be a threat to the territorial balance and
should not be decided upon in isolation. It has to be a part of development initiative
packages in order to optimize the synergy effect. In Germany, lack of coordination
between the planning process participants appeared a problem. The city development
interests were in conflict with e.g. the road traffic requirements. Lack of available land,
competing locations and difficulties with land availability at scheduled time made some
companies seek locations outside the logistics centres.
Depending on a logistics centre type and functions, it may have the following
locations:
Within the boundaries of a big city,
In a 20-30 km radius from city centre,
At approx. 50 km distance from city centre,

54
 On a sea port territory,
Close to an airport,
At a border crossing.
When an LC location is selected, an analysis of the area should be carried out to
find the most suitable location.
Several factors should be taken into account in that process, e.g.:
Configuration and size of land,
Ground and soil topography,
Price of the land,
Land ownership questions,
Transport accessibility local transport and transport network connections,
Services (power, water, gas etc.),
Possibility of future extensions,
Public policy,
Conflicts, problems.
Then the area evaluation, demand and supply analysis for the territory in question
is carried out. In order to select the best possible location, a market research and
macroeconomic analysis should be performed and the potentially best logistics centre
location identified. A comparison of market dynamics of two or more regions should
indicate the best choice.

Figure 3.3. Example of area utilization Europapark Distribution Centre

in Mszczonow (Poland)

An important logistics infrastructure element and a condition of proper logistics

centre functioning is the qualified personnel potential. This is a problem that may
determine a logistics centre location. Practical observation of the activities of logistics
operators shows this as a logistics service quality determining factor.

55
 First of all, the logistics sector operations should be identified. The next stage is
connecting each operation with the respective logistics functions. For instance, what type
of logistics operations the function goods distribution department manager is
connected with? The choice is: warehouse organization and management, transport
organization and management, customer services etc.
When each logistics chain function has its profile of activity assigned, the
professional profiles may be identified, assuming is capable of as a starting formula.
For instance, a goods distribution department manager should be capable of:
implementing the goods delivery process, taking into account costs, time, type of
product, customer requirements, destination (domestic, foreign),
selecting and negotiating the transport mode,
optimizing the delivery dates and costs,
allowing for safety and regulation aspects,
managing claimed returns, etc.
So defined competence fields should help determine the type and scope of
knowledge for each professional profile.
It has to be clearly stated that a logistics specialist is not a forwarder, which is
often mistakenly thought. In many countries there is a shortage of highly qualified
logistics management personnel, which makes the logistics centre development even
more difficult. It seems that attention should be paid not only to post-graduate logistics
studies but extending the education to basic university courses and even secondary
schools. At present some actions are being undertaken to educate and train the
specialised logistics personnel.
In the logistics centre location considerations a very important aspect is the
telecommunications infrastructure, that is the stationary telephone network, computer
network, mobile phone network and also availability of the satellite connections. The
undisturbed use of them is a basis of the centre functioning and it also influences the
effectiveness of logistics processes. Many companies face difficulties in getting an
immediate contact with customers, as telecommunications remains in many countries and
regions a weak element of the logistics infrastructure.
Each logistics centre should be equipped with an electronic internet platform,
giving an access to all the operator offers, a possibility of comparing the offers and also
of placing an electronic order. This significant simplification of business negotiations
and reduction of the operator administrative expenditures for order handling makes the
small and medium enterprises attractive customers even for the logistics giants.
It is quite clear that the quality of telecommunications infrastructure has and will
have even greater impact on the development and location and also functioning of the
logistics centres. Literature and practice confirm that one of the important elements of the
transport process control is the information flow, and that requires a high quality
telecommunications infrastructure.
In the location selection process careful attention should be paid to the possible
positive and negative environment impact on the logistics centre. That may be, for

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example: potential danger of flood, strongly polluted environment or the necessity of
meeting very rigorous environment protection requirements. Development of a logistics
centre involves an impact on the environment, beginning with the degradation of a
considerable area of land during construction to the use of transport facilities to hazards
connected with storage or distribution of products.
In the analysis of the logistics centre impact on the natural environment the
following factors should be taken into account:
degradation of the LC construction area may be harmful to the region ecosystem,
increased transport intensity will cause greater air pollution and also the transport
route congestions,
increased noise in the immediate LC vicinity and in access roads may be harmful to
the ecosystem and unacceptable to the LC neighbours,
storage and distribution of dangerous products requires special locations and also
applying appropriate procedures and preventive measures.
An important mission of the logistics centre development is greater use of the
ecological transport modes, i.e. railways and inland waterways instead of roads. It is also
a question of the reduction of exhaust gas emissions and noise as well as the number of
accidents. The European Union endeavours to promote the railway and combined
transport, i.e. transport of sea containers, semi-trailers, exchangeable bodies or even
complete lorries on special railway platforms. Logistics centres are nodes where one
mode of transport is changed to another.
The following location conclusions may be drawn from the analysis of the West
European logistics centres:
1. LC should have sufficient area, from 50 to 150 ha, for proper operation and
development,
2. LC should be situated on the perimeters of large cities, away from residential
quarters,
3. Access to the transport infrastructure is a priority, LC should be located close to
international transport routes,
4. In the port cities, a substantial part of the LC turnover are sea-borne cargoes, so the
centres should be located as close to the port area as possible,
5. Big urban agglomerations may have a few logistics centres and/or a network of
distribution subcentres, located closer to the end customers.
It is therefore indisputable that an LC should be located near a large transport
node. Most often it is a node of a big urban agglomeration. An area may be assigned to
each of those nodes where an LC should be located - a transport node area.
Another important area is the supply-collection region served by the LC.
The biggest existing logistics centres are located at the main international route
crossings, possibly with all the transport modes (railway trunk lines, motorways, inland
waterway networks or sea ports, airports), and simultaneously are well connected with
the regional transport route networks.

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Selected examples of factors influencing LC location
Example of an LC location in the Turku (Finland) region
There are two separate logistics centres in the Turku region. The first is named
Logistics Region Turku and the second Turku Logistics Centre. The Logistics Region
Turku is considered a virtual logistics centre, operating on a non-profit basis as an
internet portal for carriers and logistics companies in the Turku region. The Turku
Logistics Centre is developed as strengthening of the good Turku region prospects and
conditions for new business activities, and its features best resemble a network and not a
real or virtual logistics centre.
Turku is a capital of the south-west Finland region and fifth in the size city of that
country. The south-west Finland and Turku region are one of the greatest production and
economic centres of Finland. The strength of Turku and its region is made up of many
industrial branches, mainly electronics and metal processing and also pharmaceutical and
food industry. Logistics services comprise land transport, mail and courier services, sea
transport, transport agencies, cargo handling and storage.
According to the strategy accepted by the city of Turku and the regional
development strategy, concentration of logistics operations will take place around two
areas - one close to the airport and the other near the sea port. The greater of those areas,
that at the airport, will have office space, industrial and distribution facilities. The area of
1402 hectars near the airport has been reserved for a technology park, an industrial
complex for the most advanced technology companies and their logistics services.
Turku ensures benefits to the companies seeking location in that region. The Turku
Logistics Centre will be situated close to all the services expected of a European city, in
the immediate vicinity of universities and will be an extension of the existing logistics
services.
The most important advantage of the Turku region is its convenient location and
good connections. Therefore, the city and region of Turku will further invest in the
logistics service development. Turku has already been an important transport node. Ports
of the region have good connections with Sweden and with Germany, the road and
railway networks connect Turku with other developing regions of Finland, the Turku
airport is the second largest in Finland, in terms of the number of passengers in the
international traffic. From the international perspective, Turku is situated in the contact
zone of east and west and the region can serve the transit to and from Russia. Turku has
good air and road connections and the railway tracks of the same gauge as in Russia.
That increases the importance of Turku as a multimodal transport centre.
Example of an LC location in the Wroclaw region (Poland)
An example of a well planned LC location in Poland may be the development
conception of the Logistics Centre in Wroclaw, on an area of approximately 500 ha,
where all the necessary functional elements of the Centre will be located and also a High
School of Transport and Logistics to educate specialist staff for the Centre. The location
of the Centre assumes making use of the logistics infrastructure of all the land transport
modes and also the air transport.

58
 The planned Centre is based on the following infrastructural assumptions:
the Centre will be located at a short distance from many border crossings to the
European Union and the Czech Republic, there are 30 border crossings in the
vicinity which is 25% of all the border crossings in Poland;
it will be located at the crossroads of important domestic and international transport
routes and also at the designed crossing of three motorways:
A4 Zgorzelec - Wroclaw - Katowice - Rzeszow - Medyka,
A8 Wroclaw - Lodz,
A3 Szczecin - Zielona Gora - Legnica;
it will be located in the centreline of the Pan-European Transport Corridor III linking
West and East and in the centreline of the planned Pan-European Transport Corridor
X linking the Scandinavian countries with Southern Europe and the Balkans;
it will be located on three railway sections included in the AGC international
agreement;
it will be located in the economic activity zone of the greatest importance for the
European development and integration.
The aim of the designed Logistics Centre in Wroclaw will be rendering
comprehensive logistics services to the local, regional, national and international
transport. It is assumed that the complex investment including the territorial, warehouse
and telecommunications infrastructure will be carried out in three stages. Each stage will
cover investments on a 50 ha area. It is planned that:
the first stage will comprise closed warehouses of an area of 100 000 m2, open
warehouses of an area of 150 000 m2, access roads and manoeuvring yards and also
a combined transport terminal,
in the second stage the infrastructure will be developed of customs zones and
offices, road transport bases, forwarding, insurance and consulting companies,
display and shopping pavilions, bank branches, police stations, telecommunications
centres etc.;
in the third stage other investments will be completed, like motels, restaurants and
parking lots.
The example of the Wroclaw Logistics Centre shows that the conception includes
not only existing logistics infrastructure (roads, railway lines, availability of the air
transport or telecommunications links) but also planned new transport infrastructure.
Example of an LC location in the Aalborg port region (Denmark)
The Aalborg East Harbour has been selected in the centre planning process as a
node of the Trans-European network (TEN) of the road, railway, air, sea and combined
transport.
The NTC development-planning project emphasizes that a port, like other
terminals, must create value added by offering various logistics services. Such
opportunity has been given to the Aalborg East Harbour by the development of the
Nordic Transport Centre (NTC), which is located on the port premises.

59
 The main goals of the LC development in the port of Aalborg are the following:
increased intermodal transport
improved operating information
increased use of the Aalborg East Harbour as an intermodal node.
The strengths of the port are: situation far from the built-up areas, which means
good road access and almost unlimited development and functional capability. With
those large unused territory, the Aalborg East Harbour has excellent possibilities of
extending its activities. It may be possible to attract companies with large transport needs
and also companies with special location requirements, thus creating a strong and active
node. In this connection recommendations have been formulated that the Aalborg East
Harbour strategy take renting the unused port area into account.
An important problem in the port is improvement of the operating information,
which is closely connected with the development and planning process of
communication between the port and its users and between individual companies in the
Aalborg East Harbour. Also improvement is expected by creating a common internet
platform (PAIS). PAIS will enable to monitor cargo units and to use the planning and
ordering systems and other cargo flow data. An additional benefit will be substantial
simplification of the different procedures used by different transport modes.
Example of an LC location in Klaipeda (Lithuania)
Klaipeda Logistics Centre will be situated in the suburb of Klaipeda city, close to
all year round ice-free see port of Lithuania, and will be developed in the territory of 92
ha. The land plot to be used for the implementation of the project is found at a
strategically important place, that is by the motorway and railway line Vilnius-Klaipeda
also leading to Moscow and Kiev and situated at the end of the international transport
corridor IX B. KLC site is close to the industrial areas and far away from living districts
of the town. There is about 10 km from the newly built container terminal in Klaipeda.
The distance between the future KLC and Klaipeda seaport is about 5 km, and closest
railway lines - 1-2 km. The Palanga airport is at about 25 km close to Klaipeda.
A pre-feasibility study on the potential sites for a logistics centre in Klaipeda was
carried out in 2001. The Feasibility study and investment dossier, including detailed
implementation framework for KLC was completed in 2003.
On the 3rd of September 2003 the conference of potential investors in KLC took
place in Klaipeda; the participants of the conference, including representatives of 13
banks and companies, expressed their intention to invest in KLC.
The process of establishment of modern transport LCs allows to make preliminary
conclusion that the main strategy factors for establishment of Lithuanian network of
modern logistics centres (freight villages) are:
To create physical integration of road-, rail-, air and sea-transport
To achieve economies through internal co-operation and through co-operation with
other logistics centres in the Baltic Sea area

60
 To create freight concentration by providing the basis for establishment of efficient
international transport links
To increase the use of main transport infrastructure lines and to justify large scale
investments in the modernisation of transport infrastructure
To create from door to door cargo delivery system, opening new possibilities to all
kind of business companies in the largest cities of Lithuania without the need to have
their own storages in city areas
To create environmentally friendly transport system

3.2. LC FUNCTIONAL STRUCTURE

The logistics centre functional structure is a set of its handling and storage
facilities for specific types of cargo and vehicles (cargo handling, processing, sorting,
storage facilities, vehicle and container servicing equipment), all its resources are used
for the required cargo and vehicle operations.
The following elements should be taken into account in a logistics centre
functional structure analysis (Fig.3.4):
LC service architecture,
cargo handling and storage potential,
process categories (cargo loading and unloading, consolidation, sorting, processing,
control etc.),
access to LC services,
LC administration and the organizational and ownership structure.
The LC functional structure has three basic organizational and functional spheres:
Intermodal transport system
Multi-function logistics service system
Integrated tele-information system.
For the functional structure analysis purposes, the centre should be treated as an
independent business unit:
managed by a specially established unit (public, private or public-private
partnership),
having at its disposal a separate area and high capacity infrastructure,
connected with the transport route network and ensuring access to many (at least
two) transport mode facilities,
equipped with generally accessible facilities and equipment for a range of transport
and logistics services (storage-warehousing operations, consolidation-
deconsolidation, supply-collection, loading-unloading, distribution) and other
auxiliary and additional services,
managed with the use of modern information technology and telecommunications
systems,
functioning on long-term agreements or on one-off customer orders.

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 Logistics Centre
BOARD OF DIRECTORS

Electronic information and transaction platform

Other logistics Storage yards Associated

services warehouses services

R
S E
E C
N E
D Railway terminal
I
E V
R E
Road terminal
Direct deliveries R

Figure 3.4. Logistics centre functional structure

Discussing the logistics centre architecture should begin with presenting the LC
classification by function, size and operating range. The classification divides the LCs into:
International Logistics Distribution Centres with the highest level of
organizational and functional development, characterised by:
operating range of 500-800 km,
centre area of 100-150 ha,
fully developed logistics infrastructure,
full information technology system,
full scope of logistics services.
Regional Logistics Distribution Centres, an intermediate link in the logistics
channels, with the regional distribution service tasks, characterised by:
operating range of 50-80 km,
area of 20-50 ha,
well developed logistics infrastructure,
information technology system,
selected logistics services.
Local Logistics Distribution Centres, an end link of a distribution network
system. It is characterised by:
operating range of 5-8 km,
area of 2-10 ha,

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 limited logistics infrastructure,
limited scope of logistics services.
An inherent aspect of LC architecture is its infrastructure, dependent largely on the
LC class in the above mentioned classification, and also on the LC assigned tasks. For
example, in a long-range centre an area of 100-150 ha is needed, where an extensive
infrastructure, necessary for proper functioning of such centre, will be integrated in one
logistics system.
The LC infrastrucure may consist of:
administration buildings, housing all the logistics service performing functional
units,
warehouse buildings with the handling and service equipment and also specialised
stores, e.g. cold stores, inflammable material stores etc.,
terminal facilities with yards and access roads, gantries, cranes, overhead travelling
cranes etc.,
associated infrastructure, the information technology networks in particular,
reaching outside the centre premises and allowing to cooperate with suppliers and
receivers, to perform banking and insurance operations etc.,
catering and hotel facilities, medical services, vehicle repair and servicing
workshops etc.

