Chapter 2: Network Location

Planning and Analysis

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 Why Network Planning?

• Find the right balance between inventory,

transportation and manufacturing costs,
• Match supply and demand under uncertainty by
positioning and managing inventory effectively,
• Utilize resources effectively by sourcing products
from the most appropriate manufacturing facility

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 Network Design Decisions
• Facility role
– What role, what processes?
• Facility location
– Where should facilities be located?
• Capacity allocation
– How much capacity at each facility?
• Market and supply allocation
– What markets? Which supply sources?

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 Factors Influencing
Network Design Decisions
• Strategic factors
• Technological factors
• Macroeconomic factors
• Political
• Logistics and facility costs
• Competitive factors
– Positive externalities between firms
– Locating to split the market

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 Competitive Factors

– Locating to split the market

• Locate to capture largest market share

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 Relationship b/w Desired
Response Time & No. of Facilities

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 Relationship b/w No. of Facilities &
Inventory Cost

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 Cont.
Cost
Total cost
SC response time

Inventory cost

Facility cost

Transportation cost

Number of Facilities
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 Three Hierarchical Steps
1) Network design
Number, locations and size of manufacturing plants and warehouses
Assignment of retail outlets to warehouses
Major sourcing decisions
2) Inventory positioning
Identifying stocking points
Selecting facilities that will produce to stock and thus keep inventory
Facilities that will produce to order and hence keep no inventory

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 Cont.
3) Resource allocation
Determine whether production and packaging of different products is
done at the right facility
What should be the plants sourcing strategies?
How much capacity each plant should have to meet seasonal
demand?

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 Locational Cost-Profit-Volume
Analysis
• The economic comparison of location alternatives is
facilitated by the use of cost-profit-volume analysis. The
procedure for locational cost-profit-volume analysis
involves these steps:
i. Determine the fixed and variable costs associated with each location
alternative.
ii. Plot the total-cost lines for all location alternatives on the same graph.
iii. Determine which location will have the lowest total cost for the
expected level of output.
• Alternatively, determine which location will have the highest
profit.

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 Cont.
• This method assumes the following:
1. Fixed costs are constant for the range of probable output
2. Variable costs are linear for the range of probable output
3. The required level of output can be closely estimated
4. Only one product is involved

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 Example - 1
Cost Analysis: Fixed and variable costs for four potential plant locations
are shown below:
a. Plot the total-cost lines for these locations on a single graph.
b. Identify the range of output for which each alternative is superior (i.e.,
has the lowest total cost)
c. If expected output at the selected location is to be 8,000 units per year,
which location would provide the lowest total cost?

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 Cont.
a. To plot the total-cost lines, select an output that is approximately equal to the
expected output level (e.g., 10,000 units per year). Compute the total cost for
each location at that level:
Plot each location’s fixed cost (at Output=0) and the total cost at 10,000 units;
and connect the two points with a straight line

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 Cont.
b. The approximate ranges for which the various alternatives will yield
the lowest costs are shown on the graph. Note that location D is never
superior. The exact ranges can be determined by finding the output
level at which lines B and C and lines C and A cross.

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 Example - 2
Cost analysis: A farm implements dealer is seeking a fourth
warehouse location to complement three existing warehouses.
There are three potential locations: Charlotte, NC; Atlanta, GA;
and Columbia, SC.
Charlotte would involve a fixed cost of $4,000 per month and a
variable cost of $4 per unit; Atlanta would involve a fixed cost of
$3,500 per month and a variable cost of $5 per unit; and
Columbia would involve a fixed cost of $5,000 per month and a
variable cost of $6 per unit.
Use of the Charlotte location would increase system
transportation costs by $19,000 per month, Atlanta by $22,000
per month, and Columbia by $18,000 per month. Which location
would result in the lowest total cost to handle 800 units per
month?
Given: Volume = 800 units per month

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 Cont.

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 Example - 3
• Profit analysis: A manufacturer of staplers is about to lose its lease,
so it must move to another location. Two sites are currently under
consideration. Fixed costs would be $8,000 per month at site A and
$9,400 per month at site B. Variable costs are expected to be $5 per
unit at site A and $4 per unit at site B. Monthly demand has been
steady at 8,800 units for the last several years and is not expected
to deviate from that amount in the foreseeable future. Assume
staplers sell for $6 per unit. Determine which location would yield
the higher profit under these conditions.

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 Cont.

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 Design Options for a Distribution
Network
• Will product be delivered to the customer
location OR picked up from a preordained site?

• Will product flow through an intermediary (or

Intermediate Location)?

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 Distribution Designs

• Manufacturer Storage with Direct Shipping

• Manufacturer Storage with Direct Shipping & In-

Transit Merge

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 Cont.
• Distributor Storage with Carrier Delivery

• Distributor Storage with Last-Mile Delivery

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 Cont.
• Manufacturer/Distributor Storage with Customer
Pickup

• Retail Storage with Customer Pickup

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 E-Business & The Distribution
Network
• Response time
• Product variety
• Product availability
• Customer experience
• Faster time to market
• Order visibility
• Return-ability
• Direct sales to customers

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