Facility Location Decisions Overview

Location, Logistics, and Distribution

• This chapter covers location, logistics, and distribution, a crucial aspect of business operations.
• Key topics include defining logistics, contrasting logistics and warehouse alternatives, and analyzing logistics-driven location decisions.
• Logistics encompasses the art and science of obtaining, producing, and distributing materials and products in the right quantities and location throughout the supply chain. This involves managing the movement of goods and services.

What is Logistics?

• Logistics is the art and science of obtaining, producing, and distributing materials and products to the correct place at the correct time.
• It involves managing the movement of goods through the supply chain.

Decisions Related to Logistics

• Important decisions involve determining the best transportation mode, facility location, and overall system design.
• These decisions are crucial for effective supply chain management.

Modes of Transportation

• Key tradeoff: Speed versus cost. Different modes offer varying balances between speed and cost.
  • Highway: offers great flexibility but is slow.
  • Water: high capacity and lower cost but slow.
  • Air: fast but costly.
  • Rail: low cost, but slow and variable.
  • Intermodal: combines different modes (e.g., rail and truck).
  • Pipeline: specialized for liquids, gases, and solids.
  • Hand delivery: often the final step.
• Various transportation modes have different characteristics in terms of cost, speed, reliability, and reach.

Transportation Modes

• A table details characteristics of different transportation modes, including cost, speed, on-time dependability, product type, shipment volumes, and geographic reach.
  • Railroads: medium cost, slow speed, medium dependability, high reach, and high capacity
  • Trucks : high cost ,fast speed, high dependability, high reach, and medium capacity
  • Pipelines : low cost ,fast speed, highest dependability and lowest reach and high capacity
  • Ships (water): lowest cost, slowest speed, lowest dependability, low reach and highest capacity
  • Airplanes: highest cost , fastest speed, low dependability, medium reach, and medium capacity

Truck

• Truck transportation is the dominant mode in the US.
• Three main segments include:
  • Truck Load (TL): full truck regardless of quantity.
  • Less than Truck Load (LTL): charged per quantity.
  • Parcel (FedEx/UPS): charged per package.

Intermodal

• Intermodal transportation has grown significantly, increasing with the use of containers.
• Intermodal transportation is often more convenient for shippers as one entity handles the entire process.
• The key challenge is coordinating information exchange between different transport modes.

Logistics Outsourcing and 3PL

• Approximately 80% of international transportation is outsourced to third-party logistics providers (3PLs).
• 3PLs handle the entire logistics process for companies.
• Outsourcing logistics functions allows companies to focus on core competencies. Tracking, notification, and risk reduction are tasks commonly outsourced.

Third-Party Logistics (3PL)

• Third-party logistics revenue has increased considerably in recent years. Cost, speed, and capabilities are key factors for businesses. Cost data plays a vital role in location decisions.

Insource or Outsource Logistics

• Choosing whether to insource or outsource logistics depends on various factors:
  • Outsource: Understanding local markets, global presence, coordination of multi-modal capabilities, core competencies.
  • Insource: Proprietary or security concerns, stable supply chains, controlling logistics, industry alliances, favorable cost structures.

Dedicated Team of Highly Skilled Freight Management Experts

• Companies that choose to manage their freight in-house can do so with significant effort and resources such as dedicated teams of highly skilled freight managers.
• Key elements of managing freight in-house include: Cost savings, monitoring, multi-level customer support, dedicated account support, and overall management solutions.

Warehousing and Distribution

• Warehousing and distribution are crucial for efficient goods movement.
• Key concepts include co-location, cross-docking, and hub-and-spoke systems.

Location of Supply Chain

• Collaboration, or supply chain optimization and management (SC&OM) among businesses is desired to create higher customer value.
• Co-location of suppliers with customer facilities allows for better decision-making and addressing of customer needs proactively. Supplier personnel can play a more effective role in customer relations.

Obtaining Data

• Data sources include syndicated data (at a cost), primary research, and point-of-sale (POS) data.
• Most business data (approximately 80%) has location contexts that inform decision-making for distribution.