Figure 3.5. Present day logistics objects

The logistics centre architecture should be shaped in such a way that the basic
logistics tasks may be easily carried out, i.e.:

63
 product storing in warehouse buildings and in storage structures with their outfit,
product displacements by means of handling and transport facilities, where e.g.
introduction of the pallet system may mean a new way of the storage space
utilization,
product protection, which is the main function of packages used also as handling
aids, transport facilitating devices, with or without use of bar codes, and also as
special transport units for more efficient handling,
logistics process control information processing for improved management of the
distribution of goods and in particular better fulfilment of the Just-in-Time method
requirements.
The current logistics tendencies put forward requirements of the logistics centres
(Table 3.1), and in particular of the logistics facilities, e.g.:
Increasing requirements regarding specialised structures and equipment (high
storage warehouses, flexible shelving systems, telecommunications etc.),
Flexible investment and operation models (redundancy solutions for peak period
requirements, common use of facilities etc.),
Availability of qualified personnel.
Table 3.1. Basic requirements of the logistics centres
Requirement Description
Access to different (at least two) modes of transport
Multimodality
(most often road and railway transport)
Multifunctionality Broad scope of rendered services
Multi-user availability Offering services to many customers

Good cooperation conditions for different business units,

Integrated platform functions creating integration platforms for industrial and trading
companies, logistics and transport operators

Information technology Implementing the most advanced computer and teleinformation

solutions technologies

Creating macroeconomic benefits for regional development

Value addend
and microeconomic benefits for the logistics chain participants

Another logistics infrastructure element required for an effective logistics process

execution is the cargo handling potential and warehouse network.
From the cargo handling - warehousing potential point of view, perfect LC
locations are sea ports, having the required technical infrastructure, e.g.:
sufficient territory,
large and well maintained warehouse area,
modern technical facilities for handling all types of cargo,

64
 high storage capabilities,
suitable transport infrastructure for internal and external combined transport,
proper telephone and information technology network,
network of banks, financial institutions and customs offices.
With such infrastructure and scope of services, sea ports have become an important
link in the raw material and product supply chain, from manufacturers to final customers, and
at the same time an LC nucleus. The change of sea port operation philosophy, from the cargo
handling function to LC operations, may be illustrated by an example:
American companies deliver paper in the form of a raw material or of a processed
product, e.g. copying machine paper, by sea transport to the European ports. The
logistics operators, seated in the ports, store those materials, by the exporting company
orders, in specially adjusted warehouses. Then, also by orders of the American exporting
companies, deliver specified batches of the materials directly to customers in the
European countries and perform all the operations connected with:
customs clearance,
sorting before transport,
loading and transport,
insurance, taxes etc.,
delivery time and conditions.
It is assumed that delivery from the logistics centre to customer should not take
longer than 36 hours. Direct deliveries from the American maker or supplier in that short
time is unrealistic, so a sea port-based LC is an optimum solution for the supplier and the
end receiver. It has to be mentioned that if the American supplier was not able to keep
the required delivery time then the customer would resign and order the same commodity
with European suppliers, e.g. from Scandinavian countries.
In many logistics operator activities some operations, like storing, sorting, cargo
handling or financial services, appear repeatedly. That means that logistics operators
must have their own storage base or proper technical infrastructure which would
guarantee fulfilment of all the customer needs.
However, the storage function is not the most important one - an important
matter is fast flow of cargoes through the centre as it is an integral element of a
modern distribution system where an aim is lowering of stock levels in the whole
system, with the use of the most advanced information and telecommunication
technology.
In the retail trade, manufacturing of products in short series on an individual
customer order may be observed. That also requires logistics company support in the
form of value added storage services, in order to adjust products to changing customer
requirements.
That method has been increasing dynamically in the recent period thanks to the
internet technique. The increase of B2B (business to business) and B2C (business to
customer) markets requires efficient warehousing services (more spacious and modern
warehouses) and distribution by specialised and well equipped logistics companies.

65
 The most important logistics centre development incentive is outsourcing, i.e.
concentration of all the supply chain participants on their basic activity, leaving all other
operations to specialised subcontractors. Since the beginning of 1980s the logistics
processes (first distribution then storage and more developed value added storage) have
been moved to the operators. So performed outsourcing is called third party logistics.
Recently the market has gone even further. We are witnessing a new trend called
fourth party logistics, based on moving the entire goods transportation process to
professional logistics companies from ordering raw materials to end customer service.
Such complex service cannot be carried out by a single company. It will be performed by
a federation of the best in their class companies under the leadership of an integrator.
That new trend will require deep changes in the attitude to competition and also will need
adjustments in the logistics infrastructure. The logistics centre role will be even greater.
By developing the LCs, the storage area, handling equipment, operating software,
labour force and transport facilities may all be better utilized, which brings considerable
logistics cost reductions. The customer is the main beneficiary of that.
The present time world tendencies indicate intensification of trade between business
units and increased raw material and finished product streams. That transport intensification
requires seeking new organizational and technical solutions which would guarantee effective
fulfilling of customer transport needs in the existing economic conditions.
In general, the logistics operator and forwarder actions aim at offering the
customers a whole logistics service package, e.g.:
organization of physical displacement, i.e. transport,
storage services,
cargo handling services,
sorting services,
customs services,
information services,
financial services,
technical services,
guarantee services.
The increasing volume of goods handled by the logistics centres makes it
necessary to use faster and more reliable human work aiding systems. That type of
problems are also seen in warehousing. It is a process consisting of the material
receiving, storing, completing and issuing operations, at properly arranged places and in
specific organizational and technical conditions.
As the receiving and storing operations (Fig. 3.6) constitute a minimum
warehousing activity, the completing operations, consisting of combined material flow,
information flow and organizational functions, may create their own elementary
subsystems working within complex logistics systems.
There are different warehousing processes. They depend on the character of
performed activity.

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 The specific feature of that type of business activity is very fast flow of
information and customer orders, and flexible reacting to the market needs. Problems
with handling the internet-sent orders are connected with a very short delivery times to
customers all over the country. Also in that case it is necessary to use the storage and
distribution process aiding tools.

Figure 3.6. Diagram of the storage process basic activities

67
 In the logistics centre development attention should be paid to the centre role in
the system aspect, depending on the type of work in a network point-node: cargo
consolidation (if goods come from many sources and are addressed to one customer),
sorting (if goods come from many sources and are delivered to the same group of
customers) or break-bulk according to orders. Besides, at the centre design stage it is
important to determine what cargo groups it is going to handle (investment or
consumption goods, food products or durable goods). Type of equipment, access to
different transport modes, size of storage area and type of facilities all depend on it. Also
important is determining the scope of the offered logistics services.
Logistics centres differ from each other by many aspects (size, type, specialisation
of operators etc.), those differences consist also in the type of the centre managing
companies (state-owned, private, owned by the chambers of commerce or local
goverments, communal, mixed ownership).
Owners and operators of a real logistics centre may be several logistics service
providers or just one. Some companies in the logistics business, e.g. land transport companies
and forwarders, have often their own logistics centres. Those centres serve the needs and
flows of one company and are also owned by one single company. Some logistics centres are
used by several companies providing a wide range of value added services to their customers.
Operators may be the owners or tenants of buildings and facilities.
In the western countries the most common form of complex logistics services is
setting up a general logistics operator by collaborating companies. The role of such
operator is limited to coordination of the logistics service provider activities, income and
cost accounting and care for the best possible financial effects. From that has developed,
and is successfully functioning in those countries, a conception of the partnership-based
integrated supply chain logistics service.
There has been a strong connection between the public and private sectors in
the logistics centre development processes. Public organizations take active part in those
processes and usually play the most important role. There are some logical reasons of
that. For instance, in Finland all the logistics centres have a strong regional character in
the sense of their functions, services, operating regions and strategies. Therefore,
promoting the strengths of their respective regions and supporting local and regional
development are commonly expected of them. That connects in a natural way the local
authorities with the centres, as in Finland the public sector plays an active role in the
regional development. In Denmark there are also cases of LC planning and building by
the public sector.
Operators in the logistics centres may be owners of the spot logistics
infrastructure, may use it by renting or leasing or render services in objects owned by
industrial and trade companies.
Some logistics operators and the trade and distribution companies rent or lease the
facilities or use the objects built by developers. Some develop their own distribution
centres. These are mainly the motor and pharmaceutical industry companies and logistics
operators. Logistics centres in Poland are built mainly by the foreign capital. Large
international corporations and groups develop a dense logistics and warehousing network
which not only strengthens their position in Poland but also creates dispatch points of
goods to the Eastern Europe markets.

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3.3. CONFIGURATION OF A LOGISTICS NETWORK
Configuration of a logistics network includes the cargo sending and receiving
points, transport routes, size and structure of transport facilities - all expressed in the
measures of physical size (distance, volume) and time (delivery and collection schedules,
service time etc.).
The main aspects to be taken into account in the logistics network analysis are the
following:
1) Points (areas) of sending and collecting the cargoes passing through the logistics centre,
2) Demand for the logistics centre services. Analysis of cargo streams, incoming
cargoes, outgoing cargoes (volumes and general structure), their distribution,
3) Transport corridors and their structure. Types of transport facilities, transport
capacity, quality aspects of transport.
The analysis of customers and their requirements determines the market potential
and level of competition. Such analysis is often treated as one of basic factors in deciding
on the logistics centre location.
From the transported cargoes viewpoint, the logistics centre is a place where
cargoes are gathered and directed to the respective receivers at a scheduled time.
Depending on a logistics centre size and assigned tasks, it may have a form of cargo
handling node between a local and long-range transport, combined with the storage and
possibly other additional logistics services. In a maximum scope, the logistics
distribution centres are nodes of an international distribution network, having an
influence on manufacturers in accordance with the logistics marketing requirements.
Such a centre is a group of enterprises and institutions acting together in an integrated
manner in order to deliver proper products of a good quality, at a right time to intended
places and at as low cost as possible. They are points linking the short range and long
range transport, with environment friendly features. That kind of a logistics centre
performs complex functions, namely:
organizing cargo streams in accordance with customer needs,
linking the most appropriate carriers for a given cargo lot,
supplementing the transport and storage services with other logistics functions,
cooperation of the forwarding and logistics companies,
using the common logistics infrastructure facilities,
common management, administration, organization and acquisition of logistics
processes,
development of integrated logistics systems,
linking together the cooperating logistics companies,
using and improving compatible coding systems,
wide use of the electronic data interchange (EDI).
However, the storage function is not the most important - an essential thing, in
accordance with the principles of logistics, is as fast "flow" of cargoes through the centre
as possible. It is to be an integral element of a modern distribution system, where a goal

69
is reduction of stock levels in the whole system, with the use of information and
telecommunication technology.
In an analysis of customers understood as sender and receiver areas, the
following general indicators may be taken into account:
area and population, giving a general idea of the region potential,
gross national product, characterising general wealth of the region and showing
potential personal incomes of the people (GNP per person).
There is a group of indicators describing in more detail the concentration of
possible sender areas, i.e. places where transports start, such as the industrial production
sold and the export indicators. The data should pertain to general cargo as only that type
of cargo is attractive to logistics centres, which very seldom handle bulk cargo. As
important may be export produced by small and medium enterprises (SME), which are
potential customers of logistics centres.
Concentration of receiver areas may be described by the household gross
disposable income level and retail sales in the region. Other indicators describe imports,
and again only general cargo is taken into account as a most likely logistics centre
material.
The customer analysis should allow for the development tendencies. The regional
development directions may be determined more precisely by two processes. The first is
privatization. Dynamic transformation of the economy is typical first of all of the
former socialist countries. The privatization process may be described with an indicator,
e.g. percentage of state-owned enterprises restructurised in a given period of time.
Another important development process is connected with investments. Analysis
may be performed of the value of investments in some sectors: private sector
investments, small and medium enterprise investments, foreign capital company
investments etc.. Expectations of more intensive growth in the future seem justified in
the direct foreign investment concentration regions. For instance, Germany is
characterised by high productivity indicator. Investors can find here well trained and
motivated human resources, which are obviously one of the basic conditions of a
successful investment. Tax rate is relatively high by international standards. However,
the tax system offers various reductions. Agreements on avoiding double taxation,
concluded between Germany and other industrial countries, provide guarantees to foreign
investors that their incomes will be taxed only once. Those macroeconomic factors have
a strong impact on the increase of domestic and foreign investments in Germany. They
have also an indirect impact on the logistics centre development. The general economic
and legal conditions in a country are very important. If good, they attract the private
investment capital, if bad or instable, they keep it away.
The analysis of sender and receiver areas may be performed by characterising the
following elements:
producers,
products (goods),

70
 territorial dispersement of producers,
receivers,
communication channels between suppliers and receivers,
permanent cooperation connections, horizontal and vertical integration forms,
current use of logistics solutions.
Another LC location and service structure factor is the size of demand for the
logistics centre services and the total volume of cargo in an assumed planning time span.
The possible transport modes and directions, time and, first of all, costs should be
estimated.
The cargo streams, transport modes and scope of offered logistics services may be
presented in the form of a diagram (Fig. 3.7).
The demand for logistics services is generated first of all by the large turnover
companies, most often located in big cities or their neighbourhood, in sea ports, airports
or at border crossings.
In the cargo stream analysis the domestic and international cargoes as well as the
cargo structure should be taken into account. Not all cargo may fall into the logistics
centre. Logistics centre imposes consolidation and coordination of cargo streams. The
basis of intermodal transport systems is an integrated cargo unit. It is the intermodal
transport, using at least two transport modes and one cargo unit not decomposed in
transport (container, exchangable body, semi-trailer, lorry, tractor with semi-trailer,
trailer-truck), that determines the logistics centre development. The intermodal transport
requires multi-level coordination:
technical (adjustment of different transport modes),
organizational (one operator),
documentational (one transportation document),
tariff (one rate for the whole route),
legal (one responsibility).
The cargo stream coordination and intermodal system implementation encourage
the centralization of distribution systems and specialisation of logistics operators. A
specialised operator may have a properly organized cargo tracing system which attracts
more cargoes to the logistics centre.
Access to transport network is another important factor in the logistics centre
location. Location of a centre in a country territory should be related to the existing and
short-term planned transport corridors. One of definitions describes a transport corridor
as an area of linear character, equipped with transport infrastructure, ensuring maximum
efficiency and speed, the current state of technology and organization allowed for, in
carrying people and cargoes between the economy and population centres (cities). The
transport corridor infrastructure allows to carry out transport by different modes
railway, road, inland and sea waterway and air.

71
Defining the potentials
Defining the total * Volume of * Cost of
volume of transported transported transport
goods, costs with goods from / to
allocation to routes
and transport mode.

Links

Comparison of time * Transport time *Transport

and cost of transport, for various time
frequency and qualitative transport modes.
benefits for various
transport modes.

Customers

Defining the most * Kids of goods * Size of

promising customer * Expected services
groups services
(industrial branches). * Winning
a customer

Defining the customer groups and quantitative parameters

Products/Services

Defining the scope * Typical offers * Service

of necessary services * Basic scope features
to attract mentioned for offer
customer groups, definition
transport, warehousing,
E-business, IT, financing

Project plan

List of necessary * Project elements * Project

project phases until (marketing) status
entering the market, organization
creating project
structure and schedule *Schedule plan
plan

Figure 3.7. Defining the volume of goods, transport mode and scope
of offered logistics services

72
 Therefore, forwarders may select an appropriate transport mode for individual
customer requirements, current transport market situation, prices and safety conditions.
There is transport complementarity and multimodality and, on the other hand, also
competition between different modes. In the globalized economy, forwarders do not
determine the transport mode when selecting a corridor. Transport corridors win the
competition with multimodal transport routes which do not offer the forwarders and their
customers sufficiently flexible solutions in the fast changing economic conditions. In
effect, the passenger and cargo streams are more and more concentrated in transport
corridors and the corridor (and particularly transport node) adjacent areas have the best
accessibility. As the transport accessibility is an important effectiveness factor for many
sectors of economy, the areas around transport corridors and nodes are highly attractive
for investments. Multimodality of transport corridors forces the logistics centre
development, for the maximum efficiency, speed and high safety level of cargo and
passenger transport.
The transport corridor idea was first put forward at the 1st Pan-European Transport
Conference in 1991. The conference participants, concerned about observed phenomena:
increasing negative impact of transport upon the environment,
large number of accidents,
increasing congestion,
decreasing infrastructure outlays in various parts of Europe,
transport development forecasts anticipating the increase of transport by 40%, and in
the east-west relations by 100%, within 10 years,
recognized the necessity of establishing a European transport policy, with a plan of
European transport infrastructure network taking into account all the existing European
agreements on the development and modernization of main routes between the European
countries and peripheral regions. Elimination of the mentioned threats was to be achieved
by introduction and promoting the combined transport with the use of modern
technologies to integrate the road, railway, inland navigation, sea shipping and air
transport. A necessary condition of creating a Trans-European Network (TEN) is clear
definition of the objectives and the ways of achieving them:
priority investments to supplement the existing infrastructure system,
priority modernization investments to liquidate bottlenecks in the future transport
network,
priority modernization investments to adjust the existing roads (parts of the future
European transport network) to the European standards.
The need for that type of action was recognized relatively early and such target
road maps were developed for the individual transport modes. They were updated in line
with the political and economic changes taking place in Europe as well as with the
changing social and economic development preferences.
The existing and potential corridors and networks in the Baltic Sea Area are
designated by the European Commission as being of high importance. The main
corridors are (Fig. 3.8):

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 Figure 3.8. Existing Transport Corridors in the Baltic Sea Region

