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Network design and Facility Location

Net work design is a primary responsibility of logistical function as the firm’s facility
structure provides the products for the customer. Network or facility structure includes
production facilities, warehouses, cross-dock operations, and retail stores. How many
facilities are required, what work is to be performed [what is to be produced/what
inventory is to be stocked and how much] in these facilities, where they are to be
located [geographical locations], who [whether the operation in the facility is out
sourced] will operate these facilities are some of the salient features of net work
design. Logistics will also have to determine what customer orders are to be serviced
from where. All the logistical operations are performed in the network of facilities.
Network incorporates information and transportation capabilities.
Cost of bringing in inputs and moving outputs to market depends on the location of the
facilities. Inadequate location adds to logistics costs in addition to being counter
productive for customer satisfaction.
Logistics network
[Bardi, pages 505, Bowersox pages 555……….]
Logistical Network is the location of logistical & manufacturing facilities of a firm.
This assumes importance as logistical cost is influenced by the location of these
facilities. Strategically located facilities help managers reduce costs & lead times.
Location Analysis should address the following questions
1. How many distribution centers the firm should use, where should these be located?
2. Which market area is to be served from each distribution center?
Importance of location analysis or logistical network design
1. This is strategic in nature. Short term location decisions by and large are
unchangeable as change becomes very complex and prohibitively expensive. But this
decision needs to be reviewed by management periodically to keep in step with
dynamics of business. If management is not agile in taking cognizance of such factors
as mentioned below consequences can be disastrous for the firm.
 Changing customer service requirements. Service expectations of customer are
becoming higher. There is constant pressure to reduce lead times and costs.
Customers believe in long term relationship or strategic partnership with suppliers

 While demand for superior logistical service is intense, the customers served are
also changing! A firm selling their products through their own chain of retailer
shops has now found a big customer who specializes in running such chains. A
firm selling to variety of customers big and small has one or two big mass
merchants as customers. This change causes impact on so many logistical factors
like lead time, order size and frequency and associated activities such as shipment
notifications, markings and packaging.
 Dynamics of marketplace: shifting locations of customer and or supply market.
• When the suburbs of Mumbai became densely populated with considerable
purchasing power, companies had to consider strengthening their logistical
network to cater to the needs of this new market place. Flight of industries from
Mumbai to other cities in Maharastra or outside is also an example of this
dynamism in market.
• Such changes also take place on the inbound side, as concept of JIT has moved
suppliers closer to the customer influencing the network on the inbound side
• New raw materials deposits also calls for a review of network on the inbound side
• Global scene – unification of Germany, collapse of USSR, emergence of Asian
countries as good manufacturing or outsourcing locations for American industrial
 Change in corporate ownership and subsequent changes in corporate policies –
addition or deletion of a product line. If it is a merger or acquisition realigning
strengths of merging companies.
2. Impact on cost of moving the product to the customer.
 Analysis of logistical network yields opportunities for cost reduction.
• High labor cost, companies out sourcing jobs to cut on labor cost
• Cost of transportation
• Cost of inventories
3. Influence of inventory levels in the firm, the square root law
4. Has direct impact on ‘Delivery’ expectations of the customer and thereby on
customer satisfaction.

5. Competitive action – to be able to be competitive to the customer with respect to
6. Corporate organizational changes such as down sizing and reengineering
7. Globalization and logistical channel design: channel differences are seen within the
country and they are all the more pertinent in global business. The differences in
vehicle sizes, road and bridge restrictions, differences in material handling and
information systems and trade agreements. This has added importance to the location
Location Analysis techniques: Location analysis is done based on complex and huge
volume of data. Hence sophisticated modeling techniques are employed.
Gravity model: a simple model that takes into account the load of inventory
transferred and the distance over which it is transferred.
Use a flat board on which stick the map of market area. Locate the sources and
destinations of inventory with the help of coordinates. Use weights to represent the
inventory tonnage to be transferred for each source and destination. Tie these weights
to strings and pass the strings through the wholes bored at respective source and
destination points. The free ends of the strings are tied together. If the strings can
move friction free the knot takes a position of equilibrium which represents the
location of a distribution center.
This model can be worked out analytically as explains din the class. When dissimilar
transportation rates interact the models further modified analytically as explained in
the class.
The strength of the model is easy computability. It serves as a good starting point. As
the location decision depends an several factors in addition to transportation, the
outputs of this model are not final. The weakness of this model is that it suggests a
single location.
1. single point location
2. transportation rates are linear
3. topography is not considered
4. moves are not realistic but in x & y directions

Sensitivity analysis of above decision
Ton, mile - center model: when we have to locate a warehouse in a city for
distributing products in the market a modified version of the above model is used
refer to the class notes
Median model: refer to class notes