chapter 14- manufacturing

Logistics

is the process of coordinating and moving material and other resources from one location to another. This is a fairly broad definition, and this chapter will focus on how to analyze where we locate warehouses and plants and how to evaluate the movement of materials to and from those locations.

international logistics

refers to managing these functions when the movement is on a global scale.

third-party logistics company.

as United Parcel Service (UPS), FedEx, and DHL. These global companies are in the business of moving everything from flowers to industrial equipment. Today, a manufacturing company most often will contract with one of those companies to handle many of its logistics functions. In this case, those transportation companies often are called a third-party logistics company. The most basic function would be simply moving the goods from one place to another. The logistics company also may provide additional services such as warehouse management, inventory control, and other

Logistics is big business,

accounting for 9 to 10 percent of the U.S. gross domestic product, and growing. Today's modern, efficient warehouse and distribution centers are the heart of logistics. These centers are carefully managed and efficiently operated to ensure the secure storage and quick flow of goods, services, and related information from the point of origin to the point of consumption.

The problem of deciding how best to transport goods

from plants to customers is a complex one that affects the cost of a product. Major trade-offs related to the cost of transporting the product, speed of delivery, and flexibility in reacting to changes in demand are involved. Information systems play a major role in coordinating activities and include activities such as allocating resources, managing inventory levels, scheduling, and order tracking.

key decision area is deciding how material will be transported. The Logistics-System Design Matrix shown in I Exhibit 14.1 depicts the basic alternatives.

There are six widely recognized modes of transportation: highway (trucks), water (ships), air (aircraft), rail (trains), pipelines, and hand delivery. Each mode is uniquely suited to handle certain types of products, as described next:

Highway (truck). Actually, few products are moved without some highway transportation. The highway offers great flexibility for moving goods to

Page 459

virtually any location not separated by water. Size of the product, weight, and liquid or bulk can all be accommodated with this mode.

• Water (ship). Ships have very high capacity, and operating costs relative to this capacity are very low, but transit times are slow, and large areas of the world are not directly accessible to water carriers. This mode is especially useful for bulk items such as oil, coal, and chemical products.

• Air. Planes are fast but very expensive to operate. Small, light, expensive items are most appropriate for this mode of transportation.

• Rail (trains). This is a fairly low-cost alternative, but transit times can be long and may be subject to variability. The suitability of rail can vary depending on the rail infrastructure. The European infrastructure is highly developed, making this an attractive alternative compared to trucks, while in the United States, the infrastructure has declined over the last 50 years, making it less attractive.

Highway (truck)

Actually, few products are moved without some highway transportation. The highway offers great flexibility for moving goods to

Page 459

virtually any location not separated by water. Size of the product, weight, and liquid or bulk can all be accommodated with this mode.

• 

• Water (ship).

• Ships have very high capacity, and operating costs relative to this capacity are very low, but transit times are slow, and large areas of the world are not directly accessible to water carriers. This mode is especially useful for bulk items such as oil, coal, and chemical products.

• 

• Air. Planes

• are fast but very expensive to operate. Small, light, expensive items are most appropriate for this mode of transportation.

• 

• Rail (trains).

• This is a fairly low-cost alternative, but transit times can be long and may be subject to variability. The suitability of rail can vary depending on the rail infrastructure. The European infrastructure is highly developed, making this an attractive alternative compared to trucks, while in the United States, the infrastructure has declined over the last 50 years, making it less attractive.

• Pipelines.

• This is highly specialized and limited to liquids, gases, and solids in slurry forms. No packaging is needed and the costs per mile are low. The initial cost to build a pipeline is very high.

• 

• Hand Delivery.

• This is the last step in many supply chains. Getting the product in the customer's hand is often a slow and costly activity due to the high labor content.

Special consolidation warehouses are used when

shipments from various sources are pulled together and combined into larger shipments with a common
destination.

This improves the efficiency of the entire system. Cross-docking

an approach used in these consolidation warehouses, where, rather than making larger shipments, incoming shipments are broken down into small shipr r local delivery in an area. This often can be done in a coordinated manner so that

the goods never are stored in inventory.

Retailers receive shipments from many suppliers in their regional warehouses and immediately sort those shipments for delivery to individual stores by using cross-docking systems coordinated by computerized control systems. This results in a minimal amount of inventory being carried in the warehouses.

Hub-and-spoke systems

combine the idea of consolidation and that of cross-docking. Here, the warehouse is referred to as a "hub," and its sole purpose

Page 460

is sorting goods. Incoming goods are sorted immediately to consolidation areas, where each area is designated for shipment to a specific location. Hubs are located in strategic locations near the geographic center of the region they are to serve so as to minimize the distance a good must travel!

Designing a system is an interesting and complex task. The following section focuses on the plant and warehouse location problem as representative of the types of logistics decisions that need to be made. Logistics is a broad topic, and its elements evolve as the value-added services provided by major logistics vendors expand.

