CHAPTER 4 SUPPLY CHAIN NETWORK ANALYSIS AND DESIGN DISTRIBUTION AND OMNI-CHANNEL NETWORK DESIGN LEARNING OBJECTIVES After reading this chapter, you should be able to do the following: • Recognize the critical need to evaluate the structure and functioning of supply chain networks, and for making changes and improvements as appropriate. • Utilize an effective process for supply chain network design. • Be aware of key locational determinants, both regional/national/global and site-specific, and the impacts they may have on prospective location alternatives. • Understand the different types of modeling approaches that may be used to gain insight into supply chain network design and facility location decision making. • Apply the simple grid or center-of-gravity approach to facility location, and understand how various factors may affect the location decision. • Differentiate between a marketing channel and a logistics channel. • Understand the relevance of “omni-channel” supply chain strategies, and theits impacts on the structure and functioning of supply chains. • Become aware of contemporary examples of how firms are responding to the challenges of omni-channel distribution. CHAPTER OVERVIEW Introduction As firms continue to search for new ways to lower costs and improve service to their customers, the issue of where to locate logistics and manufacturing facilities has never been more complex or more critical. In addition to enhancing the efficiency and effectiveness of a supply chain operation, the redesign of a firm’s overall network can help to differentiate a firm in the marketplace, thus creating a new form of competitive advantage. Considering the increasingly dynamic aspects of today’s business world, companies are continually seeking new and improved approaches to network design and operation This chapter first looks at several strategic aspects of supply chain network design. While it may sometimes be that “change for the sake of change” is helpful, a number of prominent factors may suggest that a redesign of the network may be necessary. Next, the process of supply chain network redesign is examined in detail. This content provides a useful framework for understanding the key steps that must be included in a comprehensive approach to network design and facility location. Following these discussions, attention shifts to several major locational determinants. These factors may be either regionally focused or site-specific. Also included is a summary of current trends governing site selection. The chapter content on network design concludes with coverage of several modeling approaches that can be used to provide insight into the issues of supply chain network design and facility location and also provides valuable perspectives on the increasingly-relevant topic of omni-channel supply chain strategies. In addition to details relating to the overall topic of omni-channel, this chapter also considers the network design issues that can facilitate successful implementation of this concept. The Need for Long-Range Planning In the short run, a firm’s logistics/supply chain network and the locations of its key facilities are relatively fixed and the logistics manager must operate within the constraints imposed by the facility locations. Site availability, leases, contracts, and investments make changing facility locations impractical in the short run. In the long run, however, the design of the overall network must be thought of as variable. The Strategic Importance of Supply Chain Network Design This section focuses on several types of change that may suggest a need to reevaluate and/or redesign a firm’s logistics network. While not all of these factors will affect any single firm at the same time, they represent some of the more frequently changing elements of the business environment that affect logistics and supply chain management. Such changes are as follows: Changes to Global Trade Patterns, Changing Customer Service Requirements, Shifting Locations of Customer and/or Supply Markets, Change in Corporate Ownership/Merger and Acquisition Activity, Cost Pressures, Competitive Capabilities, and Corporate Organizational Change. Changes to global trade patterns With the passage of time, it is easy to see significant changes in the patterns of global trade. This is due to the economies of regions and countries being dynamic and subject to continual change. Some of the factors that need to be considered include: o Currency exchange rates o Volumes of commerce between and within regions/countries of the world o Abilities of regions/countries to have ample availability of needed items for shipment to global locations o Global transportation infrastructure necessary to physically move items from place of availability to place of demand o Balance or lack of balance in global trade lanes (i.e., relates to the issues of supply and demand for global logistics and transportation services) Customer service requirements The logistical requirements of customers are changing in numerous ways, and so the need to reevaluate and redesign supply chain networks is of great contemporary interest. While some customers have intensified their demands for more efficient and low-cost logistics services, others are seeking relationships with suppliers who can take logistical capabilities and performance to new, unprecedented levels. Shifting Locations of Customer and/or Supply Markets Considering that manufacturing and logistics facilities are positioned in the supply chain between customer and supply markets, any changes in these markets should cause a firm to reevaluate its supply chain. Change in Corporate Ownership/Merger and Acquisition Activity A relatively common occurrence today is for a firm to experience a change-in control of ownership associated with a merger, an acquisition, or a divestiture. In such instances, many companies choose to be proactive and to conduct a formal evaluation of new versus previous supply chain networks in advance of such a change. Cost Pressures A major imperative for many firms today is to figure out new and innovative ways to take cost out of their key business processes, including those relating to logistics and supply chain management. In such instances, a reevaluation of the logistics network and the functioning of the overall supply chain can frequently help to uncover new sources of such savings. Competitive Capabilities Another factor relates to competitive pressures that may force a company to examine its logistics service levels and the costs generated by its network of logistics facilities. To remain competitive in the marketplace or to develop a competitive advantage, a company should frequently examine the relative locations of its facilities toward the goal of improving service and/or lowering costs. Corporate Organizational Change It is not unusual for supply chain network design to become a topic of discussion at the same time that a firm considers any major corporate organizational change, such as downsizing. In such instances, the strategic functioning of the firm’s logistics network is viewed as something that must be protected and even enhanced through the process of organizational change. Supply Chain Network Design Figure 4-1 and 4-2 identifies the six major steps that are recommended for a comprehensive logistics network process. They are: