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Chapter 12: Introduction

Location, Logistics and Distribution

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Learning Objectives:

1. Describe what a third-party logistics provider is.

2. Assess the major issues that need to be considered in locating a plant or warehouse facility.

3. Set up the transportation model to analyze location problems and use Excel Solver to find solutions to these models.

4. Understand the centroid method for locating entities such as cell phone communication towers.

5. Know how a factor-rating system can be used to narrow potential location sites.

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Logistics

• Logistics: the art and science of obtaining, producing, and distributing material and product in the proper place and in proper quantities

• International logistics: managing these functions when the movement is on a global scale

• Third-party logistics company: an outside company used to handle logistics functions

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Decisions Related to Logistics

• How material will be transported– Truck: great flexibility

– Ship: high capacity and low cost but slow

– Plane: fast but expensive

– Train: low cost but slow and variable

– Pipeline: highly specialized and limited to liquids, gases, and solids in slurry form

– Hand delivery: last step in many supply chains

• Multimodial solutions are the norm

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Logistics-System Design Matrix

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Cross-Docking

• Cross-docking

– large shipments are broken down into small shipments for local delivery in an area

– Minimizes inventory in the warehouse

• Hub-and-spoke systems

– purpose of warehouse (the hub) is sorting goods to consolidation areas

– each area is designed for shipment to a specific location

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Issues in Facility Location

Economic/Business issues:

– Proximity to customers; Business climate; Infrastructure

– Quality of labor; Suppliers; Other facilities

– Total cost; Competitive advantage

Political economy issues:

– Free trade zones; Trading blocs;

– Political risk; Government barriers

– Environmental regulation

Other Issues:

– Host community

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Plant Location Methods

1. Factor-rating system

2. Transportation method of linear programming

3. Centroid method

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Factor-Rating System

• Most widely used

• List of factors is developed

• Range of possible points assigned to each factor

• Each site is rated against each factor

• The sums of assigned points for each site are computed

• The site with the most points is selected

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Transportation Method of Linear Programming

• Transportation method is a special linear programming method

– Seeks to minimize costs of shipping n units to mdestinations

or

– Seeks to maximize profit of shipping n units to mdestinations

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Example: U.S. Pharmaceutical Company

Example: US Pharmaceutical Problem

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Example: Solver Parameters

Example: Solver Options

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Centroid Method

• Used for locating single facilities that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them– Assumes inbound and outbound transportation costs are equal– Does not include special shipping costs for less than a full load

• 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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Centroid Method Formulas

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Locating Service Facilities

• New service facilities are far more common than new factories and warehouses

– Much less expensive

• Multiple sites close to customers

• Location decision closely tied to the market selection decision

• Decision more about maximizing profits than minimizing costs

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Chapter 12

Location, Logistics and Distribution

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Learning Objectives

1. Describe what a third-party logistics provider is.2. Assess the major issues that need to be considered in

locating a plant or warehouse facility.3. Set up the transportation model to analyze location

problems and use Excel Solver to find solutions to these models.

4. Understand the centroid method for locating entities such as cell phone communication towers.

5. Know how a factor-rating system can be used to narrow potential location sites.

Logistics

• Logistics: the art and science of obtaining, producing, and distributing material and product in the proper place and in proper quantities

• International logistics: managing these functions when the movement is on a global scale

• Third-party logistics company: an outside company used to handle logistics functions

•LO 1

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Decisions Related to Logistics

• How material will be transported– Truck: great flexibility– Ship: high capacity and low cost but slow– Plane: fast but expensive– Train: low cost but slow and variable– Pipeline: highly specialized and limited to

liquids, gases, and solids in slurry form– Hand delivery: last step in many supply chains

• Multimodial solutions are the norm•LO 2

Logistics-System Design Matrix

•LO 2

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Cross-Docking

• Cross-docking: large shipments are broken down into small shipments for local delivery in an area– Minimizes inventory in the warehouse

• Hub-and-spoke systems: the sole purpose of the warehouse (the hub) is sorting goods to consolidation areas, where each area is designed for shipment to a specific location

•LO 2

Issues in Facility Location

• Proximity to customers: makes rapid delivery easier

• Business climate: can include presence of similar-sized businesses, businesses in the same industry, and other foreign companies

• Total costs: object is to minimize overall cost

• Infrastructure: adequate road, rail, air, and sea transportation along with energy and telecommunications

•LO 2

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Issues in Facility Location Continued

• Quality of labor: educational and skill levels must match needs

• Suppliers: proximity of important suppliers supports lean production

• Other facilities: location of other facilities can influence a location decision

• Free trade zones: a closed facility into which foreign goods can be brought without being subject to the normal customers requirements

•LO 2

Issues in Facility Location Continued

• Political risk: risks in both the country of location and the host country influence the decision

• Government barriers: barriers in many countries are being removed

• Trading blocs: firms locate within a block to take advantage of new markets or lower total cost

•LO 2

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Issues in Facility Location Continued

• Environmental regulation: these impact a certain industry in a given location and must be included in the decision

• Host community: host community’s interest is part of the evaluation process

• Competitive advantage: the location should provide the company with a competitive advantage

•LO 2

Plant Location Methods

1. Factor-rating system

2. Transportation method of linear programming

3. Centroid method

•LO 2

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Factor-Rating System

• Most widely used

• List of factors is developed

• Range of possible points assigned to each factor

• Each site is rated against each factor

• The sums of assigned points for each site are computed

• The site with the most points is selected•LO 5

Transportation Method of Linear Programming

• Transportation method is a special linear programming method

• Seeks to minimize costs of shipping nunits to m destinations or its seeks to maximize profit of shipping n units to m destinations

•LO 3

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Centroid Method

• Used for locating single facilities that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them– Assumes inbound and outbound transportation costs are equal– Does not include special shipping costs for less than a full load

• This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria stated above

•LO 4

Centroid Method Formulas

•LO 4

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Locating Service Facilities

• New service facilities are far more common than new factories and warehouses– Much less expensive

• Multiple sites close to customers

• Location decision closely tied to the market selection decision

• Decision more about maximizing profits than minimizing costs

•LO 2