74
 1. The Nordic Triangle,
2. Scandinavian Link,
3. Fehmarn Belt,
4. Helsinki St. Petersburg Moscow,
5. Via Baltica and Nordic Link.
The Nordic Triangle is the most important transport corridor in the Nordic countries
and is highly prioritised in the EU. It connects the capital cities of Finland (Helsinki), Sweden
(Stockholm), Norway (Oslo) and Denmark (Copenhagen). The corridor is comprised of
roads, railway lines, ports, ferry connections and airports. The main goal is a high-class
corridor for goods and passenger transport with all types of traffic. The Nordic Triangle was
established as the main corridor from Scandinavia to Europe during the 1990s and it shares
routes with the Scandinavian Link and Nordic Link.
The Scandinavian Link Corridor is a continuation of the Nordic Triangle towards
Western Europe and consists of a road bridge and a rail bridge/tunnel. The opening of the
Great Belt corridor redirected much of the cargo flows from The Fehmarn Belt Corridor.
The coming fixed Fehmarn connection / bridge will restore many of the freight flows to
mainland Europe. But this connection is still under discussion in Denmark and Germany.
The Nordic Link corridor connects Northern Denmark with Sweden, providing
direct access to continental Europe through the Danish road / railway network.
T he Helsinki St. Petersburg Moscow corridor (IX A) is the most important link
between the Nordic countries and Russia. Extension of that corridor reaches to
Stockholm and to Oslo and that extended corridor is marked E18. That means connecting
Russia not only with the Nordic countries but also with the capitals of four Western
Europe regions, i.e. Helsinki, Stockholm, Oslo and Copenhagen. The importance of that
corridor, and also other corridors crossing the territory of Finland and Sweden, to the
logistics centre development is described in chapter 1, volume 2.
As the transport network of West European countries, in spite of its deficiencies, is
established, the EU policy has been concentrated on the transport corridors in Central
and Eastern Europe. The Transport Infrastructure Needs Assessment (TINA) program
creates network framework for the development of Trans-European transport network
(TEN) in the EU candidate countries. The work performed on the common policy has
resulted in determining the main transport corridors (2nd Pan-European Transport
Conference in Crete, 1994). Foreseen in those countries were 9, and then 10 corridors
(after the next Pan-European Conference in Helsinki, 1997), which are to facilitate trade
contacts and mobility of the population of Europe (Fig. 3.9).
Several of those transport corridors cross the territory of Poland and Lithuania:
Corridor I Tallin Riga Kaunas Warsaw
Corridor IA Riga Kaliningrad Gdansk
Corridor II Berlin Poznan Warsaw Minsk Moscow
Corridor III Berlin Wroclaw Katowice Lviv Kiev
Corridor IIIA Dresden Wroclaw
Corridor VI Gdansk Warsaw Katowice Zilina Bratislava.

75
 Figure 3.9. Pan-European Transport Corridors

It is foreseen that the main coastal logistics centres, as nodes of the north-south
transport corridor multimodal networks, should be located in line with the planned and
constructed A1 and A3 motorways and the modernized main railways running across the
territory of Poland in the north-south direction.
The functioning and development of the coastal logistics centres in Poland should
be connected both with the development of multimodal systems and with the advantages
of the location in the TEN and TINA network system. These are the basic conditions of
improved competitive position of the land-sea transport routes running through the Polish
ports in the European transport network integration process.
The increased importance of the two Polish port complexes Gdansk-Gdynia and
Szczecin-Swinoujscie as logistics centre locations is connected with the significant
restructuring of the European and national transport system in the nearest decade. That
pertains mainly to the Central and Eastern Europe, including Poland. The road and
railway transport will be subject to changes. In the railway transport the changes will be
mainly of qualitative character (increased train speed, traffic safety, new technologies)
and in the road transport both qualitative and network development will take place. It
may be said that the development process of the two port complexes will be
accompanied by the development and modernization of transport connections with the
national and international transport network.

76
 In the multinational transport system integration process a specific role is assigned
to the sea ports. The European Union Transport Commission has prepared a new
conception of the Trans-European transport networks (TEN-T). It stakes on combining
the transport modes. The 300 sea ports will play a role of intermodal transport
turntables, integrating the different transport modes. The sea ports will have a key
function in building multimodal transport systems for the hinterland. Connection,
collaboration and optimization of the Trans-European transport networks will not be
possible if the sea ports are not included in that system as critical elements of the
integrated European transport network.

3.4. THE SUPPLY CHAIN MANAGEMENT SYSTEM

Supply chain is a flow process of materials, products and services as well as
information and financial means, whose aim is to fulfil the needs of an end receiver
(customer). Its main links are (see Fig. 3.10.):
1) Supplier,
2) Transport operator,
3) Producer,
4) Logistics centre,
5) Distributor,
6) Retailer,
7) Consumer.
The main components of supply chain management are the following: information
technology, planning strategy, process quality / supply service level and professional
competence of personnel.The supply chain management system strongly influences the
logistics centre functional structure. For instance, an optimized supply chain
management procedure may bring in effect: improved implementation of the Just-in-
Time technique, desired minimization of the stock and storage area and the costs
involved, which is to a large extent dependent on the efficient transport. Creating the
management conception one should remember that a logistics centre, as an element of
multimodal supply chain, performs more and more advanced logistics functions, such as:
1) Organizing cargo streams according to customer needs,
2) Selecting the most appropriate operators for a transport offer,
3) Rendering other logistics services, apart from transport, cargo handling and storage,
4) Collaboration of forwarding companies and logistics operators,
5) Common logistics process management, administration, organization and acquisition,
6) Development of the integrated logistics systems,
7) Connecting the collaborating logistics companies,
8) Promoting new information technologies (electronic management, EDI, Internet,
EAN logistics labels, bar code systems).

77
 Suppliers Transport Manufacturer Logistics / Retailers Consumers
operators Distribution
Centre

MAIN PARTNERS OF THE SUPPLY CHAIN

Figure 3.10. Main partners of the supply chain

78
 The international competition forces entrepreneurs to reduce the production and
sales related costs. Seeking savings in supply chains, from material ordering to finished
product distribution, opens good opportunities to render logistics services.
Logistics is now being associated with and active variable marketing function able
to influence demand on a given market. When the supplier choice decisions are made, an
important selection criterion, apart from product quality, is a broadly understood supply
service standard, a specific type of logistics service in a concrete type of business. In
the purchase decision taking, often the delivery reliability takes precedence over the
purchased goods price level.
The supply service standard may be characterised by the following aspects:
delivery time elapsed time from order placing to delivery of the ordered goods to
customer,
delivery reliability punctuality of the scheduled deliveries,
delivery quality is a quality element of the delivery reliability, related to the
condition of a delivery, i.e. type and frequency of damage, mistaken deliveries etc.,
delivery flexibility determines the logistics system ability to react to changes of
specific customer requirements or to communicate with the customer during order
execution, e.g. pass information on possible delivery delays.
The systematically changing market structures impose adaptation to new
conditions. The classical stock management, consisting in keeping the necessary
materials and spare parts in stock for production needs, has developed new ideas. Apart
from internal material storing and handling, deliveries synchronized with production
processes have been organized. Efficient organization means first of all fast and effective
action. Revaluation of time in business makes it necessary to build new efficient
information exchange channels.
The supply chain organization problems are among the most difficult problems in
logistics. Proper supply chain management requires broad knowledge, appropriate
methods and techniques. The management personnel must be well acquainted with
modern technologies and advanced information techniques.
The present time world tendencies inspire intensive trade exchange, the cargo
streams, both raw materials and finished products, are increasing. That transport
intensification requires new organizational and technical solutions that would guarantee
effective transport meeting the customer requirements. Those processes are dealt with by
logistics operators and by forwarders who plan, carry out and control the entire supply
chain transport operation, from raw materials to production to the end buyer. It may be
said that a supply chain in a logistics system form is present inside enterprises and
between them and the material flow and system functions can be clearly visible. That
creates a possibility of devising optimum solutions from the viewpoint of the whole
logistics system, harmonized and fast flow of goods along the supply chain with all the
chain participants linked together by information technology systems. A supply chain
may be more precisely defined as a network of connected and mutually dependent
organizations which collaborate in controlling, directing and improving efficiency of
material and information flows, from suppliers to end users.

79
 The transport process organizing logistics operators perform in the first stage a
detailed analysis of all the processes and conditions and they propose specific solution
variants to customers. The following tendencies may be observed on the present day
transportation market:
strong development of cargo streams with the door-to-door deliveries requested by
customers;
in view of an increasing production specialisation and a large number of small and
medium-size business units, logistics operators meet an increasing demand for
transporting small lots of cargo;
customers become more and more demanding in terms of delivery time, immediate
availability of transport facilities, care for goods in transport, high quality of the
whole transport process and low price levels;
the Just-in-Time technique is more and more often used; it allows to minimize the
stock levels and therefore costs, which is to a large extent dependent on an efficient
transport;
increasing customer demand for a whole set of services, not only transport, rendered
by the logistics operators.
The logistics operator and forwarder rendered services (transport, storage,
handling, sorting, the customs, information, financial, technical and guarantee services)
are becoming a transport market standard. The scope of offered services depends on the
customer requirements and those in turn depend on their needs, area of operations and
type of business activities. Taking that into account, the following logistics operator
markets may be distinguished:
local markets: in general, operator activities comprise the cargo distribution
transport services. A production or sales company orders transport of specific lots of
cargo to a receiver or bringing cargo from manufacturer. Road transport is most
often used on that market.
inter-regional domestic markets: logistics operator renders transport and also cargo
handling, financial, storage and information services. This market is wide spread
comparing to a local market and also is in contact with the international market. A
substantial part of the customer imported goods goes to the logistics operator
warehouses and then is delivered to a final receiver at times specified in the
instruction. Apart from the road transport, also the railway transport and inland
navigation are used.
international markets: logistics operators offer to customers, both in export and in
import, a whole package of logistics services, from making a transport equipment
physically available to warehousing, sorting, cargo handling, financial services to
customs clearance. Every type of transport modes are used by the logistics operators
on that market. In general, the logistics operators, managing the supply chains by
customer orders, use various organizational and institutional forms depending on the
market where transportation process is carried out. Often observed are: storage,
sorting, cargo handling or financial services. It means that logistics operators must
have their own sufficient storage facilities or have access to the technical
infrastructure that would guarantee fulfilment of all the customer demanded services.

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 The supply chain management system implementation is conditional first of all upon:
on one hand modernizing the personnel way of thinking and acting,
on the other hand modernizing the infrastructure.
The logistics processes involve an extensive infrastructure, mainly the storage,
transport, packaging and information technology facilities (see Fig. 3.11), and only a
system integration of it may bring the expected effects. The presented subdivision of the
technical means and their elements should be treated as conventional as there may be
also different approaches. It is important that all the technical means should be
considered one and single infrastructure used for logistics management and all the
elements seen as a complex in the integrated systems.
A full system approach of a logistics character is effected only by selecting
appropriate internal transport means, in connection with external transport and storage
(including packaging) organization, and first of all with the information channels.
Nowadays, a feature of modernity and progress in transport organization is system
consistency of a transport chain, leading to delivery range optimization depending on the
logistics infrastructure. The system conception is based on the technical and organizational
integration of cooperating partial systems (suppliers, logistics units and receivers), loading
units and even omnibus packages, with the use of terminals. Three elements may be
interconnected: type of loading units, transport facilities and delivery range.
The necessary condition of achieving the required level of integration of the
logistics centre supporting system is its proper organization, and in particular
implementing an information system securing proper information flow between all the
logistics centre elements as well as between the centre and its customers. Three
communications systems are in use:
1) digital telephony system,
2) satellite system,
3) computer network system.
The communications systems serve full range of activities performed by logistics
operators. Such systems should have direct interfaces to forwarders, ports, railways,
warehouses etc.
Talking about information flow, the identification systems used in various
customer service stages should be mentioned. Different identification methods can be
met in the European logistics centres from very simple bar code based ones (2of5,3of9,
EAN13, EAN17 etc.) to very complex, depending on the cargo handling, transport and
storage process automation levels. The bar code is a graphic picture of an object or
commodity number (index) described in detail in the logistics system database.
Essentially, mixed identification methods are used, comprising not only the
internal logistics centre services but also tracing the cargo along the transport route.
In a logistics centre with highly automated cargo handling processes (there are
such centres in Europe) more complex identification methods are used related not only
to the cargo itself but also to the transport, cargo handling and storage methods, type of
vehicle etc. For instance, there are in use:

81


82
Figure 3.11. Logistics process infrastructure
 inductive counters of vehicle axles,
infrared readers capable of reading full information on the vehicle and transported
cargo (e.g. at the border crossing). Laser readers are not used due to safety reasons,
automatic weighing systems,
traditional satellite identification,
differential satellite identification (5 cm accuracy)
television camera-based identification processes (e.g. vision camera, close-up
camera - works in the 8 m to 0 cm range allowing to correct the hydraulic loading
equipment fastening elements, cargo identifying camera etc.) using a very complex
picture processing technique,
optical, magnetic, frequency etc. identification to control the unmanned internal
transport facilities.
Each identification process requires proper marking of the transport facilities and
cargoes.
The satellite identification processes cover not only a vehicle location but also its
basic movement parameters (speed, engine on/off etc.). Besides, they also identify the
transported cargo parameters (e.g. in refrigerated lorries the current inside temperature
and cargo temperature) and allow to control the temperature adjustment devices.
The necessity to process and analyse huge amounts of information caused a rapid
development of the management, control and decision making support information systems.
Using the advanced information technology tools, one can coordinate the activities of all the
supply chain partners, which is necessary for managing the logistics processes.
All the logistics process participants expect advance information on the process
progress. That is not only in order to introduce possible logistics proccess corrections but
also to speed up the invoicing process. In this way the suppliers and logistics service
providers receive their payment earlier. They can reduce the employment of their own
money or in the case of credits - reduce the working-capital credit servicing costs.
Transfer costs are thus reduced, which improves the overall financial result of the entire
logistics process.
In the present day economic conditions, financial success of a company is often
dependent on the speed of information acquiring or releasing. Information has become a
highly profitable commodity in the logistics processes. Therefore, in the logistics centre
creation or modernization conceptions the availability and quality of the information
technology infrastructure should be given a much higher priority then it has so far had.
Relying on general assumptions and opinions and also on results of empirical
investigations emphasizing the increasing importance of supply chain management, one
can indicate many substantial benefits from the use of that management conception,
both on the receiver and supplier side (Fig. 3.12)
However, application of the supply chain management conception requires new
orientation of the receiver and supplier collaboration based upon a supply chain
integrator, e.g. a forwarder acting as a logistics operator. But the conception creates
opportunities and supports endeavours, aiming at:

83
 achieving optimum solutions from the viewpoint of the entire logistics system,
harmonized and fast cargo flows along the supply chain with all the chain
participants linked together by an information system.

Benefits on the part of receivers Benefits on the part of suppliers

(customers)

* Improved quality * Greater size, capacity

* Cost reduction
* Shorter delivery time
* Earlier reaction of suppliers
* Improved competitiveness
* Higher profitability
* Flexible operation
and problem solving
Supply chain management * Long-term agreements
* Improved quality, reduced cost
through
integrator (forwarder)
shorter cycle time
* Stable planning
* Earlier information
* Higher profits
* Confidence and growth

Figure 3.12. Potential benefits of the use of supply chain management conception

3.5. POLICY OF THE AUTHORITIES

The influence of transport and environmental policy should not be omitted in
discussing the logistics centre location and planning factors. The policy in question is
that pertaining to the whole European Union area and the neighbouring countries, the
regional policy (e.g. the Baltic Sea region), national policy (of a country) and local (e.g.
municipal) policy. It is much easier to locate a logistics centre when e.g. the regional
authorities have taken the logistics trends into account in their development plans or
strategies.
The European Union transport policy indicates two important missions to be
fulfilled by the logistics centres. The first is a much greater use of the most ecological
methods of transport, such as railway and inland navigation, instead of the road
transport. With the ecological aspects (reduction of exhaust gas emissions and noise) and
reduction of the number of road accidents in view, EU endeavours to promote the
railway and combined transport (i.e. transportation of sea containers, semi-trailers,
exchangeable bodies or complete lorries on special railway platforms). The second
important mission of the logistics centres is popularizing modern logistics techniques
among the small and medium size enterprises. Each logistics centre equipped with an
electronic internet platform gives access to all the operator offers as well as capability of
comparing them and placing an order. This significant simplification of business
negotiations and reduction of the order handling administrative expenses on the part of
operators makes the small and medium enterprises attractive customers even to the
logistics giants.