Step 1: Define the Logistics/Supply Chain Network Design Process First, a logistics network reengineering team is formed who is responsible for all elements of the logistics network design process. Parameters and objectives of the logistics network design or redesign process itself are established. The use of third-party suppliers of logistics services is a topic also addressed early. Step 2: Perform a Logistics/Supply Chain Audit A logistics audit provides members of the reengineering team with a comprehensive perspective on the firm’s logistics process and the ability to gather essential types of information that will be useful in the redesign process. Step 3: Examine the Logistics/Supply Chain Network Alternatives Examining logistics network alternatives involves applying suitable quantitative models to the current logistics system as well as to the alternative systems and approaches under consideration. The use of these models provides insight into the functioning and cost/service effectiveness of various possible networks. Step 4: Conduct a Facility Location Analysis Once a desired logistics network has been recommended, the next task is to carefully analyze, both qualitatively and quantitatively, the attributes of specific regions and cities that are candidates for sites of logistics facilities. Next, a location selection team is formed, in order to collect information on specific attributes, as well as to examine potential sites in terms of topography, geology, and facility design. Step 5: Make Decisions Regarding Network and Facility Location The network and specific sites recommended in steps 3 and 4 should be then compared with the design criteria that were identified in step 1. This step should confirm the types of change that are needed to the firm’s logistics network also keeping within the context of overall supply chain positioning. Step 6: Develop an Implementation Plan Once an overall direction has been established, an implementation plan is developed, serving as a useful road map for changing the logistics network. Major Locational Determinants The importance of major locational determinants varies among industries and individual companies. Table 4.1 lists a number of major locational determinants for global/national/regional and site-specific locations. While these factors are listed in general order of importance, the relative weighting applied to each depends on the details of the specific location decision under consideration. The major general locational determinants identified are: labor climate, availability of transportation, proximity to markets and customers, quality of life, taxes and industrial development incentives, supplier networks, land costs and utilities, and company preference. Key Factors for Consideration • Labor climate. Factors to consider in determining an area’s labor climate are: the work force’s degree of unionization, skill level, work ethic, and productivity, and public officials’ attitudes. • Transportation services and infrastructure. With many firms requiring high-quality, capable transportation services, considerations such as a suitable location, cost, and modal choice are made. • Proximity to markets and customers. Considered are both logistics and competitive variables. Logistics variables include: transportation availability, freight cost, and market size within one day’s travel time. The more firms in the market area, the greater the competitive advantage the proposed location offers. • Quality of life. This involves the employees’ wellbeing. This factor is more important to companies that must attract and maintain a professional and technical mobile workforce. The qualify of life variables in metropolitan areas include: climate, housing costs, health care and environment, crime, passenger transportation, education, recreation, the arts, and economic opportunities. • Taxes and industrial development incentives. Other determinants that influence facility location include environmental considerations, and both business and personal taxes. Environmental permits are important to companies producing certain chemicals or drugs. Business taxes affect operating costs in an area, and personal taxes affect the area’s cost of living and the wages that have to be paid. Another location influence factor is industrial development incentives extended by communities to attract companies to locate in their area. These may include tax incentives, financing arrangements, reduced water and sewage rates, and rent-free buildings. The importance of various determinants depends on the specific needs of the company. • Supplier networks. This considers the availability and cost of raw materials and their transportation cost, as well as the cost of transporting of raw materials and component parts, as well as the cost of transporting materials to the proposed site. • Land costs and utilities. Issues relating to the costs of land and the availability of needed utilities are considered. Also, the availability and expense of utilities such as electrical power, sewage, and industrial waste disposal will need to be factored into the decision making process. • IT Infrastructure. This considers the availability of IT infrastructure, which refers to hardware, software, network, and talent resources. Overall, the speed and quality of data transmission will have major impacts on the effectiveness of supply chain operations in various regions and countries of the world. • Company preference. In some cases, location selection may be based upon company or CEO preference to an area. Locating near the competition and/or common access with other firms to benefits such as a skilled labor supply, excellent marketing resources, or proximity to key supplier industries is also a determinant. Current Trends Governing Site Selection A number of trends in today’s logistics environment may have a significant effect on decisions involving logistics facility location. Included among these are the following: • Strategic positioning of inventories, such that fast-moving, profitable items may be located at “market-facing” logistics facilities. • Aside from a general trend toward “disintermediation” of many wholesaler/distributor operations, companies are moving to greater use of “customer direct” delivery from manufacturing and other upstream supply chain locations. • There is a growing use of and need for strategically located “cross-docking” facilities that serve as transfer points for consolidated shipments that need to be disaggregated or mixed into typically smaller shipments for delivery to individual customers. • Due diligence for location and site selection decisions is placing great emphasis on access to major airports and/or ocean ports for import and export shipments. • Greater use of providers of third-party-logistics services, who may assume part or all of the responsibility for moving a firm’s products to its customers, and/or moving its inbound parts and materials to its manufacturing process. • The rising interest in omni-channel capabilities has elevated the importance of not only making good location decisions, but also integrating alternative approaches to fulfilling customer/consumer demand Modeling Approaches The modeling approaches are classified as: optimizing, heuristic, or simulation. Optimization Models Optimizing models seek the “best” answer given