Chapter 14:

Network Design and Facility

Location
Learning Objectives - After reading this
chapter, you should be able to do the following:

◼ Identify factors that may suggest a need to

redesign a logistics network.
◼ Structure an effective process for logistics
network design.
◼ Be aware of key locational determinants and
the impact they may have on prospective
locational alternatives.

Chapter 14 Management of Business Logistics, 7th Ed. 2

Learning Objectives
◼ Understand the different types of modeling
approaches that may be used to gain insight
into logistics network design and facility
location.
◼ Apply the simple “grid” or center-of-gravity
approach to facility location.
◼ Have knowledge of certain ways in which
transportation and transportation costs affect
the location decision.
Chapter 14 Management of Business Logistics, 7th Ed. 3
 Logistics Profile:
Need for Speed…
◼ Globalization was supposed to mean that most
of the world’s manufacturing jobs would shift to
low cost locations in Asia.
◼ Technology companies cannot afford the two
weeks transportation time from Asia, so NAFTA
has empowered Guadalajara, Mexico to become
the home to many highly efficient
manufacturers.
◼ Tax breaks, low cost land and labor, and a
friendly government have fueled the revolution.
Chapter 14 Management of Business Logistics, 7th Ed. 4
The Need for
Long-Range Planning
◼ In the short run, the logistics managers must
work with the current facility locations.
◼ However, in the long run, the firm’s facility
locations are considered variable, and are
subject to change.
◼ Facilities design and location have become
strategically important in today’s highly
competitive business environment.

Chapter 14 Management of Business Logistics, 7th Ed. 5

The Strategic Importance
of Logistics Network Design
◼ Considering the rate at which the business
environment is changing, logistics facilities
are under pressure to keep current.
◼ In many companies, change has happened
recently or is scheduled for the near future.
◼ With capital being both scarce and expensive,
facilities decisions become more important.

Chapter 14 Management of Business Logistics, 7th Ed. 6

The Strategic Importance of
Logistics Network Design
◼ Critical variables in network design:
◼ Changing Customer Service Requirements

◼ Shifting Locations of Customer and/or

Supply Markets
◼ Change in Corporate Ownership

◼ Cost Pressures

◼ Competitive Capabilities

◼ Corporate Organizational Change

Chapter 14 Management of Business Logistics, 7th Ed. 7

The Strategic Importance of Logistics
Network Design: Changing Customer
Service Requirements

◼ A customer’s business has changed and the

company may need to change some aspect(s)
of its service to those customers.
◼ Some customers will be looking for new
supply chain partners and the
company needs to be responsive
to these potential new business
partners.

Chapter 14 Management of Business Logistics, 7th Ed. 8

The Strategic Importance of Logistics
Network Design: Shifting Locations of
Customer and/or Supply Markets

◼ Geographic locations of markets often shift

over time and the company needs to position
its logistics network to be responsive to these
shifts.
◼ Similarly, global competition often results in
geographic shifts for not only new customers,
but also new markets.
◼ Companies tuned to these changes have a
head start in establishing new business.
Chapter 14 Management of Business Logistics, 7th Ed. 9
The Strategic Importance of Logistics
Network Design: Change in Corporate
Ownership

◼ Mergers, consolidations and divestiture may

mean new logistics and market patterns for
the surviving entity.
◼ Once again, companies tuned to these
changes have a head start in establishing
new business.

Chapter 14 Management of Business Logistics, 7th Ed. 10

The Strategic Importance of Logistics
Network Design: Cost Pressures

◼ As competition increases, firms must seek

ways to continue growth.
◼ One such way is to find areas where the costs
of key business processes can be reduced.
◼ Often the pressure to reduce costs can be
applied to areas for which the logistics
department has responsibility.
◼ Inventory and transportation can be such
sources.
Chapter 14 Management of Business Logistics, 7th Ed. 11
The Strategic Importance of Logistics
Network Design: Competitive Capabilities