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 The common EU transport policy was, with agriculture, competition and foreign
trade, one of the first common policies introduced by the Treaty of Rome in 1958. It was
from the beginning one of the main instruments of achieving the most important
objectives of the European Community. Till 1967 it was concentrated on creating the
customs union and eliminating the border barriers between the member countries and
that goal was achieved. Till 1974 the common transport policy included only the road
and railway transport and inland navigation. In 1985 a White Book was issued, which
in the transport sector assumed elimination, within a determined period of time, of the
whole border control (except safety measures) and freedom of rendering services in the
sea, road and inland waterway transport.
In analysing the stages of creation of the common transport policy and integration
of the European transport systems one should pay attention to the fact that guidelines for
these processes come from two sources. The EU Council gives general indications for
promoting the balanced growth. The European Commission publishes from time to time
White Books on the objectives and directions of the transport policy. These documents
set the directions of activities of the EU Council of Ministers and the Commission itself.
The turning point of the Union transport policy may be considered the White Book
Future development of the common transport policy. Global approach to the
balanced displacement system, published in December 1992, which started a new
quality discussion on the transportation problems. The new policy was based on the
assumption that transport should be seen in its integrity, as an integrated system, whose
elements are complementary and not fragmented with separated modes. The White Book
indicated that the European transport system was out of balance and it requested creation
of a Trans-European transport infrastructure network, integration of individual modes
into a uniform transport system, and also paying more attention to the questions of
environment protection and safety of people and cargoes. Connecting the transportation
needs with the environment protection and social responsibility was considered the
superior objective.
The transport policy directions for the current decade are presented in the White
Book. European transport policy 2010: time for taking decisions accepted in
September 2001. The general transport policy goal presented in the White Book was
making the transport sector independent of the economic growth. The policy of priorities
for the railway, sea and inland waterway transport is supposed to shape a new balance
between the transport modes. The aim is to reverse permanently the current tendencies,
particularly the excessive road transport development. The excessive road transport
causes road congestions, environmental pollution and a great number of road accidents.
The White Book introduces various measures of the so called regulated competition. It
also enhances creating new solutions with preference for intermodal transport
combining the road, railway, sea and inland waterway transport. In extreme cases the
road transport is excluded from that chain.
The White Book noted considerable delays in building the Trans-European
transport networks and improvements by 2004 were foreseen. The proposed solutions
would consist in e.g. better connection of inland waterways with railway and sea
shipping through the sea and inland ports, improved personal transport by cooperation of

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airports with high speed railways, improved personal and cargo transport safety as well
as implementation of intelligent transport systems with network trafiic control. This is
mainly the Galileo navigation system which from 2008 will be used for road driving
speed control, cargo railway transport monitoring and tracing large ships, particularly
those carrying dangerous loads etc.. Improvement of the passenger transport service
quality will be achieved by continuous movement of persons through the development of
an integrated intermodal ticket and luggage management system. The Union funds will
also support the pioneering projects of clean transport in cities promoting the
ecological urban public transport.
From 2006, these actions will be extended to integrating the networks with the
Pan-European transport corridor system running through the present EU candidate
countries, as well as to the sea motorway program through which the sea and inland
waterway transport will be better integrated with the Union transport system. The sea -
inland waterways - railway connections will be in the future an important alternative and
competition to the road transport.
In discussions on the transport policy in view of the access of Central and Eastern
European countries, congestions on the new Union border were considered a potential
threat. In 1996 the Commission initiated the Transport Infrastructure Needs Assessment
(TINA) program in order to review the state of affairs and needs and then to coordinate
the development of an integrated transport network in the 11 candidate countries. The
considerable railway potential of the candidate countries was indicated as an opportunity
for the Union where current railway share is about 40% in the total amount of goods
transported. A reform of the railway sector is necessary in order to keep that share at the
35% level in 2010 in spite of a downward tendency, with eliminating an unfair
competition on the part of the road transport.
The railway revolution proposal was broadly discussed in the White Book, i.e.
opening the railway service market in the TERFN network in 2003 and in the whole EU
railway network by 2008. Stimulating the railway requires that it be included in the
common market, which consists mainly in opening the national freight transport markets
(including also the coastal shipping services), optimizing the use of railway infrastructure
and improving the service quality. Particular emphasis was put on creating a special
cargo transport network. The Marco Polo program replaced, from 2002, the five-year
"PACT program carried out in the years 1997-2001. A priority of the program is
creating multimodal corridors used exclusively for freight transport, which wil be
achieved by increasing the transportation throughput of the existing infrastructure. That
will require investments in the railway access to sea ports as well as modernization or
building of the necessary cargo handling terminals. The program includes also technical
harmonization and financial support for the combined transport undertakings.
The development of logistics centres is indissolubly connected with the combined
transport development. The centres are being naturally set up at crossing points of the
road, railway, inland waterway and sea transport infrastructure. The missing elements are
links between the sea, inland waterway and railway transport. The sea and inland
waterway transport have been for centuries the dominating cargo transport modes in
Europe. The main European cities have been built on the rivers or at river mouths and the

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great medieval fairs always took place in the river or sea ports. Therefore, development
of intermodality is one of the main goals of the European transport policy guidelines to
2010, in particular those missing links between sea shipping, inland navigation and
railway. Those changes will lead to an increased importance of sea and sea-river ports
as the logistics centres.
In 1997 the Commission sent a report to the Council on an important directive of
1975 about common rules for certain combined transport modes in transporting cargoes
between member countries. An agreement on the combined road-railway international
transport of cargoes between the Community and some other non-member countries was
accepted in Brussels in 1987. The aim of that agreement was promoting that form of
transport by freeing the road transport of any quota limitations and licenses. In 2000 and
the next years a series of acts were accepted recommending the promotion of
intermodality and intermodal freight transport and also promotion of the environmentally
friendly modes of transport (railway, inland shipping and coastal shipping).
In the White Book of 2001, the European Community Commission proposed
starting the mentioned Marco Polo program on a broad scale. The program assumptions
are based to a large extent on the consultations, recommended by the European
Commission, Directorate for Energy and Transport (DGRT), and carried out before the
White Book publication. The basic material for the consultations was a document,
indicating development trends in the transport modes from the point of view of combined
transport development. The main assumptions of that document were the following:
DGRT seeks alternative transport solutions to the road freight transport and
considers the Marco Polo program a tool for that,
there is positive experience with the Pilot Action for Combined Transport (PACT)
program implementation, completed in 2001,
the main goal of the new program is support in shifting, by 2010, a considerable
volume of freight transport from roads to other transport modes, in the amounts well
above the PACT program levels,
the freight transport changes should take into account the transport service market
trends,
the new program has to be international and to involve the EU neighbouring
countries, the EU associated countries in particular.
From the point of view of the logistics centre development in Europe particularly
important was the PACT program of 1992, aimed at the promotion of combined
transport. The development of intermodal transport has a direct impact on the logistics
centre development. The program was carried out in 1992-2001. The aim of PACT was
to provoke imitation, leading eventually to an increased share of other-than-road
transport modes in the freight transport. It was assumed that the combined transport
might have better economic justification than the road transport.
In December 2001 the PACT program was replaced by the Marco Polo program,
which also supports intermodality. It has a broader scope than the PACT program and is
not limited to the combined transport only. One of its main tasks is to eliminate to a
maximum degree the road transport from the supply chain. The annual budget of the

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program is approx. EUR 30 million and it extends over 4 years. Marco Polo supports
every initiative aimed at shifting cargoes from the road transport to other more ecological
transport modes. Besides, the attempts will be made to use the benefits of short-sea
shipping. The Marco Polo program supports three basic goals:
aid means will be directed to the logistics service companies with emphasis put on
rendering new transport services, with long-term effectiveness, helping to move
significant volumes of freight transport from roads to other transport modes, without
technical innovations; the Community support will be limited to the starting phase of
rendering such services,
improved functioning of the whole intermodal chain,
concentrating attention on the innovations in collaboration and promoting the best
practices in the sector.
Implementation of the Marco Polo program requires many technical innovations,
particularly in the container and cargo unit parameters. It may be concluded that
implementation of the program will also influence the logistics centre development,
mainly the centres located in the inland and sea port neighbourhood. The sea transport
and inland shipping are two key intermodality components in the European Union.
Although the European Union has an enormous potential (35,000 km of the coast line,
hundreds of inland and sea ports) and practically unlimited transport capacity, those
transport modes have not been fully utilized. A method of stimulating them may be
building the sea motorways. To help create such a Trans-European shipping network, a
national priority should be given to ports which as a rule have good connections with the
land network.
As a supplement to the Marco Polo program, the European Commission plans to
take some steps towards increasing the European Union fleet competitiveness. The
Marco Polo program implementation will indirectly influence the logistics centre
development, as intermodal transport will require appropriate technical conditions. It is
worth mentioning that the European Commission has named a new profession connected
with that type of work - a freight integrator.
In the 1990s some large port centres in Europe turned into logistics centres. Such
ports as Rotterdam, Hamburg or Antwerp have been used mainly due to their price
attractiveness combined with high service quality. This is first of all the effect of a
modern port infrastructure. Further improvement in the operating reliability and safety in
ports may be provided by highly developed teleinformation services. Active
collaboration of various partners, mainly by the electronic data interchange, increases the
quality and effectiveness of intermodal transport. It has also a positive impact on the
standard of services offered by the logistics centres set up near the sea and inland
ports.
The combined transport development problem has been many times discussed,
since 1967, at the European Conferences of Transport Ministers.
After the European Conference of Transport Ministers in Bucharest in May 2002,
the resolution number 2002/2 was issued on the development of intermodal transport in
the member countries. The conclusion of that resolution was that the intermodal transport

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must play a significant role in the future European transport system as an alternative to
the road transport, as it is more economic and environmentally friendly. Attention was
paid to the development problems, namely:
unsuccessful attempts to determine the total costs, which makes the competition with
road transport difficult; the combined transport may be more environmentally
friendly with the participation of the railway transport, internal shipping and short-
sea shipping,
the need of developing the road-railway combined transport, but also with the
participation of inland shipping and short-sea shipping; it is also important to
develop the associated spot infrastructure, i.e. ports and terminals,
improvement of the quality of intermodal transport services by more efficient
formalities and procedures, particularly at the border crossings, time and punctuality
of transport, coordination at the terminals, stores etc.,
lack of the combined transport competitiveness in quality and the cost-price ratio.
Besides, national and international coordination was requested of the ecological,
agricultural and transport policy as well as the combined transport promotion. Regional
plans should ensure temporary incentives for the combined transport, which would
enhance the logistics centre development. Particularly important is participation of
neighbouring countries in the development of international centres. It can be seen that the
EU transport and ecological policy creates proper conditions for the logistics centre
development in Europe.
Such conditions should also be created by the transport policies of individual
countries, and also the local (regional, municipal) policies. Development of a logistics
centre is a time consuming investment, requiring careful planning and the public sector
(government, local community) support, at least at the initial stage. The long time of
investment execution and return of the invested capital as well as the risk involved make
the banks reluctant and the investors' access to capital more difficult.
Governments of the West European countries, involved in the logistics centre
development, have noticed it.
In Germany the logistics centre development is supported in various ways. The
idea of building the logistics centres in that country was considered already in 1992 by
the Federal Ministry of Transport, Building and Housing in a road planning project. At
the beginning of 1990s the Ministry supported the basic study phase of the logistics
centre development in Germany. In accordance with an act of law, the logistics centres
were supported from the financial means for transport development. A condition of
obtaining support was a close contact of such objects with the combined transport
terminals. In the East German provinces the regional economic structure improvement
act (GRW-Gesetz) might have been used. Further support was provided by the combined
transport act of 15.03.1998, which mentions the combined transport terminals in the
logistics centres. Apart from the Deutsche Bahn AG company, also other private
companies received the right to build and operate such terminals.
According to the German laws, the public financial means may be used to support
the logistics centre locations, if:

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 there is a demand for such objects,
a combined transport terminal is part of the centre,
the project is in agreement with the territorial plan for the area.
The logistics centre development in Germany was in principle based on the
Deutsche Bundesbahn / Deutsche Reichsbahn plans. In the 1990s the united German
railways (Deutsche Bahn A.G.) lost a considerable part of the market to the road
transport. The combined transport and logistics centre development was the only chance
of re-winning the lost market segments by the German railways. With the "Masterplan
GVZ I (Guterverkehrzentrum), a total of 28 logistics centre locations were established
in 1992, distinguishing the macro- and micro-location. The macrolocation was a region
and a specific place in that region was established in microlocation. The next stage of the
logistics centre development in Germany was "Masterplan GVZ II, presented in 1995
by the Deutsche Bahn AG created from the state-owned railway organizations in the
former two German states. Therefore, the conception of logistics centre locations, 39
locations in total, was created in the mid-1990s. The conception was oriented towards the
German railway interests. But the priority goal was developing the infrastructure in such
a way that all the transport modes could be used, i.e. the road, railway, air, sea and inland
navigation transport.
The linking element of individual modes in the integrated supply chain became the
combined transport terminals which unloaded the road traffic and directed the transport
stream to rails and waterways. The terminals became gradually a nucleus of the
logistics centres. Since 1998 support has been granted to the construction of 40
terminals to a total sum of EUR 250 million. The combined transport in Germany is
stimulated by the state or administratively imposed (e.g. ban of the lorry traffic on roads
and motorways on Sundays and public holidays in specified hours).
The German GVZs are seen as the logistics centres of competence and logistics
know-how for an agglomeration or region of location. The GVZ functioning conception
in Germany includes a special development and operation management unit for the
whole centre. A governing idea of GVZ in Germany is collaboration of the companies
operating in the centre, in order to achieve the synergy effect. Obtaining such benefits
encourages new business units to join the centre and the already existing companies get
better development opportunities. Special companies GVZ Entwicklungsgesellschaft
(GVZE) are created to carry out these tasks.
The GVZE companies are established in the planning and starting phase of a
centre. Their purpose is to provide the necessary GVZ initiation conditions, such as
choice of location, acquiring the land, building the infrastructure, e.g. the inner transport
roads. However, there is no standard operating pattern for such organization. The GVZEs
in Germany have different structures of participants and the range of their activities is
also differentiated. There are various legal forms used.
The GVZ conception in Germany is based on the Public-Private-Partnership (PPP)
with clearly distinguished tasks. The public sector is responsible for financing the
infrastructure and the communal and regional planning. Installing the business units

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(transport companies, logistics operators, industrial and trading companies using external
logistics services) is carried out by the private sector.
The PPP principle is also seen in the public-private composition of the GVZE
companies. Direct participation of the communal authorities, through company shares, in
the local initiative of building a logistics centre has many positive aspects. "There is
usually a more positive attitude of the authorities to the local actions and initiatives,
supporting them, possible rate reductions, facilitations or even financial support or credit
guarantees."
Distribution of the logistics centres in Germany is shown in Fig. 3.13.