the way in which the problem is formulated. Linear programming and mathematical programming provides the optimum distribution of products among plants, warehouses, and markets. They are optimizing approaches. Advantages of optimizing models are as follows: • The user is guaranteed to have the best solution possible for a given set of assumptions and data. • Many complex model structures can be handled correctly. • The analysis and evaluation of all alternatives that are generated result in a more efficient analysis. • Reliable run-to-run comparisons can be made, since the “best” solution is guaranteed for each run. • Cost or profit savings between the optimum and heuristic solution can be significant. However, an optimization technique, linear programming, is limited due to the need for the problem formulation to be deterministic and capable of linear approximation. Also, linear programming does not allow for consideration of fixed as well as variable costs of operating logistics facilities. On a more advanced scale, the use of mixed-integer linear programming allows consideration of issues such as fixed and variable costs, capacity constraints, economies of scale, cross-product limitations, and unique sourcing requirements. One of the leading models of this type is Strategic Analysis of Integrated Logistics Systems (SAILS™). Simulation Models Simulation models develops a computer representation of a logistics system, manipulates key variables and provides logistics managers with a helpful test medium for evaluating alternative logistics strategies. Although simulation models are not designed to produce optimum solutions, they are very capable in terms of their ability to incorporate relatively comprehensive and detailed problem descriptions. However, extensive data collection and mathematical relationships are required. Heuristic Models Heuristic models do not generate a “best” solution, but produce a good first approximation. These models are used for warehouse location, truck routing, and warehouse product layout. They help to reduce a problem to a manageable size and search automatically through various alternatives in an attempt to find a better solution. Potential Supply Chain Modeling Pitfalls to Avoid • Short term horizon • Too little or too much detail • Thinking in two dimensions • Using published costs • Inaccurate or incomplete costs • Fluctuating model inputs • Use of erroneous analytical techniques • Lack of appropriate robustness analysis Example of a Heuristic Modeling Approach: The Grid Technique. The grid technique is used to determine a least-cost facility location for company situations having multiple markets and raw materials sources. It attempts to determine a fixed facility location that is the least-cost center for moving materials and goods within a geographic grid; a low cost “center of gravity”. This technique assumes that the raw materials sources and finished goods markets are fixed and that a company knows the amount of each product it consumes or sells. The technique then superimposes a grid upon the geographic area containing the raw materials sources and finished goods markets. The grid’s zero point corresponds to an exact geographic location, as do the grid’s other points. Thus, the company can identify each source and market by its grid coordinates. The ton-mile center, or center of mass can be calculated mathematically. The equation can be solved for the least-cost location, provided the transportation rates for materials and goods are the same. But this is seldom the case, so the ton-mile center equation does not show the cost differences for moving commodities. Higher finished goods rates draws the least-cost location to their markets; reducing the distance to transport the goods. This increases the distance to transport raw materials. Another equation takes into account different transportation rates. Manufacturing Plant Location Example Table 4.2 presents relevant data for a manufacturing plant location example, as well as the grid technique solution using a computer spreadsheet program. The grid coordinates of the raw materials sources and markets correspond to their locations on the grid in Figure 4.6. For simplicity, assume that this company produces only one type of finished good, so that each finished good’s transportation rate is the same. To determine the least-cost center on the grid: 1. Compute two grid coordinates a. One for moving the commodities along the horizontal axis and b. One for moving them along the vertical axis. We compute the two coordinates by using the grid technique formula for each direction. Advantages The advantage of the grid technique is its simplicity and ability to provide a starting point for location analysis. There are a number of limitations to the technique. First, it is static, and the solution is only optimum for one point in time. Second, linear transportation rates are assumed. Actual rates are tapered. Third, topographic conditions at the optimum location are not considered. Fourth, the proper direction of movement is not considered. Sensitivity analysis can be used to ask “what if” questions and measure the impact on the least-cost situation. A variety of scenarios could be examined: a five-year sales projection, adding or eliminating new markets and/or sources, and switching transportation modes or carriers. Limitations The grid technique has limitations that the decision maker must recognize. First, it is a static approach, and the solution is optimum for only one point in time. Changes in the volumes a company purchases or sells, changes in transportation rates, or changes in raw materials sources or market locations will shift the least-cost location. Second, the technique assumes linear transportation rates, whereas actual transportation rates increase with distance but less than proportionally. Third, the technique does not consider the topographic conditions existing at the optimum location; for example, the recommended site may be in the middle of a lake. Fourth, it does not consider the proper direction of movement; most moves occur along a straight line between two points, not “vertically” and then “horizontally.” Sensitivity Analysis As mentioned in the preceding paragraph, the grid technique is a static approach; the computed location is valid only for the situation analyzed. If the transportation rates, market and source locations, and volumes change, then the least cost location changes. Sensitivity analysis enables the decision maker to ask what-if questions and measure the resulting impact on the least-cost location. Application to Warehouse Location in a City: A special case exists for applying the grid technique to the location of a warehouse in a city. The situation’s uniqueness comes from the blanket rate structure, which applies the same rate from an origin to any point within the city or commercial zone. Transportation Pragmatics Tapering rates, blanket rates, commercial zones, and in-transit privileges are special rate structures that affect facility location. A tapering rate is one that increases with distance but not in direct proportion to distance. Most transportation rates are tapered. The tapering results from the carrier’s ability to spread its fixed costs–loading, billing, and handling—over a greater number of miles. The zone or blanket rate does not increase with