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Chapter 12:

Network Design and Facility Location

Learning Objectives 

After reading this chapter, you should be able to do the following: Identify factors that may suggest a need to redesign a logistics network. Structure an effective process for logistics network design. Be aware of key locational determinants and the impact they may have on prospective locational alternatives.

Learning Objectives

Understand the different types of modeling approaches that may be used to gain insight into logistics network design and facility location. Apply the simple grid or center-of-gravity approach to facility location. Have knowledge of certain ways in which transportation and transportation costs affect the location decision.

Logistics Profile: Need for Speed

Globalization was supposed to mean that most of the world s manufacturing jobs would shift to low cost locations in Asia. Technology companies cannot afford the two weeks transportation time from Asia, so NAFTA has empowered Guadalajara, Mexico to become the home to many highly efficient manufacturers. Tax breaks, low cost land and labor, and a friendly government have fueled the revolution.

The Need for Long-Range Planning

In the short run, the logistics managers must work with the current facility locations. However, in the long run, the firm s facility locations are considered variable, and are subject to change. Facilities design and location have become strategically important in today s highly competitive business environment.

The Strategic Importance of Logistics Network Design

Considering the rate at which the business environment is changing, logistics facilities are under pressure to keep current. In many companies, change has happened recently or is scheduled for the near future. With capital being both scarce and expensive, facilities decisions become more important.

The Strategic Importance of Logistics Network Design

Critical variables in network design:  Changing Customer Service Requirements  Shifting Locations of Customer and/or Supply Markets  Change in Corporate Ownership  Cost Pressures  Competitive Capabilities  Corporate Organizational Change

The Strategic Importance of Logistics Network Design: Changing Customer Service Requirements

A customer s business has changed and the company may need to change some aspect(s) of its service to those customers. Some customers will be looking for new supply chain partners and the company needs to be responsive to these potential new business partners.

The Strategic Importance of Logistics Network Design: Shifting Locations of Customer and/or Supply Markets

Geographic locations of markets often shift over time and the company needs to position its logistics network to be responsive to these shifts. Similarly, global competition often results in geographic shifts for not only new customers, but also new markets. Companies tuned to these changes have a head start in establishing new business.

The Strategic Importance of Logistics Network Design: Change in Corporate Ownership

Mergers, consolidations and divestiture may mean new logistics and market patterns for the surviving entity. Once again, companies tuned to these changes have a head start in establishing new business.


The Strategic Importance of Logistics Network Design: Cost Pressures

As competition increases, firms must seek ways to continue growth. One such way is to find areas where the costs of key business processes can be reduced. Often the pressure to reduce costs can be applied to areas for which the logistics department has responsibility. Inventory and transportation can be such sources.

The Strategic Importance of Logistics Network Design: Competitive Capabilities

Obsolete facilities signal the company that a logistics examination is necessary. Companies that have not analyzed the changes in their environment are risking both profitability and solvency. Many firms locate distribution facilities near hub operations of FedEx, UPS, Airborne, Emery and DHL so that access to timecritical, express transportation services is facilitated.


The Strategic Importance of Logistics Network Design: Corporate Organizational Change

Downsizing and re-engineering cause the firm to reexamine its logistics division for potential savings. Many logistics facilities have faced various levels of change because of re-engineering efforts in the organization. Logistics functions can be provided by third party vendors (3PLs) where the firm cannot accommodate the necessary changes.

Logistics Network Design

Figure 12-1 on the next slide identifies six major steps associated with the process of Logistics Network Design. Step 1: Define the Logistics Network design Process Form a design team  Establish design parameters and objectives  Establish availability of resources and potential involvement of 3PLs.

Figure 12 1 Key Steps in the Logistics Network Design Process


Logistics Network Design

Step 2: Perform a Logistics Audit  Forces a comprehensive perspective  Develops essential information Step 3: Examine the Logistics Network Alternatives  Use modeling to provide additional insights  Develop preliminary designs  Test model for sensitivity to key variables

Figure 12-2 Key Steps in a Logistics Audit

Step 6: Logistics Strategic Plan Step 5: Strategic Logistics Issues Step 4: Logistics Provider Selection and Evaluation Step 3: Key Logistics Activities Step 2: Logistics System Step 1: Fundamental Business Information


Logistics Network Design

Step 4: Conduct a Facility Location Analysis  Analyze attributes of candidate sites  Apply screening to reduce alternative sites Step 5: Make Decisions regarding Network and Facility Location  Evaluate sites for consistency with design criteria.  Confirm types of change needed

Logistics Network Design

Step 6: Develop an Implementation Plan  Plan serves as a road map in moving from current system to the desired logistics network.  Firm must commit funds to implement the changes recommended by the re-engineering process.


Major Locational Determinants

Major Locational Determinants are summarized in Table 12-1. These determinants are subcategorized into regional and site specific factors. Take a minute and review these factors now.


Table 12-1 Major Locational Determinants

Regional Determinants Labor climate Availability of transportation Proximity to markets Quality of life Taxes & other incentives Supplier networks Land costs and utilities Company preference Site-Specific Determinants Transportation access Truck Air Rail Water Inside/outside metro area Availability of workforce Utilities

Major Locational Determinants: Current Trends Governing Site Selection


Strategic positioning of inventories, with faster moving items located at market-facing logistics facilities, and slower moving items at national or regional sites. Direct plant-to-customer shipments which can reduce or eliminate the need for company-owned supply or distribution facilities. Growing need and use of cross-docking facilities. Use of third party logistics companies which negate the need for the firm to maintain or establish its own distribution facilities.

