Learning Goals – Supply Chain Logistic Networks
- Identify the factors affecting location choices.
- Find the center of gravity using the load–distance method.
- Use financial data with break-even analysis to identify the location of a facility.
- Determine the location of a facility in a network using the transportation method.
- Understand the role of geographical information systems in making location decisions.
- Explain the implications of centralized versus forward placement of inventories.
- Use a preference matrix to evaluate proposed locations as part of a systematic location selection process.
Chapter Contents and Important Points
13 SUPPLY CHAIN LOGISTIC NETWORKS
Facilities create the logistic network. Facility location is the process of determining geographic sites for a firm’s operations, which could include manufacturing plants, distribution centers, and customer service centers. Location choices can be critically important for firms and have a profound impact on the strategic design of its supply chains. The location of a business’s facilities has a significant impact on the company’s operating costs, the prices it charges for services and goods, and its ability to compete in the marketplace and penetrate new customer segments.
When locating new marketing related facilities, marketing must carefully assess how the location will appeal to customers and possibly open up new markets.
Factors Affecting Location Decisions
Dominant Factors in Manufacturing
The following seven groups of factors dominate the decisions
1. Favorable Labor Climate,2. Proximity to Markets, 3.Impact on Environment, 4. Quality of Life, 5.Proximity to Suppliers and Resources, 6. Proximity to the Parent Company’s Facilities, and 7. Utilities, Taxes, and Real Estate Costs
Dominant Factors in Services
The factors important for manufacturers are also relevant to service providers. But for those service providers with considerable customer contact, factors related to customer convenience and customer satisfaction are also to be considered as they affect sales. These factors are: Proximity to Customers, Transportation Costs and Proximity to Markets, Location of Competitors, and Site-Specific Factors.
Calculating a Load–Distance Score
Center of Gravity
Attractive candidate locations identified using the factors listed above have to be must be identified and compared on the basis of quantitative factors. The load–distance method is a quantitative measure. Several location factors indicated above relate directly to distance: proximity to markets, average distance to target customers, proximity to suppliers and resources, and proximity to other company facilities. The load–distance approach assumes that there is only one facility to be located to serve a predetermined set of nodes (customers, suppliers) in a logistic network, and it is independent of any other facility that may be in the network. The objective is to select a location that minimizes the sum of the loads from the facility to each node, multiplied by the distance between the facility and the node. Instead of distance, time may be used.
For a rough calculation, Euclidean distance, the straight-line distance, or shortest possible path, between two points, facility and the node is used. Rectilinear distance measures the distance between two points with a series of 90-degree turns, as along city blocks.
The coordinates of the location at the center of gravity of a set of nodes can be calculated mathematically to identify good locating points for a facility to serve those nodes. The center of gravity location generally is not the optimal one for the distance measure, but it is an excellent starting point to generate candidate locations for the load distance evaluation.
Setting Up the Initial Tableau
Dummy Plants or Warehouses
Finding a Solution
Break-even analysis can help a manager compare location alternatives based on the total cost estimated for each location. Given a set of potential locations for a facility, break-even analysis is particularly useful when the manager wants to define the ranges of volume over which each alternative is best.
The transportation method of operations research is a quantitative approach that can help solve multiple-facility volume allocation problems. We use it to determine the allocation pattern that minimizes the cost of shipping products from two or more plants, or sources of supply, to two or more warehouses, or destinations. The transportation problem solution gives us an estimate of the volume allocated to a particular location.
Geographical Information Systems
Using GIS to Find Locations for Fast-Food Restaurants
The GIS Method for Locating Multiple Facilities
A geographical information system (GIS) is a system of computer software, hardware, and data that the firm’s personnel can use to manipulate, analyze, and present information relevant to a location decision. A GIS can create a visual representation of a firm’s location choices. It can be used to (1) store databases, (2) display maps, and (3) create models that can take information from existing datasets, apply analytic functions, and write results into newly derived datasets. These three functionalities are critical parts of an intelligent GIS and are used to a varying extent in all GIS applications
A GIS is a really useful decision-making tool because many of the decisions made by businesses
today have a geographical aspect.
The issue for a firm producing standardized products is where to position the finished goods inventory in the supply chain. At one extreme, the firm could use centralized placement and supply goods from there to the retailer.
Another approach is to use forward placement, which means locating stock closer to customers at a warehouse, DC, wholesaler, or retailer.
As transportation costs become cheaper compared to inventory holding cost at remote locations, central inventory or inventory consolidation can be increased. As a process improvement exercise, industrial engineers or productivity improvement executives have to make efforts to reduce both transportation costs and warehousing costs.
A Systematic Location Selection Process
1. Identify the location factors important for the decision and categorize them as dominant or secondary.
2. Consider alternative regions; then narrow the choices to alternative communities and finally to
3. Collect required data (costs and facilities) related to the alternative locations from location consultants, state development agencies, city and county planning departments, chambers of commerce, land developers, electric power companies, banks, and onsite visits. Some of the data may be available in the GIS database.
4. Analyze the data collected, based on qualitative factors. From the set of locations remaining do quantitative analysis load distance method and total cost method.
5. Bring the qualitative factors pertaining to each site into the evaluation once again. This time take into consideration the view of the persons who have a stake in the location decision. What is important in one situation may be unimportant or less important in another. What is important for one person may be unimportant for another. Develop a weighted average qualitative score. The site with the highest weighted score is best as a multi-criteria based decision.
Learning Goals in Review
Video Case Continental Tire: Pursuing a Winning Plant
Case R.U. Reddie for Location
Network Design Chapter from Chopra and Meindl
PART III: MANAGING SUPPLY CHAINS – Krajewski 12 Edition Chapters
12. Supply Chain Design
13. Supply Chain Logistic Networks
14. Supply Chain Integration
15. Supply Chain Sustainability
Supply Chain Management: Chopra and Meindl’s Book Chapters – Important Points
Index to Summaries of all Chapters of Krajewski’s Book
Operations Management – Krajewski – 12th Edition – Chapter Summaries – Important Points