distance, but remains the same for all points in the blanket area. It is an exception to tapering rates. These rates are established to ensure a competitive price for a product in a given area. The rate eliminates any transportation cost advantage or disadvantage associated with a given location. A commercial zone is a specific blanket area. It is the transportation definition of a particular city or town plus various surrounding areas. If a site is to be located beyond the municipality’s commercial zone, rates that apply to the city, will not apply to the site. Foreign Trade Zones (FTZ) foreign trade zone is a designated area where companies can set up operations with exempted or deferred tariffs on foreign merchandise. FTZs make U.S. manufacturing more competitive by reducing or eliminating unfair tax burdens on companies that make or assemble finished products using foreign components. Some benefits of FTZs are as follows: • Merchandise may be stored within a foreign trade zone for an unlimited period of time and avoid all duties and excise taxes. • Merchandise may be opened, examined, assembled, mixed, cleaned, labeled or repackaged within a zone. • Merchandise may be displayed, sampled or examined within the zone. • Waste materials and damaged merchandise may be destroyed within the zone to avoid duties. OMNI-CHANNEL NETWORK DESIGN Introduction Today, traditional brick and mortar retailers are turning to the internet to provide an alternative for customers to buy their products. The definite trend is that traditional retailers are placing a high priority on internet retailing. Amazon has played a significant role in changing the retail landscape for traditional store operations. In fact, Amazon is now the ninth largest retailer in the United States. This is the first time a non-asset retailer has made this list. Omni- channel will be defined as “a direct to consumer (D2C) business model where all sales channels ranging from online, mobile, telephonic, mail order, self-service, and physical retail establishments are aligned and fulfillment processes integrated to provide consumers with a seamless shopping experience in alignment with the company’s brand proposition.” This definition highlights three important points. First, omni-channel strategy must align with the firm’s “go to market” strategy which dictates how consumers will be able to gain access to the firm’s products. Second, the fulfillment processes must be integrated regardless of order entry point. In other words, whether the order is a purchase at a store or is placed through a Web site, the replenishment/fulfillment processes must be integrated to provide rapid and consistent delivery. Finally, “ease of shopping” for the consumer is a priority regardless of where or how the order is placed. Channels of Distribution A channel of distribution consists of one or more organizations or individuals who participate in the flow of goods, services, information, and finances from the production point to the final point of consumption. A channel of distribution can also be thought of as the physical structures and intermediaries through which these flows travel. These channels encompass a variety of intermediary firms, including those that can be classified as distributors, wholesalers, retailers, transportation providers, and brokers. Some of these intermediary firms take physical possession of the goods, some take title to the goods, and some take both. Thus, it is critical in the design of a distribution channel to take into consideration both the logistics channel and the marketing channel. The logistics channel refers to the means by which products flow physically from place of availability to place of demand. The marketing channel refers to the means by which necessary transactional elements are managed. Customer Fulfillment Models The term omni-channel typically refers to retailers that offer products to consumers through both retail stores and Web sites. In the retail sector, both stores and consumers are considered customers. As such, various network designs are used to fulfill the demands of these customers. These networks can be privately owned or outsourced to third party logistics providers. They are as follows: • Integrated fulfillment: Retailers have both retail stores as well as Internet sites where consumers can buy direct. Integrated fulfillment means the retailer operates one distribution network to service both channels. • Dedicated Fulfillment: Same as integrated fulfillment but with two separate distribution networks. Picking, packing, and shipping in dedicated fulfillment is the same as in integrated fulfillment. So, customers will see no difference between the two networks in how the order is received. However, now the retailer is faced with duplicate facilities and duplicate inventories • Pool Distribution: Pool distribution is a common method used by retailers to replenish their stores. Trailers are loaded with merchandise at the retailer’s DC for all of the stores in a pool. The trailer will be sent to the pool distribution site where the merchandise will be mixed and allocated by store in the pool. The pool carrier will then deliver LTL orders to each store in their region in a “milk run” where Store 1 gets the first delivery, then Store 2, and so on. • Direct Store Delivery: Another common fulfillment model in the retail industry is called direct store delivery, or DSD. In this network, the manufacturer delivers its product directly to a retailer’s stores, bypassing the retailer’s distribution network. • Store Fulfillment: For a retailer that has both a storefront as well as an Internet presence, store fulfillment can offer several opportunities. In this model, the order is placed through the Internet site. The order is sent to the nearest retail store where it is picked and put aside for the customer to pick up or the store can arrange for delivery. This works well for large electronic appliances (such as plasma screen televisions) and is used by firms such as Best Buy. • Flow-Through Fulfillment: The flow-through fulfillment method, is very similar to store fulfillment. The main difference between the two is that in flow-through fulfillment the product is picked and packed at the retailer’s distribution center and then sent to the store for customer pickup or delivery. The flow-through model eliminates the inventory conflict the store might realize between store sales and Internet sales. SUMMARY • The supply chain network design decision is of great strategic importance to the firm as a whole, its supply chain, and logistics functions and processes. This decision is becoming increasingly important due to trends related to the increasing globalization of manufacturing, marketing, sourcing, and procurement. • A formal, structured process for network design or redesign is preferable; the potential impacts on cost and service justify a significant effort toward following a sound process. • Numerous factors may affect the design of a logistics network and the location of specific facilities within the context of the network. • Principal modeling approaches to gain insight into the topic of supply chain network design include optimization, simulation, and heuristic models. • The grid method represents a useful way to obtain a good, but not necessarily optimal, solution to a logistics facility