On the Line: Tennessee---Choice Site

Dell Computer selected Nashville, Tennessee as its production site for a new line of computers. Tennessee has the transportation infrastructure, business tax reforms, and telecommunications capabilities that firms consider when they need to locate a facility. Dell will be responsible for an additional 11,000 jobs and $690 million in economic output.

Modeling Approaches: Optimization Models


Based on precise mathematical procedures guaranteed to find the best solution from among a number of feasible solutions. Key issues are listed in Figure 12-3. One approach is Linear Programming (LP).  Useful in linking facilities in a network.  Defines optimum distribution patterns.  Modern computers facilitate LP modeling.

Figure 12-3 Strategic Issues Relevant to Logistics Network Modeling


Figure 12-4 Supply Chain Scenario for Network Analysis


Figure 12-5 Example GeographicalMapping Representation


Modeling Approaches: Simulation Models

Based on developing a model of a real system and conducting experiments with this model. In location theory, a firm can test the effect of various locations on costs and profitability. Does not guarantee an optimum solution but evaluates through the iterative process. Simulations are either static or dynamic depending upon how whether they incorporate data from each run into the next run.

Modeling Approaches: Heuristic Models


Based upon developing a model that can provide a good approximation to the least-cost location in a complex decision problem. Can reduce a problem to a manageable size. This approach can be as sophisticated as mathematical optimization approaches. The Grid Technique is an example of a heuristic approach and will be demonstrated in the next few slides.

Example of a Heuristic Modeling Approach: The Grid Technique

The Grid Technique attempts to locate a fixed facility such that the location represents the least-cost center for moving inbound materials and outbound product within a geographic grid. It finds the ton-mile center of mass; that is, the geographic point where transportation costs are minimized. This simple approach works where all transportation rates are the same. However, we know that freight rates for raw materials are generally lower than those for finished goods.

Example of a Heuristic Modeling Approach: The Grid Technique

When we use different freight rates, the grid model will tend to pull the location of our fixed facility toward the higher rated areas. Thus, the location of a production plant will tend to be nearer the market, reducing the overall transportation of the higher rated finished goods in favor of increasing transportation of lower rated raw materials.

Example of a Heuristic Modeling Approach: The Grid Technique

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The text example will attempt to locate a new plant receiving inbound materials from Buffalo, Memphis, and St. Louis, serving markets in Atlanta, Boston, Jacksonville, Philadelphia, and New York City. Examine Figure 12-6 and Table 12-2 on the next two slides.

Figure 12-6 Grid Locations of Sources and Markets


Table 12-2 Grid Technique Analysis of Plant Location Example


Table 12-3 Impact of Rate Change on Least-Cost Location


Table 12-4 Impact of Supply Source Change on Least-Cost Location


Example of a Heuristic Modeling Approach: The Grid Technique

In the example, the plant s least-cost center is 655 in the horizontal direction, and 826 in the vertical direction. Both distances are measured from the grid s zero point. The least-cost center is in southwestern Ohio or northern West Virginia in the WheelingParkersburg area.

Example of a Heuristic Modeling Approach: The Grid Technique

Advantages  Simple to use  Provides a starting point for further analysis  Can accommodate what if questions Limitations  Static approach  Linear rates  No consideration of topography  Does not consider direction of movement

Transportation Pragmatics

Tapering rates  Rates increase with distance, but not in direct proportion to distance.  Results from the carriers ability to spread certain fixed costs over a greater number of miles.  Tends to pull the location to either the source or market, but not in between.

Table 12-5 Locational Effects of Tapering Rates with Constant Rate Assumption
Miles from S 0 50 100 150 200 Transport Rate from S $0.00 2.00 3.00 3.50 3.70 Miles to M 200 150 100 50 0 Transport Rate from M $3.70 3.50 3.00 2.00 0.00 Total Trans -port Rate $3.70 5.50 6.00 5.50 3.70

Figure 12-7 Locational Effects of Tapering Rates with Constant Rate Assumption


Table 12-6 Locational Effects of Tapering Rates without Constant Rate Assumption
Miles from S 0 50 100 150 200 Transport Rate from S $0.00 2.00 3.00 3.50 3.70 Miles to M 200 150 100 50 0 Transport Rate from M $5.20 5.00 4.50 3.50 0.00 Total Trans -port Rate $5.20 7.00 7.50 7.00 3.70

Figure 12-8 Locational Effects of Tapering Rates without Constant Rate Assumption


Transportation Pragmatics

Blanket rates  Rates do not increase with distance, but remains the same from one origin to any destination in the blanket area.  Results from the carriers desire to maintain competitive prices for a product in a given area.  Is a mutation of the basic rate-distance relationship.

Transportation Pragmatics

Commercial Zones  A specific blanket area that includes a municipality and the surrounding area.  Impact is at end of location process when a company picks a specific site. Foreign Trade Zones  Geographic zone into which importers can enter a product and hold it without paying duties, only paying when product enters U.S. customs territory.

Transportation Pragmatics

Transit Privileges  Permits a shipper to stop a shipment in transit and perform some function that physically changes the product s characteristics. (e.g., wheat to flour)  This can make intermediate locations optimum rather than focus only on sources and markets.

Chapter 12: Summary and Review Questions

Students should review their knowledge of the chapter by checking out the Summary and Study Questions for Chapter 12.

Study Question 12-9


Case 12-1 Fireside Tire Company


End of Chapter 12 Slides

Network Design and Facility Location