Figure 3.13. Logistics centres in Germany

In recent years the logistics centre development supporting organizations have

been established in Germany. There is e.g. a logistics centre association called
Deutsche GVZ-Gesellschaft mbH". It belongs to the Europlatforms organization

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which deals with the exchange of experience and cooperation of the European logistics
centres. Europlatforms is an association of Freight Villages European logistics
centres. The organization, established at the end of 1991, was initiated by the national
logistics centre associations in France, Spain and Italy. It has now over 60 member
centres (participating directly or through national associations) from 7 European Union
countries: Denmark, France, Spain, Luxemburg, Germany, Portugal and Italy. At present,
as far as data are available, only four national associations from Denmark, Spain,
Germany and Italy represent their centres in Europlatforms. The German association is
the earlier mentioned Deutsche GVZ- Gesellschaft.
Regional cooperation of centres from various provinces is carried out through the
"Deutsche GVZ-Gesellschaft mbH" (DGG) organization. DGG was established in
1993 by the logistics centre development organizations in Bremen and Turingen. In 2002
DGG grouped 22 GVZs and in 2003 already 30 GVZs. The DGG membership benefits
are remarkable, e.g. the following:
multilateral exchange of experience in company collaboration development,
comprehensive and simplified exchange of information among companies operating
in the logistics centres,
full and constantly updated database on all the logistics centres in Germany,
promoting the logistics centre interests in contacts with the Federal Ministry of
Transport, Building and Housing as well as with the European Commission.
All those involved in the DGG activities treat a coordinated and balanced
development of the GVZs in Germany as their superior goal.
Summarizing it, a logistics centre development in Germany is now carried out
according to a federal government plan. The building initiator is the Federal Ministry of
Transport, Building and Housing and the German Railways Co. but the individual new
GVZ locations are initiated by the public sector institutions municipal and district
authorities as well as the industrial-trade chambers and other economic organizations.
The role of public sector in Germany may be illustrated as follows (Fig. 3.14.):

DIRECT INDIRECT

participation in the Supporting actions in the area

investment promotion

Initiating logistic center transport infrastructure

development development
legislation
promotion promotion

Figure 3.14. Role of the public sector (an example of Germany)

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 A common and very characteristic feature of the logistics centre development in
Finland and Denmark is a close partnership between the public and private sector (also
with the partnership between the private and the third sector). The private sector includes
all types of the logistics service providers, ports, consultant companies, construction
companies etc.. The public sector members are municipal authorities, regional councils,
research institutions and universities. The third sector members are various associations.
There has been for a long time a strong connection between the public and
private sector in the logistics centre creation and development processes. The public
organizations take active part in these processes and usually play a most important role.
There are a few logical reasons for that. The Finnish logistics centres have a strong
regional dimension of their functions and services, operating regions and strategies.
Therefore, there is a common expectation that the centres will promote the strengths of
their respective regions and support the local and regional development. That ties the
local authorities in a natural way with the centres, as in Finland the public sector plays an
active role in the regional development.
Creation of a logistics centre may also require, from the beginning or at some later
stages, new land for terminals, production plants, roads etc.. Regional and local land
reserves are established in the territorial planning processes carried out by the regional
and local authorities (in accordance with national guidelines).
Finnish logistics centres are financed entirely or partly from public sources. For
instance, cities and regional councils are responsible for financing the design phase of the
centres. Public financial means are most often used at the initial stages of the new
objects.
As various public organizations play a "central role, they are usually members or
even founding members of the centres, acting e.g. as project coordinators. The
experience of collaboration and partnership between the public and private sector in
Finland is very positive. In spite of different decision making procedures and goals of the
private and public organizations, most partners consider the partnership a success.
The roles of public organizations in the logistics centre development are now
changing. In some Finnish centres, e.g. the Logistics Turku Region, the public financing
period is coming to an end. It is planned to set up a private limited company (e.g. similar to
that in Logisforum in the North Bothnia Region) where the role of public organizations will
be different. The present tendencies show evidently that the financial role of public
organizations will be diminished as the centre design stage is close to completion.
The experience from Denmark shows a significant influence of the integrated
territorial planning on the logisitcs centre development. Integration is stimulated in the
national planning where the logistics centre support opportunities are well used. The
following examples illustrate that:
The Danish Road Directorate initiated a study of the existing roads connecting the
logistics centres with motorways, in order to accelerate the plans of access road
efficiency and throughput improvements and adjustment to the actual road transport
and traffic needs. That will link the motorway planning with the logistics centres and
the road capacity requirements.

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 The Danish authorities have set up a transport task team in order to ensure an
integrated and coherent attitude to the transport problems in the ministries and
departments together with the respective organizations and companies.
The Danish Association of Logistics Centres (FDT) collaborates closely with all the
ministries and departments responsible for planning and the territorial planning in
particular (e.g. the Ministry of Environment, Road Directorate, Danish Maritime
Administration). The agreements and consultations are repeated every three months
and representatives of FDT and the respective authorities meet and discuss the
current and future common problems.
At the same time, the central position and the future EU development prospects
have made several regions of Denmark participate in the European Commission regional
programs for the North Sea and the Baltic - Interreg III A + B. It has a direct impact upon
the territorial planning and the existing logistics centres in Hoje-Taastrup, Aalborg and
Taulov have been strengthened. Besides, it has created a better base for the development
of the Esbjerg logistics centre (in close connection with the port). Fig. 3.15. shows the
location and connections of the planned and existing corridors which generate the cargo
streams and support the transport node development in Denmark.

Figure. 3.15. Transport corridors and logistics centres in Denmark

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 The territorial planning provides framework for the use of land and construction of
buildings, roads and other infrastructure, together with indicating the best methods of
protection for the existing buildings and city landscape. The environment protection
tasks are to a great extent integrated with the territorial planning. There are three levels ot
territorial planning in Denmark:
1) local and municipal planning in the cities,
2) regional planning in districts,
3) national planning coordinated by the Ministry of Environment.
The Ministry can influence planning through regulations, national planning
directives and dissemination of information. For instance, location of power windmills
and high voltage transmission lines in rural landscapes is a Territorial Planning
Department domain. After each parliamentary election, the Department prepares a
national planning bill. The document describes the Danish government national territorial
planning visions and is supplemented with demonstration projects seeking new solutions
and non-traditional collaboration.
An important point in the Territorial Planning Department work is also the urban
environment and town development. Besides, the department takes part in the European
cooperation on the promotion of sustained town development and endeavours to reduce
the environmental load from transport through an appropriate city and transport planning.
Important is also collaboration of the department with the National Association of
Local Governments and the Regional Council Association in Denmark, consisting in
encouraging each region and city in Denmark to prepare a local Agenda 21. The local
Agenda 21 is a strategy or action plan of how a district or city may participate in the
sustained development of the twenty first century. The local Agenda 21 may deal with
the noxious waste, water, air, soil, energy supply, transport planning, city planning,
social and labour aspects etc.
In the last 10 years three national planning conceptions have been presented in
Denmark by three governments, which together form a general prospective vision of the
future national transport infrastructure. That vision aims at optimizing the layout of
Danish cities and supporting the city potential. The conceptions also show how the
transport and logistics network should link the cities and how Denmark should
effectively join the international traffic.
The following recommendations, based on the Danish experience, may be
presented to the European Union countries in the Baltic Sea region as the logistics centre
policy is concerned:
1) Concentrate on the collaboration of freight transport nodes in order to improve
planning and integration of the existing transport nodes instead of building new
ones. There must be cooperation in the national, regional and local level planning,
2) Base the regional transport strategies on the strengths of location in relation to the
cargo streams and of the already existing transport capacity,
3) Increase the support to the networks and capabilities instead of the physical areas,
i.e. use the existing potential of collaboration between the transport and logistics
companies in logistics centres and also between different logistics centres in order to
increase the value added instead increasing the road traffic,

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4) Territorial planning must create and integrate foundations for private users /
companies to build transport links with an efficient use of the existing infrastructure.
Territorial planning should connect the private and public interests in such a way
that sustained transport solutions are created with the business, social and
environmental aspects taken into account.
5) More attention should be paid to the regional and local transport development
potential, e.g. urban logistics in big cities. In the traditional planning attention is
concentrated mainly on the national and international transport.
In Poland, one can hardly talk as yet about a similar level of support from the
national government for the logistics centre development, as it is in many EU countries.
There is no development policy for a national network of logistics centres in Poland and
no long-term program an implementation tool for such policy. Therefore, there is
insufficient legislative support, insufficient financial means and the financing lines are
not defined. The emerging logistics centre development initiatives are weakened by the
condition of existing infrastructure: very few motorways, bad state of many roads,
inconvenient location of some container terminals, poor condition of inland waterways.
The logistics operators look themselves for proper locations and invest in the
logistics infrastructure, guided by various premises, e.g. the anticipated demand for
logistics services, vicinity of their main customers, access to the transport infrastructure
etc.. They build their own logistics centre networks which gradually fill the free logistics
service space left by the unrealized logistics centre development conceptions.
Development of multimodal logistics centres is included in some regional development
strategies and also in some local territorial plans. At present there are a dozen or so local
initiatives of the international, regional or local logistics centre development.
In the sustained balanced national development strategy accepted by the government
in 2000, in the chapter titled Economy is a subchapter Transport development where the
only mention of logistics centres is in a sentence on the necessity of modernization of the
main sea ports and modernization and development of the airport network. Also phrases on
the "necessity of modernization of the railway infrastructure in the main transport lines in
order to ensure competitiveness against the road transport" and "reducing the harmful impact
of transport, the road transport in particular, on the natural environment may be treated as
indirectly influencing the logistics centre development process.
However, the Transport Infrastructure Development Strategy for the years 2004-
2006 and later, a part of the National Development Plan for the years 2004-2006,
contains a direct reference to the logistics related initiatives. The basic objective of that
Strategy is improving the transport accessibility of Poland by carrying out the transport
infrastructure development projects. Such actions will bring the following effects:
Ensuring efficient transport connections serving the intensified trade in the Unified
Market,
Improved accessibility of the main urban agglomerations in Poland - important
economic growth centres,
Reduced environment protection costs through the balanced transport sector
development,
Development of the intermodal systems.

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 The sea port related projects will strengthen the sea ports, by 2013, as transport
nodes and will cause:
Integration of sea ports and harmonization of their functioning and development
with the development and modernization of the national transport infrastructure as a
part of TEN,
Creation of new intermodal systems and connections aimed at development of a
multimodal transport system, offering door-to-door transport and logistics
services,
Improved access to the ports from the sea and from land.
Conditions will thus be created for an improved functioning of "sea motorways"
connecting Polish ports with ports of the Baltic Sea countries.
As the intermodal transport infrastructure development is concerned, the Strategy
foresees construction of the combined transport terminals based on the existing railway
infrastructure and their further development to a logistics centre standard. The Strategy
emphasises that better integration of different transport modes will be ensured by
creating transport chains, linking transport, cargo handling and logistics services.
Regions where the intermodal transport terminals and logistics centres will be developed
will gain benefits by: new work places, increased share of the more ecological railway
transport and reduced harmful impact on the environment, better competitiveness
comparing with neighbouring regions, more logistics centre development stimulated
services.
The implementation basis of the above mentioned Strategy in the years 2004-2006
are: the Consistence Fund Strategy for 2004-2006, the Sector Operating Program:
Transport for 2004-2006 and the transport part of the Integrated Regional Development
Operating Program for 2004-2006. The Strategy itself results from the program
documents, such as: transport policy of the EU and Poland, Government Economic
Strategy, Conception of the national territorial planning policy. It will be financed
from the following sources: public funds, EU means (ISPA, consistence and structural
funds, EIB credits), credits from other international financial institutions and also the
licensee participation funds. Therefore, one may hope that the logistics centre
development in Poland will soon find material government support and the investor
initiatives will be successfully accomplished.
Development of the logistics centres serving the international and inter-regional
trade is connected with high investment costs and relatively long capital return period.
Therefore, the state government and local government support is indispensable here,
often in a form of special government programs. In order to prevent the investment
potential dispersement and to attract a strategic investor, the strategic decisions must be
taken with the interest and support of regional and municipal authorities.

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 4. INTRODUCTION TO PLANNING METHODS
OF LOGISTICS CENTRES

4.1. AN OVERVIEW OF PLANNING MODELS IN LOGISTICS

4.1.1. Logistics center as a complex system

Pre-investment and development planning of logistics centres is always based on
some kind of a model, or otherwise on some vision of future reality of the logistics centre
against a background of probable influence of its environment. The same reality of
logistics centre can be described (or represented) by great many models that are different
as for category, scale, scope, and semantic form. These models can be static or dynamic,
deterministic or probabilistic, verbal, graphical, thought, physical (analog), analytical or
based on simulation. Models are based on intuition, experience, heuristics, mathematical

Figure 4.1. Logistics center environment

Source: AMR Research Inc.

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 and econometric formal structures, digital simulation, or constitute a mixture of
several approaches. Selection of the model that is most suitable for evaluation of logistics
centre effectiveness is very essential.
In planning of logistics centre it is necessary to consider it as a system. And it is a
very complex system being under direct influence of even more complicated environment
of supply chains. There are many different processes in every logistics centre, both
sequential and parallel, interconnected in time span. The source and cause of all those
processes is located in complicated impact of the environment: logistics network
configuration and supply chain management system. The complexity of logistics centre
from systems science point of view becomes even larger because of the necessity of long
planning horizons, as it concerns the system that does not exist yet. Consequently, we
have to consider the interaction between the four main aspects in planning logistics
centres in probabilistic terms. If the future were predictable, it would be relatively
straightforward to design a supply chain that was optimized for that particular future. In
reality, however, the future is uncertain, and a well-designed supply chain must be
flexible and fully capable of adapting to a wide range of potential futures. Therefore, any
modeling of the logistics center as an element the supply chain must account for all the
possible futures by providing a means of incorporating uncertainty into the analysis. All
the processes that are carried on in the logistics centre, as well as the demand for storage
area, goods handling facilities etc. are random if consider them against long-time horizon.

Figure 4.2. Logistics centre structure as a function of its environment

Logistics centre is a typical queuing system. Many other organizations belong to

this class of systems, eg. sea ports, freight and passenger terminals and depots. In view of
that, we can assume that various methods used in pre-investment and development
planning for this class of systems are suitable in planning logistics centres, too.

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 The chapter contains a review of selected method and tool models used at the
logistics centre planning stage. Attention was in particular focused on models connected
with the centre location decisions, centre size planning and optimization of the scale and
method of cargo stream flows.
A system and holistic view of the logistics centre planning functions and their
scope requires an analysis of the entire logistics chain from many perspectives, for
different goals aimed at on various levels (strategic, tactical and operational). A tool for
such analysis should be a software environment allowing to perform simulation
experiments on a set of logistics problem models.
Building of this type of environment (a logistics laboratory) is a serious, time
consuming and expensive undertaking. Only a few such laboratories are described in the
literature and the assessment of their effectiveness is difficult as hardly any information is
available. An effective use of the logistics laboratory capabilities depends upon the
availability of up-to-date and credible information.
Difficulties with a complete solution of the broad logistics centre planning problem
spurred development of many optimization models which aimed at seeking an optimum
for certain partial problems, usually with relatively strong initial assumptions. The centre
location models, presented in this chapter, belong to that class.
Unfortunately, all the important location models, e.g. the constant location cost
models, maximum cover models in the non-competitive location theory or the basic
competitive location theory models, are computationally complex combinatorial problems
and belong to the NP-difficult class. A consequence of that is the necessity of using
approximate algorithms in solving practical problems. Hence, the arsenal of the logistics
centre planning and optimization tools comprises meta-heuristics-based algorithms and in
particular the evolutinary algorithms and their derivatives, tabu search algorithms,
simulated annealing algorithms and random local optimum search algorithms.
Apart from the logistics planning problem complexity, another difficulty is lack of
full information on the decision effect influencing factors. A classical method of coping
with the incomplete information situation is using stochastic models. Some of the above
discussed models are based on the assumption that the distributions of important decision
influencing variables are known. However, in some cases the probabilistic approach
appears unpractical or even impossible to apply in view of the character of acquired
information. In such cases it is necessary to use other alternative uncertainty models
developed in recent years. The repertoire of decision making tools includes here, first of
all, the fuzzy set theory (see the model discussed further in this chapter), the approximate
set theory and the Bayes network theory.
A critical factor in all the operational research tool applications to the logistics
centre location, size, structure and function planning is the credibility, scope and
character of data to base the decisions on.

4.1.2. Choices for modelling

Although there are numerous individual models that can be used for analysis,
models may be classified in just a few categories. Namely, there are

100
(1) chart, compass, and ruler techniques,
(2) simulation models,
(3) heuristic models,
(4) optimization models, and
(5) expert system models.
Chart, compass, and ruler techniques
This is a general label referring to a wide variety of basically intuitive techniques
that may be aided by a relatively low level of mathematical analysis. However, the results
need not be of low quality. Insight, experience, and a good understanding of logistics
network design allows an individual to generate satisfactory logistics center designs.
Subjective factors, exceptions, costs, and constrains, many of which cannot be
represented by the most elaborate mathematical model, can be taken into account. This
enriches the analysis and is likely to lead to designs that are directly implementable.
Methods used to support this type of analysis are likely to seem rudimentary in
todays sophisticated computerized world. Statistical charting, mapping techniques, and
spreadsheet comparisons are just a few of the techniques that might be employed in
logistics center planning.
Simulation models
Simulating a logistics center functioning against its logistics network ordinarily
involves replicating the cost structures, constraints, and other factors that represent the
physical reality in a reasonable manner. This replication is usually done by means of
mathematical relationships, which are often stochastic in nature. Then, the simulation
procedure typically is nothing more or less than the technique of performing sampling
experiments on the model of the system. That is, a particular network configuration is
presented to the simulation model which then provides the costs and other data relevant to
the operation of the system design. Repeating the experiment many times over with the
same design and with different designs generates statistics that are useful in making
comparisons among the design choices. Manipulating the simulation model rather than
the real system is done as a matter of convenience.
Computer simulation have been used to deal with about every planning problems in
logistics. Many examples exist. Simulations are, for the most part, tailor-made to the
particular problem being analyzed. Although simulators exist that that specifically handle
logistical problems many more may be created with the aid of general simulation
languages. A number of these languages include graphic features whereby the action of
product flows and stocking levels can be animated in simulated time on the screen for
easier interpretation of the results.
Simulation is the method of choice when substantial detail in a complex logistical
problem description is essential, when there are stochastic elements in the planning
problems (and they exist as a rule), and when finding the mathematically optimum
solutions is not critical. Practitioners rank simulation as the second most frequently used
quantitative technique for analysis, ranking it only behind statistics.