location problem. • The availability and cost of transportation affects the location decision in a number of significant and unique ways. • In an omni-channel environment, many network models exist that can be used to service retail stores and Internet consumers. • In designing customer fulfillment models, retailers focus on speed of product to and availability of products for the customer (effectiveness) and the cost of providing that service (efficiency). • The type of product and nature of the order will influence customer fulfillment model design. • Each type of customer fulfillment model has its advantages and disadvantages; trade-offs must be taken into consideration when deciding which network model to use. Study Questions 1. In what ways can the design of a firm’s supply chain network affect its ability to create value for customers through efficiency, effectiveness, and differentiation? As firms continue to search for new ways to lower costs and improve service to their customers, the issue of where to locate logistics and manufacturing facilities has never been more complex or more critical. In addition to enhancing the efficiency and effectiveness of a supply chain operation, the redesign of a firm’s overall network can help to differentiate a firm in the marketplace, thus creating a new form of competitive advantage. Considering the increasingly dynamic aspects of today’s business world, companies are continually seeking new and improved approaches to network design and operation. Several examples illustrate this type of success: o A major home improvement retailer created a nationwide network of 18 specialty warehouses. These so-called “rapid deployment centers” were strategically located and were designed to increase the efficiency of restocking store shelves and the delivery of products like generators, snow blowers, and plywood to areas hit hard by damaging weather. The strategy resulted in faster and cheaper supply chain capabilities. o A leading pharmaceutical distributor with nationwide service significantly reduced its total number of distribution centers, while offering its customers a selection of service responses from which to choose (e.g., same-day delivery, regular service, and so on). o A prominent office products company shrunk its network of distribution facilities from 11 to 3, while substantially increasing the level of cross-docking activity with its customers and significantly improving logistical customer service. o As a result of the merger of two large grocery industry manufacturers, the combined logistics network consisted of 54 distribution centers across the United States. Following careful study and analysis, with a look to the future, the company consolidated its network into 15 strategically located facilities. This move significantly reduced the company’s overall logistics costs and improved service to its customers. o A well-known consumer products retailer developed a very large import distribution center to accommodate inbound shipments of products from its global manufacturing sites. o A major provider of global contract logistics services was tasked with designing a single distribution center that would allow a European manufacturer to consolidate multiple distribution centers into one. The economics of the single, new facility, coupled with significantly enhanced fulfillment of customer orders, resulted in improved market share and improved profitability for the manufacturing client. o A global semiconductor products manufacturer consolidated its logistics network into a single, global distribution center in Singapore and engaged a third-party supplier of express logistics services to manage its overall distribution activity. The end results included lower cost, improved service, and a new way for the firm to differentiate itself in the marketplace. 2. What are the steps in the process of supply chain network design? Of these steps, which are most relevant to the task of selecting a specific location for a logistics facility? Below are the steps in the process of supply chain network design. Steps 4 and 5 are the most relevant to the task of selecting a specific location for a logistics facility. Step 1: Define the Logistics/Supply Chain Network Design Process First, a logistics network reengineering team is formed who is responsible for all elements of the logistics network design process. Parameters and objectives of the logistics network design or redesign process itself are established. The use of third-party suppliers of logistics services is a topic also addressed early. Step 2: Perform a Logistics/Supply Chain Audit A logistics audit provides members of the reengineering team with a comprehensive perspective on the firm’s logistics process and the ability to gather essential types of information that will be useful in the redesign process. Step 3: Examine the Logistics/Supply Chain Network Alternatives Examining logistics network alternatives involves applying suitable quantitative models to the current logistics system as well as to the alternative systems and approaches under consideration. The use of these models provides insight into the functioning and cost/service effectiveness of various possible networks. Step 4: Conduct a Facility Location Analysis Once a desired logistics network has been recommended, the next task is to carefully analyze, both qualitatively and quantitatively, the attributes of specific regions and cities that are candidates for sites of logistics facilities. Next, a location selection team is formed, in order to collect information on specific attributes, as well as to examine potential sites in terms of topography, geology, and facility design. Step 5: Make Decisions Regarding Network and Facility Location The network and specific sites recommended in steps 3 and 4 should be then compared with the design criteria that were identified in step 1. This step should confirm the types of change that are needed to the firm’s logistics network also keeping within the context of overall supply chain positioning. Step 6: Develop an Implementation Plan Once an overall direction has been established, an implementation plan is developed, serving as a useful road map for changing the logistics network. Step 1: Define the Logistics Network Design Process 3. Discuss the factors that cause a company to analyze the design of a supply chain network or to reconsider the location of a particular facility. Businesses operate in a dynamic environment in which change is the only constant. Because of this change, business must redeploy its resources in response to and in anticipation of an ever-changing environment. The static nature of logistics facilities and locations presents some difficulty for the logistics manager to cope with change. The decision to locate or relocate a facility involves consideration of capital outlay, cost savings, service improvements, or improved competitive advantages. High labor costs or restrictive work rules have caused companies to relocate from highly unionized areas in areas of less union influence, and to overseas locations; higher logistics costs for transportation, inventory, and communication are balanced against lower labor costs. Plant modernization may result in relocation to a more favorable location. Shifting markets can cause facility relocation. Implementation of JIT systems have caused companies to locate near their suppliers, or suppliers to locate nearer to major customers. Competitive pressures forces companies to examine their service levels and relocate to achieve an improved competitive advantage. The opening of the Eastern European market and the European community’s unification has caused U.S. managers to examine facility locations, and in some cases enter into arrangements providing a greater presence in the market. Outsourcing from foreign suppliers provides reasons for analyzing existing facility locations; leading to U.S. coastal relocations. The downsizing of company owned warehousing and use of public warehousing often causes examination of remaining company warehouse locations. 