Location, Logistics and

Distribution
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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Importance of Facility Location
 Facility Location decisions are part of the
company’s strategy. Infrequent but expensive.
 Reasons for the importance:
 Facility Location requires large investment that
can not be recovered.
 Facility Location decisions affect the
competitive capacity of the company.
 All areas of the company are affected by Facility
Location: Operations, but also Business
Development, Human Resources, Finance, etc.

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Importance of Facility Location
 The facility location decisions affect not only costs but the
company’s income:
 For a service business, market proximity is critical to determine the
capacity to attract customers.
 For a manufacturing business, facility location affects product
delivery time and level of customer service, which affects sales.
 Regarding costs, facility location affects a great
variety of them:
 Land costs.
 Labor costs.
 Raw materials.
 Transportation and distribution

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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: 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

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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
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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
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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

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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

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 Costs vs Response Time
Hi Local FG
Mix
Regional FG
Local WIP
Cost Central FG
Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time Hi

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Response Time 1 week-> 1 Distribution Center

Customers
Distribution
Center

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Response Time 5 days-> 2 Distribution
Centers

Customers
Distribution
Center

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Response Time 3 days-> 5 Distribution
Centers

Customers
Distribution
Center

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Response Time 1 day-> 13 Distribution
Centers

Customers
Distribution
Center

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Same Day Response --> 26 Distribution
Centers

Customer
DC

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Response time vs. Number of facilities
Response
Time

Number of Facilities
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Cost vs Number of Facilities
Total Costs
Cost of Operations

Percent Service
Level Within
Promised Time

Facilities
Inventory
Transportation
Labor

Number of Facilities

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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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 11-23

Factor Rating Method Example

Two refineries sites (A and B) are assigned the following
range of point values and respective points, where the more
points the better for the site location.
Sites
Major factors for site location Pt. Range A B
Fuels in region 0 to 330 123 156
Power availability and reliability 0 to 200 150 100
Labor climate 0 to 100 54 63
Living conditions 0 to 100 24 96
Transportation 0 to 50 45 50
Water supply 0 to 10 4 5
Climate 0 to 50 8 4
Supplies 0 to 60 5 50
Best Site
Tax policies and laws 0 to 20 5 20 is
Total pts.
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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 m destinations or its seeks to maximize
profit of shipping n units to m destinations

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Example: U.S. Pharmaceutical Company

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Example: Excel Screen Showing the U. S.
Pharmaceutical Problem

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Example: Solver Parameters

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Example: Solver Options

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Example: Solver Options
Total
Candidate
Shipped
Solution

Indianapolis 0 0 15 0 15
Phoenix 0 0 0 6 6
New York 10 4 0 0 14
Atlanta 0 8 0 3 11
Total 10 12 15 9
Supplied

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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
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Centroid Method Formulas
C =
 d V ix
C =
 d V
i iy i
x
V i V y
i

Where:
Cx = X coordinate of centroid
Cy = Y coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith
location
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Centroid Method Formulas
C =
 d V
ix i
C =
 d Viy i
x
V i V
y
i

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Example of Centroid Method
 Centroid method example
 Several automobile showrooms are located according to
the following grid which represents coordinate locations
for each showroom
Y S ho wro o m No o f Z-Mo b ile s
Q s o ld p e r mo nth
(790,900)

D A 1250
(250,580)

D 1900
A
(100,200)
Q 2300
(0,0) X
Question: What is the best location for a new Z-Mobile
warehouse/temporary storage facility considering only distances
and quantities sold per month?
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Example of Centroid Method (Continued):
Determining Existing Facility Coordinates
Y
To begin, you must identify the Q
existing facilities on a two- (790,900)

dimensional plane or grid and D

(250,580)
determine their coordinates.
A
(100,200)

(0,0) X

S ho wro o m No o f Z-Mo b ile s

You must also have the
volume information on the
business activity at the
existing facilities.
s o ld p e r mo nth
A 1250
D 1900

Q 2300 34
Example of Centroid Method (Continued):
Determining the Coordinates of the New Facility

You then compute the new coordinates using the

formulas:

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Example of Centroid Method (Continued):
Determining the Coordinates of the New Facility
You then take the coordinates and place them on the
map:

Y
S ho wro o m No o f Z-Mo b ile s
Q New
(790,900) s o ld p e r mo nth
location
D
Z
(250,580)
of facility A 1250
Z about
A D 1900
(100,200)

(0,0) X Q 2300

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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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Locating Service Facilities

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Example
Cool Air, a manufacturer of automotive air conditioners, currently
produces its XB-300 line at three different locations: Plant A, Plant
B, and Plant C. Recently management decided to build all
compressors, a major product component, in a separate
dedicated facility, Plant D.

Using the centroid method and the information displayed,

determine the best location for Plant D. 39
Example

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Example
A small manufacturing facility is being planned that will feed
parts to three heavy manufacturing facilities. The locations
of the current plants with their coordinates and volume
requirements are given in the following table:

Use the centroid method to determine the best location

for this new facility.
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Example

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