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Heuristic models
Heuristic modelling is a practical approach to some of logistics most difficult
problems. Heuristics are useful where the desire is for the model to search for a best
solution, but too much might need to be compromised to solve the problem by optimizing
methods.
Heuristic models are something of a blend of the realism in model definition that
can be realized by simulation models and the search for optimum solutions achieved by
optimization models. They generally achieve a broad problem definition, but do not
guarantee optimum problem solutions.
The models are built around the concept of the heuristic, which Hinkle and Kuehn
define as A short cut process of reasoning that searches for a satisfactory, rather than
an optimal, solution. The heuristic, which reduces the time spent in the search for the
solution of a problem, comprises a rule or a computational procedure which restricts the
number of alternative solutions to a problem, based upon the analogous human trial-and-
error process of reaching acceptable solutions to problems for which optimizing
algorithms are not available.
Optimization models
Optimization models are based on precise mathematical procedures for evaluating
alternatives and they guarantee that the optimum solution (best alternative) has been
found to the problem as proposed mathematically. That is, it can be proved
mathematically that the solution produced is the best. Many of the deterministic
operations research, or management science, models are of this type. These include
mathematical programming (linear, nonlinear, dynamic, and integer programming),
enumeration, sequencing models, various calculus-dominated models, and equipment
replacement models. Many optimization models have been generalized and are available
as computer software packages.
When to use optimization models? According to Powers, wherever and whene-
ver possible. He goes on to note the several advantages of the optimization approach:
The user is guaranteed to have the best solution possible for a given set of
assumptions and data.
Many complex model structures can now be handled correctly.
A more efficient analysis is conducted since all alternatives are generated and
evaluated.
Reliable run-to-run comparisons can be made since the very best solution is
guaranteed for each run.
The cost or profit savings between optimum and heuristic generated solution can be
significant.
Although these are impressive advantages, the optimization models are not without
their disadvantages. The primary disadvantage is that, as the complexity of the problem
increases, an optimum solution cannot be achieved within a reasonable computational time.
Often the realism of the problem description must be considered in trade-off with solution
time.

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Expert systems models
When planning problem, such as logistics center design, is solved many times in a
variety of situations, the planner is likely to develop insight as to how the problem is
solved. Such insight often transcends the most complex mathematical formulation
possible. This knowledge of expertise, if it can be captured in a model settings or expert
system, can be used to produce solutions of higher overall quality than previously
obtained with the use of simulation, heuristic, or optimization methods alone.
Cook defines an expert system as an artificially intelligent computer program that
solves problems at an expert level by utilizing the knowledge and problem solving logic
of human experts.
Growing number of applications of expert systems in logistics, transport,
inventory, and customer service are reported. According to Cook, expert systems have
several distinct advantages over conventional planning systems:
They can process both qualitative and quantitative information, allowing critical
subjective factors such as managerial judgment to more easily be part of the decision
process.
They can process uncertain information and provide solutions with only partial
information, allowing more complex, unstructured problems to be solved.
They provide solutions faster and at lower cost by using only the minimum
information needed to solve a problem.
They display the experts problem solving logic, which allows the logistics manager
to quickly improve decision making capabilities.
They provide portable, duplicatable, and documantable knowledge.

4.2. SELECTED MATHEMATICAL MODELS FOR PLANNING

LOCATION AND FUNCTIONS OF LOGISTICS CENTRES
The aim of this study is a review of selected methods and tools allowing to design
and analyse the logistics chain functions, with particular attention paid to the methods of
supporting decision making in the location (distribution) of logistics centres and planning
their functions. Distinguished are here, on one hand, the tools and techniques of analysis
and simulation of an entire logistics chain and, on the other hand, models and methods of
planning the logistics centre location and optimizing some logistics chain functions.

4.2.1. Logistics centre location models

Analysing the whole logistics chain from many perspectives, from the viewpoint of
different goals on different levels (strategic, tactical and operational) is dependent upon
an access to the environment, making it possible to perform experiments on a set of
logistics models. Those models are built of bricks elementary models which are used
for constructing complex system models and for simulating their operation. Such
environments are sometimes called "logistics laboratories", examples of which are the
TASTE and DPSS laboratories.

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TASTE A tool of model building and simulation of integrated logistics chains
[Slats et al., 1995].
TASTE consists of the following main elements:
TASTE software library with typical logistics chain components used as the chain
model building bricks
MILESTONED methodology of stepwise investigation by means of a simulation
model
Set of manuals and instructions for managers and analysts and other TASTE users
ExSpect logistics model specification program environment
DPSS Decision aiding system for planning and development of distribution
networks [Slats et al., 1995].
DPSS (Distribution Planning Support System) supports decision making in the design
and planning of logistics systems. The approach is based on decomposing a distribution
system into processes for which separate models are built. The models comprise:
Territorial structure model which allows - from the data on customers, suppliers,
products and transport chain organization - to plan the logistics centre locations and
to allocate centres, suppliers and customers.
Functional model which allows to assign logistic functions in the logistics centre,
based on the distribution system structure data.
Flow model which is used for determining the supply frequency, size of deliveries,
stock levels and the facility usage from the function, distribution network structure
and distributed product data.
Operations model which allows to determine the stock renewal points, distribution
cycle time and schedules from the distribution chain structure and operational
requirement data.
Planning of sizes and locations of the production plants and service centres is one
of the classic operational research problems. Early works on the problem in question are
dated in the 1920s [Weber, 1929]. Subsequent years bring dozens of models and methods,
an interesting review of them may be found in [Drezner, 1995]. The transport terminal
location problems and cargo stream optimization were considered in [Daganzo, 1996],
[Noritake and Kimura, 1990] proposed a sea port location and size optimization model.
The plant and object location optimization models were solved by means of the
mathematical programming methods (see e.g. [Aikens, 1985], [Daskin, 1995]).
Unfortunately, all the important location models, e.g. the Fixed Charge Location Model
(FCLM), Covering Model or the Medianoid and Centroid Models from Competitive
Location Theory are numerically very complex combinatorial computational problems
and belong to the NP-difficult class.

4.2.1.1. Non-competitive location models

In the FCLM (fixed charge location) model, where no capacity constraints are
imposed on the logistics centres, a location minimizing the following objective function is
sought [Jaramillo et al., 2002]:

104
 f
j
j X j + c hi d ijYij ,
i j

where:
Xj is a zero-one variable describing the location decision in the j-th place (Xj =
1)
or lack of such decision (Xj = 0)
Yjj is a demand share of the i-th node which is served by the j-th location
logistics centre
fj is a fixed location charge in the j-th place
hi is the i-th node demand
dij is a distance from the i-th demand node to the potential j-th place location
c is a unit transport cost.
The model with capacity constraints imposed on the possible logistics centre
locations has an identical objective function as the FCLM without capacity constraints.
However, the total capacity of the centres must be greater than or equal to the demand for
their services and the problem in question is a version of the so called transportation
problem solved by the simplex method.
In the maximal cover model a set of the logistics centre locations is sought to maximize
the joint degree of demand satisfaction by all the nodes. The maximal cover location problem
(MCLP) is considered one of the useful models for solving practical location problems. The
MCLP goal is to find a set of m centres in order to maximize the joint weighed "cover" of the
customers. A customer is considered "covered" if its distance from the nearest centre is not
greater than r. In [Church and Meadows, 1979] algorithms are proposed to find the
dominating set of centres by the linear programming method for real number solutions and
the division and constraint method for integer number solutions.
A basic assumption of the classical MCLP model is a binary "coverage" character -
a customer either is covered or not. This assumption does not reflect fully the reality
where various degrees of coverage may occur. Hence the development of models where
the degree of coverage is a function of distance from the centre (and, possibly, from
competing centres) [Gosh et al., 1995].
In [Berman and Krass, 2002] a generalized MCLP problem is proposed where the degree
of coverage depends on distance from a centre. Let N (|N| = n) be a set nodes of a certain G(N,
E) network. With each node i, iN of that network a weight wi is associated representing
importance of that node e.g. the number of customers in the node. It is assumed that a
customer in node i may be "covered" on various levels depending on the distance of node i from
a logistics centre. It is also assumed that for each node iN one can define k radiuses r0i = 0 < r1i
< .... rki = with the corresponding coverage levels a1i = 1 > a2i > .... aki 0.
In order to formulate the generalized maximal cover problem in the form of an
integer programming model it is necessary to define the following two sets: for each node
iN with wi > 0 and for each l {1,...,k}, let d(x,y) be the smallest distance between two
points x,y G. Then for each set of locations of the potential logistics centres defined
over G, the least distance to the node iN , d(S, i) is defined as:

105
 d(S, i) = min d(j, i)
jS

For a given set of possible logistics centre locations S and the cover level l k, let
{
N (S , l ) = i N ril 1 d (S , i ) < ri l }
be the set of all nodes whose smallest distance to S is in the range
[r i
l 1
]
, ril .
Each node i belongs to exactly one such set. For i N(S, l) the cover level is ail ,
and the contribution to objective function is ail wi .
So if i N(S, l) then 100% of the node i customers are covered (as in the classic
MCLP). But if i N(S, 2) then only a fraction a i2 of the node i customers are covered etc..
The generalized MCLP problem may now be formulated as [Berman and Krass, 2002]:
k
max S X , S = m h(s ) = wi ail
l =1 iN ( S ,l )

where X is a set of potential locations (e.g. X = N). The respective integer programming
model requires two more sets to be defined. Let for each node iN and wi > 0 and also for
each l {1,...,k} be:
X i (l ) = {x X | ril 1 d (i, x ) < ril }, l k
and
{
L(i ) = l k | x X such that ril 1 d (i, x ) < ril }
Hence Xi(l) contains all the centre locations which can guarantee the level l cover
for node i customers and L(i) contains all the possible cover levels which may occur for
node i. In the model in question two binary variables were used:
fx = {1 log istics centre located in x
0 otherwise

and
yil = {1 if cov eredbyx X i (l )centreandn oother centre in ril 1 from i
0 otherwise

The corresponding integer programming model assumes then the following form:
n
max wi ( )a y l
i
l
i
i =1 lL i

with constraints:

106
 f
xX
x =m

( )f x y il , i N , l L(i )
xX i l

( )y
lL i
l
i 1, i N

f x , y il [0,1], i N , l L(i ), x X
In view of the computational complexity of the problem, finding an optimum solution
for a practical situation seems impossible. It is therefore recommended to apply the greedy
heuristics, which in a series of experiments presented in [Berman and Krass, 2002] generated
solutions at a 1,03 optimum level. An alternative procedure is solving a relaxed problem by
means of a linear programming algorithm (see [Cornuejols et al., 1990]).

4.2.1.2. Competitive location models

In the competitive analysis the location problem is a medianoid or centroid model
based game. In the first case, the problem consists in minimizing the market share of a
competitor (Follower), who may set up open logistics centres in places not taken up by
the decision maker. The latter makes location decisions with resource constraints. The
minimized value (i.e. the competitor's market share) is calculated by aggregation of the
demand part satisfied by the competitor managed centres. In the centroid model the game
consists in considering the best competitor response to each possible location variant.
Maximized is the difference between the total sum of requirements (i.e. demand) and the
sum of requirements satisfied by the competitor.
In view of the computational complexity of these location problems, the mega-
heuristics based algorithms are used for solving them. The medianoid and centroid model
solving algorithms with the use of a tabu search algorithm were proposed in [Benati and
Laporte, 1994]. Also effective in the location problem solving appeared the population
evolution based algorithms. In [Beasley and Chu, 1996] a genetic algorithm was proposed
for solving the maximum cover problem. One of the first proposals of using genetic
algorithms in solving location problems was presented in [Hosage and Goodchild, 1986].
Analysis of the effectiveness of evolutionary algorithms in the basic location model
solving may be found in [Jaramillo et al., 2002].

4.2.2. Combined optimization of the logistics centre location and size

An interesting model of the logistics centre size and location optimization is
proposed in [Taniguchi et al., 1999]. The model is based on the following assumptions:
an optimum location is chosen from a finite number of the candidate nodes;
the model takes into account relations between the transport costs and the centre costs
(construction, maintenance, land cost, internal warehousing and handling costs etc.);
the decision maker can determine the optimum location and size of centres but
cannot solve the problem of transport means allocation to transport tasks;

107
 it is assumed that transport means (e.g. trucks) optimize their routes choosing a
logistics centre from among the available ones.
The discussed model, whose structure is presented in Fig. 4.3, consists after
decomposition of two interdependent levels - the upper and the lower level.

Figure 4.3. The logistics centre location and size optimization model structure
Source: Taniguchi et al., 1999

The objective function and constraints for the upper level problem have the
following form:
min xX , yY TC (x, y ) = xi Ci + ct t aVa + xi C ' i + c' t t bV ' b
i a i b

with constraints:
Ci = cbi y i T + c t n yi (qi )T i,
C ' i = c bi y ' i T + c' t n y 'i (q' i )T i,
qi = qoi + qid i ,
o d

q' i = q' oi + q' id i ,

o d

V ' b = bi q' id + bi q' id b,

i o i d

q
o
oi = ' q' id i ,
d

q
d
id = ' q' oi i.
o

108
where:
x, y - vectors representing the location and the number of reloading stands of
potential logistics centres, respectively
X,Y - x, y vector sets
xi - zero-one variable (xi = 1 if centre located in i node, xi = 0 otherwise)
Ci,Ci - total cost of the alternative transport means service in centre i in time T
ct,ct - unit cost of transport by alternative means in centre i
ta,tb - transport time by alternative routes a and b
V - stream of vehicles (number of vehicles/time unit)
Va,Vb - streams of vehicles in alternative routes a and b
cbi - cost per hour of stay on a reloading stand in centre i
yi,yi - number of reloading stands for alternative transport means in centre i
T - planning time
qi,qi - numbers of alternative vehicle types visiting centre i daily
nyi(qi) - average number of vehicles in centre i, which has yi reloading stands
qoi,qoi - flow of alternative vehicles from supplier o to centre i (number of
vehicles/time unit)
qid,qid - flow of alternative vehicles to receiver d from centre i (number of
vehicles/time unit)
bi - zero-one variable (bi = 1 if transport between supplier o, centre i and
receiver d is performed by route b; bi = 0 otherwise)
,i - cargo transported by alternative means of transport (t/vehicle)
The objective function and constraints for the lower level take the following form,
respectively:

min t a (V )dV Wod (z )dz

Va qod

0 0
a o d

with constraints:
f r ,od = xi f r ,od r, od ,
f
r
r ,od = qod od ,

f ''
r
r ,od = q' ' od od ,

Va = rod,a f r ,od + rod,a f ' ' r ,od a,

o d r o d r

q
o
od = Dd d ,

q
d
od = Ooo,

f r ,od 0 r, od ,
f ' ' r ,od 0 r, od .

109
where:
Wod(z) - inverse demand function per vehicle stream; o,d are candidate
nodes for centre i
qod,qod - stream of vehicles for the o, d pair (vehicles/day)
fr,od, fr,od - stream of vehicles for path r determined by the o,d pair
r,oda - zero-one variable ( r,a = 1 if path r crosses the a route, r,a = 0
od od

otherwise)
Oo, Dd - generation value for centroid o and attraction value for centroid d
(vehicles/day)
The presented model is a two-level nonlinear programming problem, [Taniguchi et
al., 1999] proposed an effective genetic solution algorithm for it.

4.2.3. Supply chain design - combined optimization of the number of logistics

centres and vehicle routes
The problem in question pertains to the problem of designing the structure of a
logistics system comprising many warehousing and distribution centres. A system
structure is sought which minimizes the number of centres, with satisfying full customer
(receiver) needs. The problem is computationally difficult, so the possibilities of
obtaining the optimum solutions are seriously limited (see [Gendreau, 1996]).
The design decisions in the considered case include:
1. Selection of a minimum number and locations of the logistics centres in order to
ensure the required service level.
2. Choice of the optimum vehicle routes to and from the logistics centres.
3. Determining the level of supplies to satisfy the customer needs at minimum costs.
The problem may be treated as a two-level optimization task. The tools and
solution methods are proposed in [Hwang, 2002]. The general assumptions of the
proposed method are presented in Fig. 4.4.
Selection of a minimum number and locations of the logistics centres from among
a finite number of possible locations is based on a stochastic model of graph coverage. A
solution is sought which minimizes the costs with an assumption that the probability of
satisfying the needs of each customer is not less than a given critical value.
The proposed model [Hwang, 2002] is based on two assumptions:
Logistics centres and suppliers are always ready to render services.
The transport time is a random variable of a known distribution.
In the discussed model, the logistics costs Fij are defined as a sum of the costs of
transport satisfying the customer demand and the costs of value depreciation connected
with the delay due to the products being tied in the supply chain between the logistics
centre Sj and the end receiver Ri..