4. Why are most location decisions analyzed by a team of managers instead of a single person? What types of teams are suggested as being helpful to the task of logistics network redesign? A logistics network reengineering team makes most plant and warehouse location decisions. The team is responsible for all elements of the logistics network design process. A team is used as a particular location must serve many different areas within the company, each of which has important objectives to achieve. Having logistics decide upon the location is a very narrow view, and might result in a location that only achieves logistics goals. Today’s facility location decision will affect the logistics, marketing, production, and finance costs in the future. 5. What are the major locational determinants, and how does each affect the location decision? The importance of major locational determinants varies among industries and individual companies. Labor-intensive industries such as textiles, furniture, and household appliances place more emphasis on favorable labor climate and labor rates, than do high-tech industries such as engineering and scientific instrument manufacturers. Logistics variables are important in industries such as drugs, beverages, and printing and publishing. The major general locational determinants identified are: labor climate, availability of transportation, proximity to markets and customers, quality of life, taxes and industrial development incentives, supplier networks, land costs and utilities, and company preference. Below describes how each affect the location decision: • Labor-related factor to be considered is the rate of unemployment in the local areas under consideration. While many other factors may seem to be quite acceptable, low levels of unemployment may require a firm to significantly increase its projected hourly wage scales to attract qualified workers. This sometimes unexpected increase may affect the overall attractiveness of a particular local area under consideration. The location study team will need to visit areas of potential interest to gather impressions and study attitudes regarding work ethic, absenteeism, potential labor-management issues, and the cooperativeness of state and local public officials. • Transportation Services and Infrastructure - The need by many firms for high-quality, capable transportation services is of great significance in many location decisions. Depending on the product type and industry to be served, a suitable location may require one or more of the following features: interstate highway access, availability of intermodal or local rail facilities, convenience of a major airport facility, proximity to inland or ocean port facilities, and so on. The number of serving carriers and the breadth of overall transport capabilities are factors that may need to be evaluated. Availability of capable transportation services and issues relating to transportation infrastructure may vary widely among regions of the world. • Proximity to Markets and Customers - The nearness-to-market factor usually considers both logistics and competitive variables. Logistics variables include the availability of transportation, freight cost, and the geographical market size that can be served, for example, on a same-day or next-morning basis. The greater the number of customer firms within the market area, the greater the competitive advantage offered by the proposed location. Although many companies place a high priority on locating logistics facilities near markets and customers, an overly complex supply chain network can be disadvantageous from a cost perspective. Also, the availability of high-quality transportation services and capable information technologies has resulted in an expansion of the geographical areas that can be served in a timely manner from key logistics facilities. • Quality of Life - A particular region’s or area’s quality of life is difficult to quantify, but it does affect the well-being of employees and the quality of work they are expected to perform. The quality-of-life factor is more important to companies that must attract and retain a mobile professional and technical workforce capable of moving to any location. Such a situation is common in the high-tech industry, especially in a company’s research and development operations. • Taxes and Industrial Development Incentives - It is important to have advance knowledge of state and local taxes that apply to businesses and individuals. Prevailing business taxes, including revenue or income taxes, inventory taxes, property taxes, and so on, will have a significant impact on the cost of operating a business in the area under consideration. Personal taxes that may affect the attractiveness of a particular region or local area include taxes on income and property, as well as applicable sales taxes, excise taxes, and so forth. • Supplier Networks - In the case of a manufacturing facility, the availability and cost of raw materials and component parts, as well as the cost of transporting these materials to the proposed plant site are of significance. For a distribution center, it is important to know how the proposed facility sites will fit with the geographic locations of key supplier facilities. To best understand feasible solutions to these types of problems, the cost and service sensitivities of the inbound movements from suppliers must be considered. • Land Costs and Utilities - Depending on the type of facility under consideration, issues relating to the cost of land and the availability of needed utilities are more or less critical. In the case of a manufacturing plant or distribution center, for example, a certain minimum acreage or parcel size may be needed for current use as well as future expansion. This represents a potentially significant expense. Factors such as local building codes and cost of construction are important to consider. Also, the availability and expense of utilities such as electrical power, sewage, and industrial waste disposal need to be factored into the decision-making process. • IT Infrastructure - An increasingly relevant issue pertaining to supply chain facility locations is the availability of capable IT infrastructure that refers to the necessary hardware, software, network, and talent resources. Overall, the speed and quality of data transmission will have major impacts on the effectiveness of supply chain operations in various regions and countries of the world. Specific issues may include network enablement, internet connectivity, firewall and security. • Company Preferences - Aside from all of the preceding types of factors, a company, or its CEO for that matter, may prefer a certain region and/or local area for the location of a logistics facility. For example, a company may prefer to locate all new facilities in rural areas within 50 miles of a major metropolitan area. Or a company may wish to locate its facilities in areas where competitors already have a presence. In other instances, a firm may wish to locate facilities in an area where it may enjoy common access with other firms to benefits such as a skilled labor supply, excellent marketing resources, or proximity to key supplier industries. 