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McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved 1-1

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Chapter 11

Logistics

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved 1-2

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Learning Objectives
After completing the chapter you will:
• Know what a third-party logistics provider is
• Understand the major issues that need to be
considered when locating a plant or warehouse
facility
• Be able to use the transportation method of
linear programming to analyze location
problems
• Know how a factor rating system can be used to
narrow potential location sites
• Understand the centroid method to locating
entities such as cell phone communication
towers

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What is Logistics?

• The movement of goods

through the supply chain

• “the art and science of

obtaining, producing, and
distributing material and
product in the proper place
and in proper quantities”

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Decisions Related to Logistics

• How to best transport goods

– Modes of transportation
• Truck, ship, rail pipelines
– Warehouses
• Consolidation
• Cross Docking
• Hub-and-Spoke systems
• Facility Location

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Issues in Facility Location

• Proximity to Customers
• Business Climate
• Total Costs
• Infrastructure
• Quality of Labor
• Suppliers
• Other Facilities

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Issues in Facility Location

• Free Trade Zones

• Political Risk
• Government Barriers
• Trading Blocs
• Environmental Regulation
• Host Community
• Competitive Advantage

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Plant Location Methodology: Factor Rating Method Example

Two refineries sites (A and B) are assigned the

following range of point values and respective points,
where the more points the better for the site location.
Sites
Major factors for site location Pt. Range A B
Fuels in region 0 to 330 123 156
Power availability and reliability 0 to 200 150 100
Labor climate 0 to 100 54 63
Living conditions 0 to 100 24 96
Transportation 0 to 50 45 50
Water supply 0 to 10 4 5
Climate 0 to 50 8 4
Supplies 0 to 60 5 50
Tax policies and laws 0 to 20 Best Site
5 20 is B
Total pts. 418 544
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Plant Location Methodology: Transportation Method of Linear

Programming

• Transportation method of
linear programming seeks to
minimize costs of shipping n
units to m destinations or its
seeks to maximize profit of
shipping n units to m
destinations

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Plant Location Methodology: Centroid Method

• The centroid method is used for

locating single facilities that
considers existing facilities, the
distances between them, and the
volumes of goods to be shipped
between them
• This methodology involves
formulas used to compute the
coordinates of the two-
dimensional point that meets the
distance and volume criteria
stated above
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Plant Location Methodology: Centroid Method Formulas

Cx =
d V ix i
Cy =
d V iy i

V i V i

Where:
Cx = X coordinate of centroid
Cy = X coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith
location
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Plant Location Methodology: Example of Centroid Method

• Centroid method example

– Several automobile showrooms are
located according to the following grid
which represents coordinate locations for
each showroom
Y
S ho wro o m No o f Z-Mo b ile s
Q
s o ld p e r mo nth
(790,900)
A 1250
D
(250,580)
D 1900
A
(100,200)
Q 2300
(0,0) X

Question: What is the best location for a new Z-Mobile

warehouse/temporary storage facility considering only
distances and quantities sold per month?
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Plant Location Methodology: Example of Centroid Method (Continued):

Determining Existing Facility Coordinates

Y
To begin, you must identify the Q
existing facilities on a two- (790,900)

dimensional plane or grid and D

(250,580)
determine their coordinates.
A
(100,200)

(0,0) X

S ho wro o m No o f Z-Mo b ile s

You must also have the s o ld p e r mo nth
volume information on the
business activity at the A 1250
existing facilities.
D 1900

Q 2300
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Plant Location Methodology: Example of Centroid Method (Continued):
Determining the Coordinates of the New Facility

You then compute the new coordinates using the formulas:

100(1250) + 250(1900) + 790(2300) 2,417,000
Cx = = = 443.49
1250 + 1900 + 2300 5,450

200(1250) + 580(1900) + 900(2300) 3,422,000

Cy = = = 627.89
1250 + 1900 + 2300 5,450

You then take the coordinates and place them on the map:
Y
S ho wro o m No o f Z-Mo b ile s
Q New
(790,900) s o ld p e r mo nth
location
D
Z
(250,580)
of facility A 1250
Z about
A D 1900
(100,200) (443,627)
(0,0) X Q 2300
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End of Chapter 11

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved 1-15