110
 Figure 4.4. Method of solving the problem of combined optimization of the number
of logistics centres and vehicle routes
Source: Hwang, 2002

The following values are used to calculate the logistics costs of transport from Sj to
Ri:
Ri(XRi, YRi) - receiver locations
Sj(XSj, YSj) - potential locations of the logistics centres
Fij(Ri, Sj) - logistics costs in the relation between Ri and Sj
Ai - the required service level
i - demand change rate (increasing or decreasing)
Di - demand in Ri
Dist(Ri,Sj) - distance between Ri and Sj
Tim(Ri,Sj) - transport time between Ri and Sj
Then:
Fij = ci Dist (S j , Ri )Di exp ( i Tim(S j , Ri ))
where ci is constant for receiver i, and the distance:

(
Dist (S j , Ri ) = XS j XRi
p
+ YS j YRi )
p 1/ p

with p = 1 becomes a linear distance and with p = 2 - a Euclidean distance.

Using the presented assumptions, the level 1 problem, i.e. the minimization of the
number of centres and their locations, may be outlined as follows:
n
min X j ,
j =1

111
with constraints:
n

a
j =1
ij X j 1, i = 1,..., m

X j = (0,1), j = 1,...n
aij = { (
1if Pr Fij Ai ri
0 otherwise
)

If the assumption that a logistics centre is always ready to render services is

dropped and replaced with a corresponding probability bj = Pr (Sj is in readiness), then:
Pij = Pr (Riis cov ered by S j )
Pij = aij bij
qij = 1 Pij
Pr (Riis cov ered ) = 1 q ij
j = ( X )

(
( X ) = j X j = 1, j = 1,..., n . )
In the above presented situation, an alternative formulation of the discussed
optimization problem is the following:
n
min X j ,
j =1

with constraints:
1 q
j = ( X )
ij li , i = 1,..., n

X j = (0,1), j = 1,..., n
where li is a probability that Ri is covered by one of the available logistics centres on at
least the required level.
Solution of the level 1 problem by means of the standard zero-one programming
algorithms leads to a lower level problem (level 2), where a set of routes and
transportation schedule for a fleet of vehicles is sought.
The objective function for the problem is minimizing the logistics costs of serving
a group of customers, without delays in supplies and without breaking the vehicle fleet
loading capacity and the required transport time constraints. The search for solution is
preceded by applying a simple heuristic algorithm of customer grouping. The algorithm
(see [Hwang, 2002]) allows to assign customers to the logistics centres selected on level
1. Eventually, the following problem has to be solved:
N N NV
min C ij x ijv
i =1 j =1 v =1

with constraints:

112
 N NV

xi =1 v =1
v
ij = 1, j = 2,..., N

N N

x
i =1
v
ip xijv = 0, v = 1,..., NV , p = 1,..., N
j =1
N
N

d x
i
v
ij DV , v = 1,..., NV
i =1 i =1
N N N N

tiv xijv + tijv xijv Tv , v = 1,..., NV

i =1 j =1 i =1 j =1
N

x
i =2
v
ij 1, v = 1,..., NV .

where N is the number of customers, NV number of vehicles, Tv vehicle loading capacity,

di the customer i demand, DV total turnover in the system, t iv required delivery time to
v v
customer i, t ij transport time in i j relation, Cij transport cost in i j relation and x ij is a
v
binary decision variable; x ij = 1 if vehicle v serves the i j relation.
In practical cases the presented model should be solved by means of heuristic
algorithms or by metaheuristics, e.g. the tabu search, simulated annealing or evolutionary
algorithms. In [Hwang, 2002] a genetic algorithm is proposed for solving the model.

4.2.4. Multi-criterion location models

Many experts are of the opinion that location problems are by virtue the multi-
criterion problems. This evidently pertains also to the logistics centre location decisions.
The centre location selection as well as the function and scope design problem is a
problem of increasing the supply chain effectiveness. Solution of the problem depends on
many factors of an objective or subjective character, in fact not always well defined or
fully known. The multitude of location influencing factors and the necessity of taking
many criteria into account make the traditional model of seeking extremum of an
objective function subject to constraints appear a considerable simplification of reality. In
real situations, apart from many selection factors, there are usually many objectives and
therefore many evaluation criteria of a possible solution. In some publications on the
subject the use of multi-criteria decision making methodology is proposed for solving the
location problems (see e.g. [Hwang and Yoon, 1981], [Pavic and Babic, 1991],
[Tompkins and White, 1984]).
In the general case, the problem of the logistics centre best location choice from
two or more possible locations, taking into account at least two important location
decision factors, becomes a multi-criterial problem. Solution of such a problem, by means
of traditional decision making models in the multi-criteria situations, requires that the
mentioned factors be of a quantitative and precisely measurable character. But in practice
the logistics centre location selection is influenced by the quantitative as well as
qualitative factors and some of them are not precisely definable. Hence, there have been

113
proposals of using here the fuzzy models, based on the fuzzy set theory, where at least
some evaluation criteria may be expressed in the fuzzy categories, like e.g. "big", "high",
"very small", "friendly" etc.. The described below fuzzy model of distribution centre
location was proposed in [Chen, 2001]. The approach is based on the methodology of
making multi-criteria decisions in fuzzy conditions, where a technique is used of
identification of the decision maker preference relations by comparing pairs from a set of
possible solutions [Chen et al., 1992].
Assuming the fuzziness of the logistics centre location problem, the weights of
different criteria and the qualitative criteria are treated as linguistic variables, which may
be represented as triangular fuzzy numbers. A triangular fuzzy number is defined as
three coordinates (n1, n2, n3) presented in Fig. 4.5.

(x)

0
X
n1 n2 n3

Figure 4.5. Triangular fuzzy number

The triangular fuzzy number belonging function is defined as follows:
for x<n1 (x) = 0,
for n1xn2 (x) = (x n1)/(n2 n1),
for n2xn3 (x) = (x n3)/(n2 n3),
for x>n3 (x) = 0.
Let A1, A2,...,Am be a set of possible logistics centre locations and C1, C2,...,Cn be a
set of criteria related to the individual potential locations. The location selection is based
on an analysis of the matrix:
x11 x12 ... x1n
x x 22 ... x 2 n
D= . 21
. .
. ... .
.

x m1 x m 2 ... x mn
W = [w1 , w2 , ...,wn ]

114
where xij, i,j is a fuzzy evaluation of the Ai (i = 1,2,...,m) alternative from the viewpoint
of criterion Cj and wj (j = 1,2,...,n) is the weight of that criterion. The fuzzy evaluations
and weights of individual criteria are linguistic variables written as triangular fuzzy
numbers xij = (aij, bij, cij) and wij = (wj1, wj2, wj3).
In order to ensure comparability of the numerical (objective) and linguistic criteria
evaluations, a normalization is necessary leading to determination of a normalized fuzzy
decision matrix:
R = [rij]mn
aij bij cij
rij = * , * , * , j B,
c c c
j j j
a j a j a j
rij = , , , j C ,
c b a
ij ij ij
c j = max i cij , j B,
*

a j = min i aij , j C ,
where B and C are the benefit and cost criterion sets, respectively.
Taking into account the importance of individual criteria, a final fuzzy evaluation
of each potential location can be calculated:
n
Pi = rij (.)w j , i = 1,2,..., m,
j =1

where Pi is a fuzzy evaluation of the value of alternative Ai.

To define the preference relation of alternative Ai to alternative Aj, the belonging
function is used of the triangular fuzzy number Pi(-)Pj, which in turn is compared to zero.
The Pi(-)Pj difference is a fuzzy difference of two fuzzy numbers. Its value is calculated
in the following way:
Zij = Pi(-)Pj,
[
Z ij = z ijl , ziju

]
,
where:
[ ] [
Pi = pil , piu , Pj = p jl , p ju , ]
z ijl = pil p ju , z iju

= piu p jl .

If zijl >0 for [0,1] then alternative Ai is absolutely preferred to alternative Aj. If

z iju <0 for [0,1] then alternative Ai is not absolutely preferred to alternative Aj. If
zijl <0 and z iju

>0 for an then the fuzzy preference relation between alternative Ai and Aj
is defined as eij:

115
 S1
eij = , S > 0,
S
where:
S1 = Z (x )dx, S 2 = Z ( x )dx,
x >0 ij x <0 ij

S = S1 + S 2.
The ei j value is the degree of preference of alternative Ai to Aj, and Zij is the
belonging function of the fuzzy number Pi(-)Pj. Correspondingly, eij > 0,5 means that
alternative Ai is preferred to Aj. If eij = 0,5 then there is no preference in relations between
Ai and Aj. Finally, if eij < 0,5 then alternative Aj is preferred to Ai. Using the fuzzy
preference relation, a fuzzy preference relation matrix may be constructed:
[ ]
E = eijs mm
,
where:
eijs = {eij e ji , when eij e ji
0, otherwise

s
The eij value is a degree of strict domination of alternative Ai over Aj. Then the
non-domination level of each Ai (i = 1,2,...,m) alternative is determined by means of a
fuzzy matrix of strict preference relations:
ND ( Ai ) = min{1 e sji }= 1 max e sji
j j
ji ji
where ND ( Ai ) is the non-domination degree of each Ai, alternative and is the set of
alternatives.
Large ND ( Ai ) value indicates that alternative Ai has a higher non-domination
degree than other alternatives. Hence the ND ( Ai ) value may be used for ranking the
alternatives in accordance with the following algorithm [Hsu and Chen, 1997]:
1. K := 0; = {A1, A2,...,Am}.
2. Select alternative Ah, for which ND ( Ah ) = maxi{ ND ( Ai ) }. Set ranking for Ah as
r(Ah) = K + 1.
3. Delete Ah from . The corresponding row and column are deleted from the fuzzy
strict preference relation matrix.
4. Calculate again the non-domination levels for all Ai . If = then stop.
Otherwise substitute K:= K+1 and return to step 2.
In [Chen, 2001] an interesting numerical example is presented of the fuzzy
approach application to the solution of the logistics centre location problem.

116
4.2.5. Optimization of the logistics centre location and size with random
centre operating costs
In [Ricciardi et al., 2002] a model is presented of the optimization of logistics centre
location and size with random costs of the reloading and warehousing operations in the centre.
The considered model belongs to a broader class of stochastic location-allocation models (see
e.g. [Balachandran and Jain, 1976], [Louveaux and Peeters, 1992]). In the discussed models
given are the supplier set and receiver set and sought are the optimum location and size of
intermediate centres (warehouses, logistics centres etc.). The optimization criterion in the model
[Ricciardi et al., 2002] is the expected total cost of transport with constraints connected with the
receiver requirements and supplier capabilities.
The total cost of a freight unit transport from supplier to receiver is a sum of two
components: cost of transport from supplier to receiver through a logistics centre and cost
of operations in the centre. The first component is treated as deterministic and the second
is of random character and its probability distribution is known.
Solution of the problem is two-stage. First the transport stream allocation problem
is solved. Results of those calculations are necessary for solution of the location of finite
number of centres problem. The solution is based on two heuristic algorithms. The first
heuristic algorithm is used for finding an initial solution of the location problem, the
second - for improving it. The input data comprise:
number of suppliers and receivers,
number of potential logistics centres,
supply capacity of each supplier,
demand of the individual receivers,
unit cost of transport from supplier i to receiver j through centre k,
unit cost of operations in centre k (random variable).
The model assumes balanced demand and supply as well as independence and
identical character of the operation cost distributions in the individual centres. The
decision variable for the transport stream allocation subproblem is determination of a
stream from supplier i to receiver j through centre k (for all i,j,k). The allocation problem
solution is a binary variable defined over all the potential locations.
The presented computational experiment results allow to judge that the proposed
heuristic algorithms are characterised by a considerable computational effectiveness and
high quality.

4.3. APPLICATION OF NEURAL NETWORKS IN PLANNING

OF LOGISTICS CENTRE
4.3.1. Analysis of the usefulness of artificial neural networks
in logistics centre planning
Application of the neural networks to the logistics centre investigations does not
require developing a detailed model with all the specific relations. From the observations
of a real logistics centre behaviour the neural network learns to solve the investigated

117
problem - to find the appropriate relations. For this reason the neural networks may be
used in logistics centre planning with computationally difficult and sometimes not fully
recognized problems. Neural networks as a logistics centre modelling tool are an effective
and attractive information technology vehicle. They are used in modelling very complex
transport systems and provide a new look on solving many difficult problems typical of a
logistics centre.
The transport processes are influenced by so many factors that identification of the
significance of each of them is difficult. Logistics centres of complex structure suffer
from a considerable shortage of information connecting the individual transport system
elements.
Many experiments and investigations have proved that neural networks are a very
useful tool and may be used, with a high probability of success, wherever problems occur
with computer models representing complex system relations. Neural networks make use
of very sophisticated modelling technique capable of representing extremely complex
functions and relations.
In most cases the neural networks have a non-linear character, which increases
their capabilities and distinguishes them from other methods. A commonly used
technique of the mathematical description of various objects and processes is linear
modelling. This approach is mainly applied due to the well known strategy used for
building such models. Where there is no basis for linear approximation of the existing
phenomena and processes (and such cases are frequent in the transportation practice), the
linear models have not proved adequate, which sometimes leads to groundless opinions
that there is no method of a mathematical description of transport systems. In such cases
of solving those difficult and troublesome problems, referring to models using neural
networks (i.e. models capable of representing non-linear relations without difficulty) may
the fastest and easiest solution.
Building an econometric and simulation model of a logistics centre assumes
knowledge of the system structure, the transport process governing laws and the cause-
effect relations of an occurrence. We have that knowledge for many transport systems
and processes, very good models have been built for them and we use them with
satisfaction. But apart from those processes and phenomena whose models have been
developed, there are also many processes with the structures and operating rules not yet
adequately known and described to be able to build an effective model of them. There are
occurrences in the logistics centres the causes of which are unclear and often we are not
sure what factors really influence the considered transport processes and determine their
course and result. A great advantage of neural networks is that they allow to seek models
of such little known transport processes and the researcher need not declare in advance
any form of the sought model and even need not be sure that there exists any relation
rendering itself to mathematical modelling. A set of selected data describing the analysed
logistics centre is in a logical sense equivalent to a hypothesis stating what factors and
phenomena influence the observed problem. Formulation of such hypothesis is difficult
for a large group of the logistics centre processes. The neural networks help to evaluate
automatically the significance of individual input data and eliminate information of little
value for a given model.

118
 Neural networks present a range of unique properties making them useful in the
logistics centre analysis. The neural network based models have the ability of learning
from the presented examples. It is not necessary to define precisely the logistics centre
operating rules, as is the case with other models. It suffices to collect a large and
representative enough set of logistics centre behaviours. A neural network can process
such information in a natural way and draw the most important elements from it. Neural
networks have the ability of generalization. It means giving information on the behaviour
of a logistics centre the network has not met before.
In view of their properties, the neural network based methods are often called the
"super-regression" methods. The neural network capability of non-linear approximation
comes from their natural strong non-linearity. Quality of their approximation is
comparable with the quality of approximation of the best non-linear regression methods.
Properly applied neural computation technique usually appears better than the statistical
methods. The difference is particularly visible with a large number of input-output
parameters. Neural networks can very well analyse all non-linear problems - those most
often (almost exclusively) met in the real logistics centre operating conditions.
Summarizing the above discussion, one may say that neural networks will be very
useful in solving problems with large process uncertainty and non-linearity factor, i.e.
processes taking place in the complex transportation systems.
The neural network properties form a powerful tool of the logistics centre
investigations. We can use it for solving tasks in the logistics centres we do not know the
operating rules of but we have examples of real behaviour of the system. The logistics
centre functioning data can be used for building an effective model.

4.3.2 Artificial neural network based logistics centre models

The use of a neural network based logistics centre model may allow to investigate
the following problems:
effectiveness of a logistics centre structure
sensitivity analysis in relation to specific internal and external factors
reactions to the quantitative and qualitative changes in the environment
choice of optimum parameters of a functioning logistics centre.
Conclusions drawn from a neural network based model may be used in making
investment and operational decisions, development planning and organizational changes.
The neural network based models perform similar tasks as the simulation models.
Effectiveness of a simulation model depends to a large extent upon a proper choice of the
simulated phenomena. A neural network has no problem with determining which logistics
centre processes should be accounted for and which should be omitted (due to their
secondary character). The neural network learning covers all the logistics centre functions
and the insignificant processes are automatically shut out. A neural network can
automatically switch off those input factors which do not influence the investigated
logistics centre process.

119
 A neural network tries to solve the investigated problem in one step - if it succeeds
the result is immediately available and it is a great practical advantage. The neural
network does not perform a stepwise analysis, as it is in a simulation model.
Effectiveness of a neural network based model depends largely on the teaching set,
i.e. on data used by the neural network to build a model of the internal logistics centre
relations. The character and process of teaching, i.e. building up knowledge of a given
phenomenon, may be used for evaluation of the proper selection of factors influencing a
given investigated logistics centre problem. The neural network has the ability of
verifying the input data. In the learning process, the neural network will signal a wrong
logistics centre model and data errors.
The neural network based models may react flexibly to the changing conditions
around the logistics centre. Changes in the logistics centre surroundings may be input
currently to the model without disturbing the earlier acquired knowledge. Such an
approach makes use of the past experience.
The implemented neural networks are characterized by great operating speed,
which makes them well suited for real time systems.
For the logistics centre analysis a model should be created which would attempt to
formalize the relations between its inputs and outputs. There are many methods of
describing those relations but they all may be reduced to three approaches:
quantitative approach using the logistics centre quantitative features
qualitative approach using the logistics centre qualitative features
mixed approach combining the quantitative and qualitative methods.

