Logistics and Facility Location

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Logistics and Facility Location

• Selected Slides from Jacobs et al, 9th Edition
• Operations and Supply Management
• Chapter 11
• Edited, Annotated and Supplemented by
• Peter Jurkat

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What is Logistics?
11-2

• The movement of goods through the supply chain
• the art and science of obtaining, producing, and
  distributing material and product in the proper
  place and in proper quantities

3
Facility Location

• Business, Social and Political Constructs

• Decisions

• Proximity to Customers
• Business Climate
• Total Costs
• Infrastructure
• Quality of Labor
• Suppliers
• Other Facilities
• Free Trade Zones
• Political Risk
• Government Barriers
• Trading Blocs
• Environmental Regulation
• Host Community
• Competitive Advantage
• Clusters

• How to best transport goods
• Modes of transportation
• Truck, ship, rail pipelines
• Warehouses
• Consolidation
• Cross Docking
• Hub-and-Spoke systems
• Facility Location

Country Characteristics memo chose an
organization with globalization goals and
investigate various countries as to their
desirability for locating a facility there with
regard to one of the business/social/political
constructs in red. Short memo and at most 4
slides. Define the terms (e.g., quality of
labor) , provide operational definitions of
relevant quantitative(?) measures, and give
references for further details. Presentation by
one team for each issue selected at random.
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Location Cost Analysis

• Four common methods (among others?)
• Break-even analysis compares locations on volume
  necessary to break-even if located there
• Transportation method allows minimization of cost
  or maximization of profit for combinations of
  factories (sources), warehouses (sources and
  destinations), and retail/customer locations
  (destinations)
• Center of gravity methods finds best location of
  a source among several destinations based on cost
  or distance and/or time weighed by volume
• Intervening opportunity method based on the
  willingness (probability) of customers travel to
  a destination among several other similar
  destinations
• Regression models find relationship between a
  location success measure (e.g., sales) and
  location characteristics

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Location DecisionBreak-Even Analysis Example
Total Cost Fixed Cost (Variable Cost x
Volume) Total Revenue Price x Volume Break-even
volume (FC1 FC2)/(VC2 VC1)

• Selling price 120
• Expected volume 2,000 units
• Expected revenue 240,000

BEV A vs. B 1000 BEV A vs. C 380 BEV B vs.
C 2500
Three locations
See Ch07_BreakEvenAnalysis_Template.xls for any
volume
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Transportation Method Example

• Minimizes total cost of shipments from several
  existing factories (rows) to several existing
  warehouses (columns) subject to factory
  production limits and warehouse demands
• Date often presented as follows but for
  computation in Excel need two separate arrays,
  one for costs and other for actual shipments

See Ch11_4x4_US_Pharmaceutical.xls- need to build
a new spreadsheet for each (n, m) Now do Problem
11.3
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Location DecisionCenter-of-Gravity Method

• Finds location of distribution center that
  minimizes distribution costs
• Considers
• Location of markets usually given
• Volume of goods shipped to those markets
• Shipping cost (or distance)
• Place existing locations on a coordinate grid
• Calculate X and Y coordinates for center of
  gravity
• Assumes cost is directly proportional to straight
  line distance and volume shipped
• Averages distances weighted by amount to be
  shipped (not inverse square)
• Airline distance (diagonal of triangle) may
  need to consider curvature of earths surface
• City block distance (base height of triangle)

any destination (xi,yi)
diagonal
height
(0,0)
(xc,yc)
base
Consider (xc,yc) potential source (center of
gravity)
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Location DecisionCenter-of-Gravity Method
City block distances
See Ch11_Centroid_Method_Template.xlsx for
city-block distances See AirlineDistanceCenterOfGr
avityLocationModel.xlsx for airline distances
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Inerv
Intervening Opportunity Model

• Used as if a traveler wishes to got to a facility
  of a particular type (e.g., fast food, shopping
  mall, food store, movie, club)
• Rank destinations by distance and/or cost and
  assign the destination index i such that di lt dj
  for i lt j (means destination1 is nearest,
  destination2 is next furthest, , destinationn
  is furthest away)
• For each potential destination assign a
  probability, Pi, of it being chosen regardless
  of distance (i.e., as if they were all
  equidistant) preference for competitor?
• Then probability of choosing destination i
• Pci K(1 P1)(1 P2)(1 Pi-1)Pi
• K chosen so that sum of all probabilities 1
• Probabilities estimated from surveys and/or
  actual traffic

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11-10

• Initial location characteristics and other
  independent variables for a regression model of
  hotel success (profitability) others added
  during analysis
• Final model included state population/inn, price,
  square root(median income), and college students
  within 4 miles (p395)

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Factor-Rating MethodLocation Decision Wider
Applicability

• Popular because a wide variety of factors can be
  included in the analysis prior only considered
  location, cost, volume
• What are other factors should be considered?
• Six steps in the method
• Develop a list of relevant factors (often called
  critical success factors)
• Assign a weight to each factor for each factor
  (recall QFD)
• Desirability?
• Importance?
• Rate each location for each factor
• Multiply rates by weights for each factor and add
  for each location
• Recommend the location with the highest point
  score

Text describes ratings as combined weight x
desirability although equivalent, people often
think that separation allows more objectivity.
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Factor-Rating Example
Suppose one of the factors is cost. The ratings
can then be calculated in several ways.
See FactorRatingWorksheet.xlsx
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Geographic Information Systems (GIS)

• After regression analysis gather data for
  independent variables of the candidate geographic
  areas
• Important tool to help in location analysis -
  enables more complex demographic analysis
• Available data bases include
• Detailed census data
• Detailed maps
• Utilities
• Geographic features
• Locations of major services

See http//www.gis.com/, a commercial site by
ESRI, http//gislounge.com/, http//opensourcegis.
org/ .
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Geographic Information Systems (GIS)