Network Design and Facility Location

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Chapter 14

• Network Design and Facility Location

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Learning Objectives - After reading this
chapter, you should be able to do the following

• Identify factors that may suggest a need to
  redesign a logistics network.
• Structure an effective process for logistics
  network design.
• Be aware of key locational determinants and the
  impact they may have on prospective locational
  alternatives.

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Learning Objectives

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

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Logistics Profile Need for Speed

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

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The Need for Long-Range
Planning

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

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The Strategic Importance of Logistics
Network Design

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

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The Strategic Importance of Logistics Network
Design

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

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The Strategic Importance of Logistics Network
Design Changing Customer Service Requirements

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

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

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

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The Strategic Importance of Logistics Network
Design Change in Corporate Ownership

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

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The Strategic Importance of Logistics Network
Design Cost Pressures

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

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The Strategic Importance of Logistics Network
Design Competitive Capabilities

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

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The Strategic Importance of Logistics Network
Design Corporate Organizational Change

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

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Logistics Network Design

• Figure 14-1 on the next slide identifies six
  major steps associated with the process of
  Logistics Network Design.
• Step 1 Define the Logistics Network design
  Process
• Form a design team
• Establish design parameters and objectives
• Establish availability of resources and potential
  involvement of 3PLs.

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Figure 14 1 Key Steps in the Logistics Network
Design Process
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Logistics Network Design

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

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Figure 14-2 Key Steps in a Logistics Audit
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Logistics Network Design

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

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Logistics Network Design

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

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Major Locational Determinants

• Major Locational Determinants
  are summarized in Table 14-1.
• These determinants are subcategorized into
  regional and site specific factors.
• Take a minute and review these factors now.

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Table 14-1Major Locational Determinants
Regional Determinants Site-Specific Determinants
Labor climate Transportation access
Availability of transportation Truck
Proximity to markets Air
Quality of life Rail
Taxes other incentives Water
Supplier networks Inside/outside metro area
Land costs and utilities Availability of workforce
Company preference Utilities
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Major Locational Determinants Current Trends
Governing Site Selection

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

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On the Line Tennessee---Choice Site

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

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Modeling Approaches Optimization Models

• Based on precise mathematical procedures
  guaranteed to find the best solution from among
  a number of feasible solutions.
• Key issues are listed in Figure 14-3.
• One approach is Linear Programming (LP).
• Useful in linking facilities in a network.
• Defines optimum distribution patterns.
• Modern computers facilitate LP modeling.

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Figure 14-3 Strategic Issues Relevant to
Logistics Network Modeling
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Figure 14-4 Supply Chain Scenario for Network
Analysis
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Figure 14-5 Example Geographical-Mapping
Representation
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Modeling Approaches Simulation Models

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

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Modeling Approaches Heuristic Models

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

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Example of a Heuristic Modeling Approach The
Grid Technique

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

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Example of a Heuristic Modeling Approach The
Grid Technique

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

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Example of a Heuristic Modeling Approach The
Grid Technique

• The text example will attempt to locate a new
  plant receiving inbound materials from Buffalo,
  Memphis, and St. Louis, serving markets in
  Atlanta, Boston, Jacksonville, Philadelphia, and
  New York City.
• Examine Figure 14-6 and Table 14-2 on the next
  two slides.

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Figure 14-6 Grid Locations of Sources and Markets
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Table 14-2 Grid Technique Analysis of Plant
Location Example
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Table 14-3 Impact of Rate Change on Least-Cost
Location
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Table 14-4 Impact of Supply Source Change on
Least-Cost Location
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Example of a Heuristic Modeling Approach The
Grid Technique

• In the example, the plants least-cost center is
  655 in the horizontal direction, and 826 in the
  vertical direction.
• Both distances are measured from the grids zero
  point.
• The least-cost center is in southwestern Ohio or
  northern West Virginia in the Wheeling-Parkersburg
  area.

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Example of a Heuristic Modeling Approach The
Grid Technique

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

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Transportation Pragmatics

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

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Table 14-5 Locational Effects of Tapering Rates
with Constant Rate Assumption
Miles from S Transport Rate from S Miles to M Transport Rate from M Total Trans -port Rate
0 0.00 200 3.70 3.70
50 2.00 150 3.50 5.50
100 3.00 100 3.00 6.00
150 3.50 50 2.00 5.50
200 3.70 0 0.00 3.70
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Figure 14-7 Locational Effects of Tapering Rates
with Constant Rate Assumption
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Table 14-6 Locational Effects of Tapering Rates
without Constant Rate Assumption
Miles from S Transport Rate from S Miles to M Transport Rate from M Total Trans -port Rate
0 0.00 200 5.20 5.20
50 2.00 150 5.00 7.00
100 3.00 100 4.50 7.50
150 3.50 50 3.50 7.00
200 3.70 0 0.00 3.70
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Figure 14-8 Locational Effects of Tapering Rates
without Constant Rate Assumption
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Transportation Pragmatics

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

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Transportation Pragmatics

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

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Transportation Pragmatics

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

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Chapter 14 Summary and Review Questions

• Students should review their knowledge of the
  chapter by checking out the Summary and Study
  Questions for Chapter 14.

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Study Question 14-9
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Case 14-1 Fireside Tire Company
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End of Chapter 14 Slides

• Network Design and Facility Location