◼ Obsolete facilities signal the company that a

logistics examination is necessary.
◼ Companies that have not analyzed the
changes in their environment are risking both
profitability and solvency.
◼ Many firms locate distribution facilities near
hub operations of FedEx, UPS, Airborne,
Emery and DHL so that access to time-critical,
express transportation services is facilitated.
Chapter 14 Management of Business Logistics, 7th Ed. 12
The Strategic Importance of Logistics
Network Design: Corporate
Organizational Change

◼ Downsizing and re-engineering cause the firm

to reexamine its logistics division for potential
savings.
◼ Many logistics facilities have faced various
levels of change because of re-engineering
efforts in the organization.
◼ Logistics functions can be provided by third
party vendors (3PLs) where the firm cannot
accommodate the necessary changes.
Chapter 14 Management of Business Logistics, 7th Ed. 13
 Logistics
Network Design
◼ Figure 14-1 on the next slide identifies six
major steps associated with the process of
Logistics Network Design.
◼ Step 1: Define the Logistics Network design
Process
◼ Form a design team
◼ Establish design parameters and objectives

◼ Establish availability of resources and

potential involvement of 3PLs.

Chapter 14 Management of Business Logistics, 7th Ed. 14

Figure 14 – 1 Key Steps in the
Logistics Network Design Process

Chapter 14 Management of Business Logistics, 7th Ed. 15

Logistics Network Design
◼ Step 2: Perform a Logistics Audit
◼ Forces a comprehensive perspective

◼ Develops essential information

◼ Step 3: Examine the Logistics Network

Alternatives
◼ Use modeling to provide additional insights

◼ Develop preliminary designs

◼ Test model for sensitivity to key variables

Chapter 14 Management of Business Logistics, 7th Ed. 16

Figure 14-2
Key Steps in a Logistics Audit

Step 6: Logistics Strategic Plan

Step 5: Strategic Logistics Issues

Step 4: Logistics Provider Selection and Evaluation

Step 3: Key Logistics Activities

Step 2: Logistics System

Step 1: Fundamental Business Information

Chapter 14 Management of Business Logistics, 7th Ed. 17

Logistics Network Design
◼ Step 4: Conduct a Facility Location Analysis
◼ Analyze attributes of candidate sites

◼ Apply screening to reduce alternative sites

◼ Step 5: Make Decisions regarding Network

and Facility Location
◼ Evaluate sites for consistency with design

criteria.
◼ Confirm types of change needed

Chapter 14 Management of Business Logistics, 7th Ed. 18

Logistics Network Design
◼ Step 6: Develop an Implementation Plan
◼ Plan serves as a road map in moving from

current system to the desired logistics

network.
◼ Firm must commit funds to implement the

changes recommended by the

re-engineering process.

Chapter 14 Management of Business Logistics, 7th Ed. 19

Major Locational Determinants

◼ Major Locational Determinants

are summarized in Table 14-1.
◼ These determinants are subcategorized into
regional and site specific factors.
◼ Take a minute and review these factors now.

Chapter 14 Management of Business Logistics, 7th Ed. 20

 Table 14-1
Major Locational Determinants
Regional Determinants Site-Specific Determinants
Labor climate Transportation access
Availability of transportation ● Truck
Proximity to markets ● Air
Quality of life ● Rail
Taxes & other incentives ● Water
Supplier networks Inside/outside metro area
Land costs and utilities Availability of workforce
Company preference Utilities

Chapter 14 Management of Business Logistics, 7th Ed. 21

Major Locational Determinants: Current
Trends Governing Site Selection
◼ Strategic positioning of inventories, with faster
moving items located at “market-facing” logistics
facilities, and slower moving items at national or
regional sites.
◼ Direct plant-to-customer shipments which can reduce
or eliminate the need for company-owned supply or
distribution facilities.
◼ Growing need and use of “cross-docking” facilities.
◼ Use of third party logistics companies which negate
the need for the firm to maintain or establish its own
distribution facilities.