6. What is the difference between a regional/national location decision, and in what ways do the determinants of each differ? A special case exists for applying the grid technique to the location of a warehouse in a city. The situation’s uniqueness comes from the blanket rate structure, which applies the same rate from an origin to any point within the city or commercial zone. Thus, any location within a city’s commercial zone incurs the same inbound transportation cost from a company’s mix of suppliers used; that is, the cost of moving supplies to a warehouse within the same city does not affect the location decision. Since the supply volumes moving into the warehouse do not affect the location decision, the least-cost warehouse location within a city considers the cost of moving finished goods from the warehouse to the customers. 7. Discuss the role of logistics variables in the decision as to where to locate a plant or distribution center. Improper facility location can result in added costs or unacceptable logistics service levels. Location analysis is a logistics department staff activity, who evaluates locations on the basis of service level policy and the operational constraints production and marketing impose on the logistics system. The logistics decision process first determines the firm’s least-transportation cost area. Next are considered non-logistic determinants such as: the availability and cost of land, power, labor, and a site’s cultural, recreational, and educational resources. This analysis reduces the number of possible sites for the company decision maker 8. What are the principal types of modeling techniques that apply to the task of supply chain network design and facility location? What are the strengths and limitations of each? The modeling approaches are classified as: optimizing, heuristic, or simulation. Optimizing models seek the “best” answer given the way in which the problem is formulated. Linear programming and mathematical programming provides the optimum distribution of products among plants, warehouses, and markets. They are optimizing approaches. Advantages of optimizing models are as follows: • The user is guaranteed to have the best solution possible for a given set of assumptions and data. • Many complex model structures can be handled correctly. • The analysis and evaluation of all alternatives that are generated result in a more efficient analysis. • Reliable run-to-run comparisons can be made, since the “best” solution is guaranteed for each run. • Cost or profit savings between the optimum and heuristic solution can be significant. However, an optimization technique, linear programming, is limited due to the need for the problem formulation to be deterministic and capable of linear approximation. Also, linear programming does not allow for consideration of fixed as well as variable costs of operating logistics facilities. Simulation models develops a computer representation of a logistics system, manipulates key variables and provides logistics managers with a helpful test medium for evaluating alternative logistics strategies. Although simulation models are not designed to produce optimum solutions, they are very capable in terms of their ability to incorporate relatively comprehensive and detailed problem descriptions. However, extensive data collection and mathematical relationships are required. Heuristic models do not generate a “best” solution, but produce a good first approximation. These models are used for warehouse location, truck routing, and warehouse product layout. They help to reduce a problem to a manageable size and search automatically through various alternatives in an attempt to find a better solution. 9. Describe the grid technique. What is its purpose, and how does it lead to the making of a decision? What are its strengths and limitations? The grid technique is used to determine a least-cost facility location for company situations having multiple markets and raw materials sources. It attempts to determine a fixed facility location that is the least-cost center for moving materials and goods within a geographic grid; a low cost “center of gravity”. After assuming the materials sources and goods’ markets are fixed, and the number consumed or sold is known, a grid is superimposed over the geographic area containing the sources and markets. With the use of the grid, each source and market can be determined by its grid coordinates. The ton-mile center or center of mass can be calculated mathematically. The equation can be solved for the least-cost location, provided the transportation rates for materials and goods are the same. But this is seldom the case, so the ton-mile center equation does not show the cost differences for moving commodities. Higher finished goods rates draws the least-cost location to their markets; reducing the distance to transport the goods. This increases the distance to transport raw materials. Another equation takes into account different transportation rates. The advantage of the grid technique is its simplicity and ability to provide a starting point for location analysis. There are number limitations to the technique. First, it is static, and the solution is only optimum for one point in time. Second, linear transportation rates are assumed Actual rates are tapered. Third, topographic conditions at the optimum location are not considered. Fourth, the proper direction of movement is not considered. 10. Using the grid technique, determine the least-cost location for the following problems: To compute you would use the below calculation: 11. Explain how tapering rates, blanket rates, commercial zones, foreign trade zones, and in-transit privileges affect the facility location decision. Tapering rates, blanket rates, commercial zones, and in-transit privileges are special rate structures that affect facility location. A tapering rate is one that increases with distance but not in direct proportion to distance. Most transportation rates are tapered. The tapering results from the carrier’s ability to spread its fixed costs–loading, billing, and handling—over a greater number of miles. The zone or blanket rate does not increase with distance, but remains the same for all points in the blanket area. It is an exception to tapering rates. These rates are established to ensure a competitive price for a product in a given area. The rate eliminates any transportation cost advantage or disadvantage associated with a given location. A commercial zone is a specific blanket area. It is the transportation definition of a particular city or town plus various surrounding areas. If a site is to be located beyond the municipality’s commercial zone, rates that apply to the city, will not apply to the site. Foreign Trade Zones (FTZ) is a geographic area into which importers can enter a product and hold it without paying duties—and only paying duties or customs when is it shipped into U.S. customs territory. Advantages of FTZs include the following: Deferred customs duties and federal excise taxes on imports, No duties or quota payments on re-exported materials, choice of duty rates paid—based either on the rate for component parts or for the finished product Exemption from state and local inventory taxes or foreign and domestic goods that are to be exported The transit privilege permits the shipper to stop a shipment in transit to perform some function that physically changes the product’s characteristics. The lower through rate for origin to final destination applies, rather than the higher combination rate. The transit privilege makes intermediate locations, not just origins or destinations optimum, and eliminates any geographic disadvantage associate with a producer’s location. 