Warehouse Activities

• Cross-docking involves breaking down large shipments rapidly for efficient local delivery to minimize warehouse inventory.
• Hub-and-spoke systems utilize a central warehouse (the hub) to sort and consolidate goods for distribution to individual destinations (spokes). This method is beneficial when targeting multiple destinations.

Cross-Docking

• A diagram illustrates the process, contrasting the before and after cross-docking models and detailing the flow of materials and supplies.

Hub-and-Spoke

• This distribution model utilizes multiple local warehouses to consolidate goods for final delivery. A central hub warehouse organizes the shipment flow to specific destinations. A diagram illustrates the model.

Distribution Center Location Tools

• Important tools for deciding warehouse locations are covered in this section.

Where to Locate Facilities

• This section focuses on deciding where to geographically locate the facilities.

Distribution Objectives

• Criteria for locating distribution facilities include ease of entry into the market, cost leadership, financial risk, and profit margins.

Facility Location Decision Attributes

• Such decisions are crucial, as they are long-term commitments affecting fixed and variable costs, and they require careful consideration. These decisions must maximize location benefits for the company.

Plant Location Methods

• This module covers various methods for determining plant locations, including the factor-rating system, transportation method of linear programming, and the centroid method.

Factor Rating System

• This method involves developing a list of factors, assessing each site against these factors, and calculating point values to rank potential locations. Relevant factors for business location decisions include customer proximity, business climate, infrastructure, labor quality, suppliers, and other facilities.

Facility Location: Factor Rating System

• This section outlines the steps in using the factor-rating system. It provides an example of how to use the system to determine the best location for a refinery. It also showcases a methodology example with hypothetical refinery locations, listing important factors such as fuel availability, labor climate, and transportation.

Linear Programming - Transportation Method

• This method aims to minimize transportation costs. It can be applied to shipping units to various destinations and finding optimized routes to minimize cost. An example showcases potential locations (A, B) and shipping destinations (1, 2, 3) with associated costs.

Example 14.1

• The example provides a table of shipping costs from multiple factories to different warehouses.

Centroid Method

• This approach calculates the optimal location considering existing facilities, distances between them, and volumes of goods transported. It assumes equal inbound and outbound transportation costs, not including special shipping costs. Formulas for calculating the optimal coordinates are included.

Centroid Method Example

• An example uses coordinate locations of showrooms and sales volumes to illustrate the centroid method in determining the optimal warehouse or storage facility location.

Centroid Method Formulas

• This section lists the important formulas used to compute the centroid location coordinates.

Plant Location Methodology - Centroid Method

• Provides a brief summary and example for finding the optimal location for a warehouse or storage facility. Coordinates of existing facilities and their sales figures are used, and a simplified formula is illustrated in reaching the answer.

Centroid Method

• Locating a new warehouse or temporary storage facility using only distance and volume of sales per month, calculating the weighted average coordinates of the other facilities to find the optimal location.

Internal Warehouse Operations

• Management of warehouse activities and operations is dealt with extensively.

Service Facility Location

• The process of locating new service facilities, which differ from factories and warehouses, and are more common and much less expensive, is described.

Service Facility Location

• Service facility locations are often intertwined with targeted markets, the aim being profit maximization rather than minimizing costs.

Service Location Approaches

• Approaches like competitive clustering (competitors locate close together) and saturation marketing (multiple company facilities close to each other) are discussed.

Examples

• Examples are given of competitive clustering (urgent care, gas stations) and saturation marketing (integrated delivery networks, retail).

Freight Terms

• Freight terms of sale deal with the responsibility of various parties regarding transportation when two entities conduct business.

Freight Terms of Sale

• Two major categories exist: domestic and international freight terms. The terms of sale determine who pays for transportation, routes freight, insurance, and bears the risk for goods during transit.

Domestic Freight Terms

• Key freight terms like FOB (Free On Board), Prepaid, collect are covered, illustrating the responsibilities of buyers and sellers throughout the transportation process. Illustrative examples include diagrams depicting the transfer of ownership during transit

Explore the critical elements of facility location decisions in supply chain management. This quiz covers various factors impacting location choices, including costs, logistics, and political risks. Assess your understanding of concepts like the Factor Rating Method and the role of Third Party Logistics (3PL).