Chapter 14 Management of Business Logistics, 7th Ed. 22

 On the Line:
Tennessee---Choice Site
◼ Dell Computer selected Nashville, Tennessee as
its production site for a new line of computers.
◼ Tennessee has the transportation infrastructure,
business tax reforms, and telecommunications
capabilities that firms consider when they need
to locate a facility.
◼ Dell will be responsible for an additional 11,000
jobs and $690 million in economic output.

Chapter 14 Management of Business Logistics, 7th Ed. 23

 Modeling Approaches:
Optimization Models
◼ Based on precise mathematical procedures
guaranteed to find the “best” solution from
among a number of feasible solutions.
◼ Key issues are listed in Figure 14-3.
◼ One approach is Linear Programming (LP).
◼ Useful in linking facilities in a network.

◼ Defines optimum distribution patterns.

◼ Modern computers facilitate LP modeling.

Chapter 14 Management of Business Logistics, 7th Ed. 24

Figure 14-3 Strategic Issues Relevant to
Logistics Network Modeling

Chapter 14 Management of Business Logistics, 7th Ed. 25

Figure 14-4 Supply Chain
Scenario for Network Analysis

Chapter 14 Management of Business Logistics, 7th Ed. 26

Figure 14-5 Example “Geographical-
Mapping” Representation

Chapter 14 Management of Business Logistics, 7th Ed. 27

 Modeling Approaches:
Simulation Models
◼ Based on developing a model of a real system
and conducting experiments with this model.
◼ In location theory, a firm can test the effect of
various locations on costs and profitability.
◼ Does not guarantee an optimum solution but
evaluates through the iterative process.
◼ Simulations are either static or dynamic
depending upon how whether they incorporate
data from each run into the next run.

Chapter 14 Management of Business Logistics, 7th Ed. 28

 Modeling Approaches:
Heuristic Models
◼ Based upon developing a model that can
provide a good approximation to the least-cost
location in a complex decision problem.
◼ Can reduce a problem to a manageable size.
◼ This approach can be as sophisticated as
mathematical optimization approaches.
◼ The “Grid Technique” is an example of a
heuristic approach and will be demonstrated in
the next few slides.

Chapter 14 Management of Business Logistics, 7th Ed. 29

Example of a Heuristic Modeling
Approach: The Grid Technique
◼ The Grid Technique attempts to locate a fixed facility
such that the location represents the least-cost
center for moving inbound materials and outbound
product within a geographic grid.
◼ It finds the ton-mile center of mass; that is, the
geographic point where transportation costs are
minimized.
◼ This simple approach works where all transportation
rates are the same.
◼ However, we know that freight rates for raw
materials are generally lower than those for finished
goods.

Chapter 14 Management of Business Logistics, 7th Ed. 30

 Example of a Heuristic Modeling
Approach: The Grid Technique
◼ When we use different freight rates, the grid
model will tend to pull the location of our fixed
facility toward the higher rated areas.
◼ Thus, the location of a production plant will
tend to be nearer the market, reducing the
overall transportation of the higher rated
finished goods in favor of increasing
transportation of lower rated raw materials.

Chapter 14 Management of Business Logistics, 7th Ed. 31

Example of a Heuristic Modeling
Approach: The Grid Technique

◼ The text example will attempt to locate a new plant

receiving inbound materials from Buffalo, Memphis,
and St. Louis, serving markets in Atlanta, Boston,
Jacksonville, Philadelphia, and New York City.
◼ Examine Figure 14-6 and Table 14-2 on the next two
slides.

Chapter 14 Management of Business Logistics, 7th Ed. 32

Figure 14-6 Grid Locations of
Sources and Markets

Chapter 14 Management of Business Logistics, 7th Ed. 33

Table 14-2 Grid Technique Analysis
of Plant Location Example

Chapter 14 Management of Business Logistics, 7th Ed. 34

Table 14-3 Impact of Rate
Change on Least-Cost Location

Chapter 14 Management of Business Logistics, 7th Ed. 35

Table 14-4 Impact of Supply Source
Change on Least-Cost Location

Chapter 14 Management of Business Logistics, 7th Ed. 36

Example of a Heuristic Modeling
Approach: The Grid Technique

◼ In the example, the plant’s least-cost center

is 655 in the horizontal direction, and 826 in
the vertical direction.
◼ Both distances are measured from the grid’s
zero point.
◼ The least-cost center is in southwestern Ohio
or northern West Virginia in the Wheeling-
Parkersburg area.