12. Define omni-channel. How is it different from a typical retail channel? Omni- channel is defined as a direct to consumer (D2C) business model where all sales channels ranging from online, mobile, telephonic, mail order, self-service, and physical retail establishments are aligned and fulfillment processes integrated to provide consumers with a seamless shopping experience in alignment with the company’s brand proposition. This is different than the typical retail channel because even though a typical retail channel provides multiple access points to consumers, those access points are not aligned and the fulfillment processes are not integrated together to provide the consumer with a seamless shopping experience in alignment with the company’s brand proposition. 13. Compare and contrast the concepts of a marketing channel and logistics channel. A channel of distribution consists of one or more organizations or individuals who participate in the flow of goods, services, information, and finances from the production point to the final point of consumption. A channel of distribution can also be thought of as the physical structures and intermediaries through which these flows travel. These channels encompass a variety of intermediary firms, including those that can be classified as distributors, wholesalers, retailers, transportation providers, and brokers. Some of these intermediary firms take physical possession of the goods, some take title to the goods, and some take both. Thus, it is critical in the design of a distribution channel to take into consideration both the logistics channel and the marketing channel. The logistics channel refers to the means by which products flow physically from place of availability to place of demand. The marketing channel refers to the means by which necessary transactional elements are managed (for example, customer orders, billing, and accounts receivable). 14. Pick any three customer fulfillment models from Figure 4.9 and: a. Explain how the network operates; b. Identify its advantages; c. Identify its disadvantages; d. Identify the type of market in which this model would work best. Evaluate the students work on its own merits Case Studies CHAPTER CASE 4.1 Johnson and Johnson 1. What factors help to explain why J&J historically had as many as 12 DC’s in Europe? Several factors contributed to the large number of DC’s in Europe for J&J in the past. Among them are: • Diversity of customers and customer preferences between countries and regions, despite the relative geographic closeness of the population. • European customers, like their counterparts in North America, have begun to demand higher service levels than in the past. • Customer demand and preferences have shifted in conjunction with political and social change in Eastern Europe and across the continent, requiring time- and space sensitive fulfillment from nearby facilities. • In some Eastern European countries, labor costs have traditionally been somewhat low and the population density high, making the location of more DCs there economical. 2. What steps in the supply chain network design process discussed in this chapter would have been most relevant to the task faced by J&J in Europe? All of the steps in the network design process are important; however, steps 2-4 (auditing, examination of network alternatives, and facility location analysis), if improved upon, stand to create the most effective change in the shortest time frame. 3. Are there other factors the network optimization study should have considered? The other factors are summarized in Table 4.1. National/regional factors include labor climate, availability of transportation, proximity to customers, taxes, etc. Site specific factors would include local taxes, as well as transportation access, metropolitan location, workforce availability, and utilities. 4. This case study focuses on the shipments from DCs to customer locations. What factors on the supply side, or inbound-to-DC side, would be relevant to the analysis that was conducted? This analysis would be conducted similarly, but with proximity to supply markets weighed as the primary factor. Realistically, any valid network analysis should focus on both the customer and supplier markets, with optimization between the two being a primary goal. CASE 4.2 Bigelow Stores 1. The new Bigelow “network” is comprised of different product lines, with different geographies and volumes, with varying customer touch points (stores versus internet). How would you advise the management of Bigelow on how to proceed in implementing their one-brand, omni-channel strategy? The student will need to identify those product lines that fit into the on-line model for Bigelow and give suggestions on how to grow that market region by region. Also, the student will need to identify the demographics of the consumers who shop at the stores and on-line for the various product categories. For example, would a consumer buy both groceries and sporting goods from the same web site? Bigelow must take advantage of those facilities that already do fulfillment for on-line orders since they will have the technology to add products to their inventory. 2. What type(s) of customer fulfillment networks would you implement to service the different channels in different geographies? There is no one correct answer to this question. However, the student will need to address the feasibility of using integrated versus dedicated fulfillment and pool distribution. 3. What challenges and opportunities do you see for Bigelow in offering all products to all consumers on a single Web site? Would the current DC network support this strategy? Explain your answer. Because of the divergent nature of the products now in Bigelow’s inventory, it might be difficult to offer all on a single web site. However, this divergence gives Bigelow the opportunity for “one-stop” shopping for the consumer. The physical structure of Bigelow’s current network would support a single web site since it does both store and consumer deliveries. However, an integrated information system that links all facilities would be necessary to make a single web site for all products operational. Solution Manual for Supply Chain Management: A Logistics Perspective John J. Coyle, John C. Langley, Robert A. Novack, Brian J. Gibson 9781305859975
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