MODEL CLASS
(input-output criterion

quantitative model qualitative model mixed model

characteristic=<transport 5m tons> characteristic=<transport growth> combination of characteristics
characteristic value is a numeric variable characteristic value is a linguistic variable

Figure 4.6. The individual approaches determine the model class

The neural network based logistics centre mixed model structure may be
implemented in the way presented in Fig. 4.7.

quantitative quantitative
characteristics characteristics

quantitative
model
qualitative qualitative
characteristics coding classification characteristics

Figure 4.7. The neural network bases logistics center mixed model

120
 The neural network based logistics centre models may be divided into the
following types:
generalizing models
non-generalizing models.
The division criterion is characteristic of the neural network operation. The
generalizing models allow to use the knowledge contained in the neural network to
investigate the cases not included in the teaching set from which the neural network
obtained information on the logistics centre operation. Achieving a proper knowledge
generalization level to include the unknown cases is connected with choosing such error
margin during the network learning process which would allow to establish good quality
inter-neuron links. The basic criterion of obtaining a generalizing model is maintaining
the proportion:
number of neural network teaching examples >> number of model parameters
The non-generalizing models are used when a tool has to be built to model
precisely a given logistics centre process.
Model identification consists of two basic steps: definition and selection, from
expert knowledge, of the class and type of model. Model recognition comes from the
essence of the modelled logistics centre process. Identification is an iterative process
including also model testing and verification.
In this sense, identification consists of the following stages:
model selection
identification of the structure and parameters of selected model
model testing
model verification
if model verified negatively then correction.

Model identification

Model structure identification Model parameter identification

number of network layers

number of neurons in each layer

bias

neural network learning parameters

Figure 4.8. Structure of a neural network model based model

121
4.3.3. An example simplified Neural network model of the Pomeranian
Logistics Centre (PLC)
Purpose of investigation
The purpose of this expel is to outline neural network capabilities in the logistics
centre modelling. The problem posed to neural network was to indicate the most effective
method of improving the financial result. A constraint was imposed that only three
elements could be investigated.
The following hypothesis was formulated - the PLC financial results depend on the
following factors:
size of cargo turnover in the port hinterland where cargoes for PLC are generated
types of cargo
technological equipment efficiency.
The most important factor for improvement of the PLC financial result should be
indicated.
Also the quantitative impact of each factor on the financial result should be
determined, as well as possible modelling error.
The model has to demonstrate how a neural network solves a task. The input data
were generated by computer and should not be treated as real data.
A constructed model will be true when the initial assumptions are close to reality. To
make the model practically useful, historical data coming from a functioning logistics centre
should be input to it. The model may be additionally "taught" and currently updated in real time.
Definition of initial assumptions
It is assumed that the PLC turnover is influenced by the turnover of:
Sea Container Terminal (MTK)
Sea Ferry Terminal (MTP)
Westerplatte Ferry Base (BPW)

Port turnover
2 500
thousands of TEU

2 000

1 500

1 000

500

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

total BPW MTP MTK

Figure 4.9. The port turnover forecast obtained from a simulation model

122
 It is assumed that there is a correlation between the cargo turnover in PLC and the
turnover in port hinterland. The type and value of that correlation, if it does exist, will be
found by the neural network.
Table 4.1. Data are taken for the calculations (in ths of TEU)
Year BPW MTP MTK total
2006 181 233 545 960
2007 185 238 564 987
2008 182 244 538 964
2009 196 258 597 1 052
2010 198 265 663 1 125
2011 202 291 690 1 182
2012 205 300 864 1 369
2013 207 302 864 1 373
2014 217 315 839 1 371
2015 213 328 1 076 1 617
2016 224 324 1 098 1 646
2017 223 321 1 080 1 625
2018 222 330 1 356 1 909
2019 234 338 1 444 2 017
2020 243 348 1 553 2 144

The cargoes served by PLC are divided into three types:

cargoes in containers
cargoes on pallets and in collective packings
cargoes in separate packings and without packings.
The cargo type indicator is defined as follows:
M 1*W 1 + M 2 *W 2 + M 3 *W 3
WL =
M1 + M 2 + M 3
M1 mass of cargoes in containers
M2 mass of cargoes on pallets and in collective units
M3 mass of cargoes in separate units and without units.
The cargo type indicator (WL) is a qualitative variable.
The W1,W2,W3 indicators are dependent upon the PLC technical facilities and
express the degree of specialisation in serving a given type of cargo. The highest
specialisation is assumed in serving containerised cargoes (W1=5) and the lowest for
cargoes in separate units and without units (W3=1).
W1 =5, W2 =2, W3 =1.
It is assumed that containerised cargoes will dominate in the future.
The calculated WL factor was subject to computer sampling in order to introduce a
probabilistic element.

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Table 4.2. Assumed cargo type structure
year Cargo type WL
M1 M2 M3 before sampling after sampling
2006 60% 25% 15% 3,65 3,75
2007 66% 22% 12% 3,72 3,73
2008 71% 19% 10% 3,91 3,75
2009 75% 17% 8% 4,07 4,22
2010 78% 15% 7% 4,21 4,36
2011 81% 13% 6% 4,32 4,12
2012 84% 11% 5% 4,42 4,57
2013 86% 10% 4% 4,50 4,33
2014 88% 9% 3% 4,57 4,37
2015 90% 8% 3% 4,63 4,45
2016 91% 7% 2% 4,69 4,78
2017 92% 6% 2% 4,73 4,75
2018 93% 5% 2% 4,77 4,78
2019 94% 5% 1% 4,80 4,65
2020 95% 4% 1% 4,83 4,86

Cargo type indicator (WL)

6,00

5,00

4,00
WL

3,00

2,00

1,00

0,00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 4.10. Cargo type indicator

In a real logistics centre the service efficiency will increase with the outlays on
machine equipment and management systems. An increased technological equipment
efficiency is assumed due to the technical progress and replacing the old equipment with
new facilities.
The technological equipment efficiency indicator (WS) is a qualitative variable and
it expresses the technical progress.

124
 Technological equipment efficiency indicator (WS)

1,00 0,95
0,89
0,90 0,80 0,77
0,80 0,69
0,70 0,64 0,66
0,59 0,61
0,60 0,51
0,46 0,49
0,50 0,41 0,43 0,43
0,40
0,30
0,20
0,10
0,00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 4.11. The assumed PLC technological equipment efficiency indicator (WS)
generated by the neural network

An increased financial result in PLC is assumed. The data are not supported by an
economic analysis. The financial result forecast was generated by computer.

PLC financial result

18 16 17
16
16 15 14 15
13 13 14
14 13
11 12 11
12 10 10
mln PLN

10
8
6
4
2
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 4.12. PLC assumed financial result forecast

The model was built by means of the NEURONIX 3.0 software which is part of the
SPHINX integrated artificial intelligence package developed by the Artificial Intelligence
Laboratory AITECH.
The task of building the PLC model was performed by an artificial neural network
with the following structure (3-3-1) :

125
 three neurons in the input layer
three neurons in the hidden layer
one neuron in the output layer.

Figure 4.13. The neural network used in computations

The network is built on neurons with a non-linear activation function. The

activation function is a logistics function described by the formula:
1
f ( x) = z
1+ e
where:
z = xi wi
i

The use of this type of neuron allows to build models with non-linear
characteristic.
The network teaching process was carried out with the following parameters:
teaching coefficient - 0,9
moment coefficient - 0,7
maximum sampled weight values +/- 0,5
teaching patterns were given in a random sequence within one epoch
teaching file size 80%, test file size 20%, separate file contents, values in files were
sampled.

126
 Teaching process

0,3
0,25

RMS error
0,2
0,15
0,1
0,05
0
0 100 200 300 400 500 600 700 800 900 1000
epoch

RMS teaching error RMS testing error

Figure 4.14. The neural network teaching process

A basis for the RMS error determination is the mean square error (MSE):
1 n
MSE = (
n i =1 d i
y)
i
2

where :
n number of the network outputs
d i
expected value of the i-th network output

y - real value of the i-th network output.

i

With the mean square error so defined, the RMS error is defined as the square root
of the MSE:
RMS = MSE
Sensitivity analysis was performed on the PLC model (see Fig. 4.15).
Conclusions
The cargo turnover has the greatest impact on the increase of PLC financial result.
A 20% increase of cargo turnover generates a 5% increase of financial result.
A 20% increase of the technological equipment efficiency indicator (WS) generates a
3% increase of financial result.
A 20% increase of the cargo type indicator (WL) generates an 1% increase of
financial result.
From the RMS error values in the test file, which did not take part in the neural
network teaching process, we may conclude that the model has found the existing
relations and reproduces them with a 5% RMS error.
These considerations should be treated as a presentation of the methodology of
computations on the artificial neural networks in optimizing the logistics centre
operations. Therefore computer generated data were used instead of real data.

127
 PLC sensitivity analysis

114%
% increase of financial result

112%

110%

108%

106%

104%

102%

100%
100% 105% 110% 115% 120% 125% 130% 135% 140% 145% 150%

% increase

Cargo turnover WL indicator WS indicator

Figure 4.15. Sensitivity analysis performed for the example case

128
4.4. DIGITAL SIMULATION AS A TOOL IN PLANNING LOGISTICS
CENTRES

4.4.1 The basic process of modelling and simulation of logistics centre

The most effective supply chain management systems are designed to deliver high-
quality products and services promptly and reliably at the least cost. To accomplish this
goal, all the supply chain processes must be effectively coordinated.
One major obstacle in creating a seamless supply chain is uncertainty. In order to
deal with this issue, managers must identify and understand the causes of uncertainty and
determine how it affects other activities up and down the supply chain. Then they can
formulate ways to reduce or eliminate it. Currently, tools for understanding uncertainty
are limited to traditional mathematical formulas that do not account for variability.
However, simulation is one of the best means for analyzing supply chains because of its
capability for handling variability. Companies can use simulation to see how effective
and costly an innovative inventory system such as just-in-time would be in their own
environment without having to implement the system physically.
Great variety of subsystems and processes exist in logistics centers (LC).
Transferring all possible phenomena of the real world LC so the simulation model makes
the modeling process unnecessarily complex that prohibits clear and reliable results of
simulation. Some LC processes are principal, core ones, others are secondary or
derivative. Therefore a question arises: which processes should be taken into
consideration in modeling and which may be omitted, or which real objects of logistics
center are to be included in its simulation model?
Most of resources of LC are used for cargo-handling as the main object of service.
The cargo passes through the following phases:
Delivery of cargo from the point of origin to LC
Servicing cargo on the entry to LC
Servicing cargo inside of LC
Servicing cargo on the exit from LC
Delivery of cargo from LC to the point of destination.
In the simulation model we can assume that all the above phases and relevant
processes may be optionally carried on according to various alternative technologies,
each supported by different set of resources. Various priorities may also be assigned to
parallel and sequential technological paths included in the LC simulation model.
A typical simulation model imitates four main processes that exist in real logistics
centers:
(1) Movement of vehicles (trains, ships, trucks): arrivals to LC, movement within LC
and leaving LC
(2) Transfer of cargoes in the following directions: vehicle - storage and vice versa,
vehicle vehicle, storage storage.
(3) Servicing cargoes (processing good, stuffing and stripping containers etc.)
(4) Servicing vehicles

129
 Figure 4.16. Functional structure of the system for modelling and simulation
of logistics centres

Figure 4.17. The process of simulation of logistics centre

130
 Typical framework of the system of modelling and simulation of logistics centers is
presented in Fig. 4.16. This system consists of three main modules (or sub-systems):
(1) Modelling LC (building new models and modifications/updates of existing ones)
(2) Simulation execution (carrying out simulation experiments with the use of the
model)
(3) Analysis and edition of simulation results (processing raw output from the simulation
runs in the form of time series so as to create a concise results in various forms
animated, graphics etc).
The simulation process proceeds in cycles which are determined by sequential time
increments between consecutive events. The simulation model is moved along the time
axis from one event to another. Four main activities are carried out during one simulation
cycle (see Fig. 4.16 blocks 1, 2, 3 and 4).
Simulation process is performed in two distinct phases realized at every time
increment. The first phase consists of three activities (see Fig. 4.17 blocks 1, 2 and 3):
(1) Control of arrivals of vehicles (trains, trucks, ships) to the logistics center. Generation of
arrivals of new vehicles to LC, queuing up for relevant services, definition of types of
required operations (categories of cargo-handling operations or other tasks to be done),
start of counting of vehicle stay in LC and waiting time for the service.
(2) Control of events of end of service processes. Recording service times. Releasing
resources (eg. cargo-handling facilities). Updating lists of operations to be carried out.
(3) Initiating new service processes i.e. generating events of starting service processes.
Engaging resources. Calculating service times (duration of the initiated processes).
Modification of the stock level of goods in storage areas and currently on the vehicles.
After completion of all the changes that are possible in the state of the simulated
LC at a given point of time, the second phase starts in which time flow mechanism
simulates real system dynamics (Fig. 4.17, block 4). The minimum time increment t is
found (i.e. the time to the nearest event from the time now) and all events are brought
closer by the smallest time increment, whereas the simulation clock is increased by the t.
After shifting the model on the time axis by the minimum time increment, the control is
passed over to the beginning of the next simulation cycle (Fig. 4.17, block 1).
The simulation process is continued until the assumed simulation period is
completed. The output module works out results of the simulation run which characterize
the simulated logistics centre functioning. Typical LC simulation results comprise three
main groups of observations recorded during the process of simulation:
(1) Evaluation of logistics center functioning
Use of LC resource
Use of storage facilities
Movement of cargoes between storages
Analysis of simulated technological processes
(2) Movement of vehicles and cargoes
Movement of vehicles
Time analysis of vehicles
Cargo turnover

131
(3) Economic analysis
Cost analysis of technological processes
Cost analysis of LC resources
Cost analysis of storage facilities
Cost analysis of vehicles
Total cost analysis; various concise indicators.

4.4.2. Benefits of the use of simulation models in the logistics centers

planning process.
A. Simulation is experimenting with a model of the logistics centre.
Simulation is the art and science of creating a representation of a process or
system for the purpose of experimentation and evaluation.
Simulation is a problem-solving tool
Simulation is one of the best instruments for predicting performances. It turns
data into knowledge, and knowledge into experience.
B. Simulation can predict outcomes for possible courses of action.
Logistics centers, from systems science point of view, are dynamic and
stochastic.
Simulation models differ from static models because they are event driven
Simulation models are generally superior imitators of dynamic/stochastic
systems, such as logistics centers, when compared to static mathematical models
or opinion models.
C. Simulation can account for the effects of variances occurring in the logistics variances
and its environment.
Conventional analytical methods, such as static mathematical models, do not
effectively address this issue.
Static mathematical models downplay the impact of stochastic processes even
though they exist in almost all systems. They overlook the role of time when
analyzing the logistics problems. What is the impact when something occurs in
relation to other incidents?
D. Simulation promotes total solutions.
Simulation is an excellent tool for analyzing entire problems and finding total
solutions. It is based on the principle of synergism.
Total solutions are more likely to be found when a total problem is analysed as a
whole. Simulation promotes this type of analysis.
E. Simulation brings expertise, knowledge and information together.
The simulation modelling process (model building) can help unite the ideas and
proficiencies of numerous people (logistics operators, transport specialist,
simulation experts etc.)
When executed properly, the simulation process brings together a broad scope of
knowledge, information and expertise from a variety of sources.

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 The time required to communicate ideas is also significantly reduced. The
clich, A picture paints a thousand words, is a good way to describe the
difference between the communication capabilities of static analysis and
simulation. A spreadsheet full of numbers does not yield the communication
power of visual animation.
F. Typical problems that can be solved by means of simulation.
How effective is logistics center functional structure in response to assumed
demand for logistics services.
Identification of optimal parameters of logistics center (storage space, handling
facilities, technology etc.)
Sensitivity analysis against different configurations of servicing cargoes and
vehicles
How the logistics center as a whole or its selected subsystems (or functions)
behave in response to qualitative and quantitative changes in the environment.
G. Effects of simulation experiments.
Justified investment and development decisions.
Operational decisions: technological and organizational changes
Co-operation and co-ordination solutions in relation to the trade partners
involved in the logistics center.
Verification of various innovative logistics solutions.
Optimal logistics centers networking.

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