Chapter 14 Management of Business Logistics, 7th Ed. 37

Example of a Heuristic Modeling
Approach: The Grid Technique
◼ Advantages
◼ Simple to use

◼ Provides a starting point for

further analysis
◼ Can accommodate “what if”
questions
◼ Limitations
◼ Static approach

◼ Linear rates

◼ No consideration of topography

◼ Does not consider direction of movement

Chapter 14 Management of Business Logistics, 7th Ed. 38

Transportation
Pragmatics
◼ Tapering rates
◼ Rates increase with distance, but not in

direct proportion to distance.

◼ Results from the carriers ability to spread

certain fixed costs over a greater number

of miles.
◼ Tends to pull the location to either the

source or market, but not in between.

Chapter 14 Management of Business Logistics, 7th Ed. 39

 Table 14-5 Locational Effects of Tapering
Rates with Constant Rate Assumption
Transport Transport Total Trans -
Miles from S Miles to M
Rate from S Rate from M port Rate

0 $0.00 200 $3.70 $3.70

50 2.00 150 3.50 5.50

100 3.00 100 3.00 6.00

150 3.50 50 2.00 5.50

200 3.70 0 0.00 3.70

Chapter 14 Management of Business Logistics, 7th Ed. 40

Figure 14-7 Locational Effects of Tapering
Rates with Constant Rate Assumption

Chapter 14 Management of Business Logistics, 7th Ed. 41

 Table 14-6 Locational Effects of Tapering
Rates without Constant Rate Assumption
Transport Transport Total Trans -
Miles from S Miles to M
Rate from S Rate from M port Rate

0 $0.00 200 $5.20 $5.20

50 2.00 150 5.00 7.00

100 3.00 100 4.50 7.50

150 3.50 50 3.50 7.00

200 3.70 0 0.00 3.70

Chapter 14 Management of Business Logistics, 7th Ed. 42

Figure 14-8 Locational Effects of Tapering
Rates without Constant Rate Assumption

Chapter 14 Management of Business Logistics, 7th Ed. 43

Transportation Pragmatics
◼ Blanket rates
◼ Rates do not increase with distance, but
remains the same from one origin to any
destination in the blanket area.
◼ Results from the carriers desire to maintain
competitive prices for a product in a given
area.
◼ Is a mutation of the basic rate-distance
relationship.

Chapter 14 Management of Business Logistics, 7th Ed. 44

Transportation Pragmatics
◼ Commercial Zones
◼ A specific blanket area that includes a municipality

and the surrounding area.

◼ Impact is at end of location process when a

company picks a specific site.

◼ Foreign Trade Zones
◼ Geographic zone into which importers can enter a

product and hold it without paying duties, only

paying when product enters U.S. customs
territory.

Chapter 14 Management of Business Logistics, 7th Ed. 45

Transportation Pragmatics
◼ Transit Privileges
◼ Permits a shipper to stop a shipment in

transit and perform some function that

physically changes the product’s
characteristics. (e.g., wheat to flour)
◼ This can make intermediate locations

optimum rather than focus only on sources

and markets.

Chapter 14 Management of Business Logistics, 7th Ed. 46

 Chapter 14:
Summary and Review Questions

Students should review their knowledge of the

chapter by checking out the Summary and Study
Questions for Chapter 14.
Study Question 14-9

Chapter 14 Management of Business Logistics, 7th Ed. 48

Case 14-1
Fireside Tire Company

Chapter 14 Management of Business Logistics, 7th Ed. 49

 End of Chapter 14 Slides

Network Design and Facility

Location