Having the proper network design is fundamental to efficiency in the industry!

Proximity to Customers

For example, Japan's NTN Driveshafts built a major plant in Columbus, Indiana, to be closer to major automobile manufacturing plants in the United States-whose buyers want their goods delivered frequently. Such proximity also helps ensure that customer needs are incorporated into products being developed and built.

Business Climate

A favorable business climate can include the presence of similar-sized businesses, the presence of companies in the same industry, and, in the case of international locations, the presence of other foreign companies. Probusiness government legislation and local government intervention to facilitate businesses locating in an area via subsidies, tax abatements, and other support are also factors.

Total Costs

The objective is to select a site with the lowest total cost. This includes regional costs, inbound distribution costs, and outbound distribution costs.

Land, construction, labor, taxes, and energy costs make up the regional costs. In addition, there are hidden costs that are difficult to measure. These involve

excessive moving of preproduction material between locations before final delivery to the customers and loss of customer responsiveness arising from locating away from the main customer base.

Infrastructure

Adequate road, rail, air, and sea transportation is vital. Energy and telecommunications requirements also must be met. In addition, the local government's willingness to invest in upgrading infrastructure to the levels required may be an incentive to select a specific location.

Quality of Labor The

educational and skill levels of the labor pool must match the company's needs. Even more important are their willingness and ability to learn.

Suppliers

high-quality and competitive supplier base makes a given location suitable. The proximity of important suppliers' plants also supports lean production methods.

Other Facilities

The location of other plants or distribution centers of the same company may influence a new facility's location in the network. Issues of product mix and capacity are strongly interconnected to the location decision in this context.

Free Trade Zones

foreign trade zone or a free trade zone is typically a closed facility (under the supervision of the customs department) into which foreign goods can be brought without being subject to the normal customs requirements. There are about 290 such free trade zones in the United States today. Such specialized locations also exist in other countries. Manufacturers in free trade zones can employ imported components used in the production of the final product and delay the payment of customs duties until the product is shipped into the host country.

Political Risk

The fast-changing geopolitical scenes in numerous nations present exciting, challenging opportunities. But the extended phase of transformation that many countries are undergoing makes the decision to locate in those areas extremely difficult. Political risks in both the country of location and the host country influence location decisions.

Government Barriers

Barriers to enter and locate in many countries are being removed today through legislation. Yet many nonlegislative and cultural barriers should be considered in location planning.

Trading Blocs

L The Pacific Alliance is a trading bloc formed by Chile, Columbia, Mexico, and Peru, which all border the Pacific Ocean. Such agreements influence location decisions, both within and outside trading bloc countries. Firms typically locate, or relocate, within a bloc to take advantage of new market opportunities or the lower totil costs afforded by the trading agreement. Other companies (those outside the trading bloc countries) decide on locations within the bloc so as not to be disqualified from competing in the new market.

Environmental regulation

The environmental regulations that impact a certain industry in a given location should be included in the location decision. Besides measurable cost implications, these regulations influence the relationship with the local community.

Host Community The host community's

interest in having the plant in its midst is a necessary part of the evaluation process. Local educational facilities and the broader issue of quality of life are also important.

Competitive advantage

An important decision for multinational companies is the nation in which to locate the home base for each distinct business.

is created at a home base where strategy is set, the core product and process technology are created, and a critical mass of production takes place. Tax implications also play a role in the decision. So a company should move its home base to a country that stimulates innovation and provides the

Trading blocs

A group of countries that agree on a set of special arrangements governing the trading of goods between member countries. Companies may locate in places affected by the agreement to take advantage of new market opportunities.

Free trade zone

A closed facility (under the supervision of government customs officials) into which foreign goods can be brought without being subject to the payment of normal import duties.

Plant Location Methods

we will see, there are many techniques available for identifying potential sites for plants or other types of facilities. The process required to narrow the decision down to a particular area can vary significantly depending on the type of business we are in and the competitive pressures that must be considered. As we have discussed, there are often many different criteria that need to be considered when selecting from the set of feasible sites.

In this section, we sample three different types of techniques that have proven to be very useful to many companies. The first is the factorrating system that allows us to consider many different types of criteria using simple point-rating scales. Next, we consider the transportation method of linear programming, a powerful technique for estimating the cost of using a network of plants and warehouses. Following this, we consider the centroid method, a technique often used by communications companies (cell phone providers) to locate their transmission towers. Finally, later in the chapter we consider how service firms such as McDonald's and State Farm Insurance use statistical techniques to find desirable locations for their facilities.

Keep in mind that each of the techniques described here would be used within the context of a more comprehensive strategy for locating a facility. Typically, the strategy would employ some type of search where major regions are first considered; it is narrowed down to areas, then to potential sites, and finally a choice is made between a few alternatives. Think of these techniques as simple tools used in different ways to zero in on a site. The factor-rating system is useful when nonquantitative factors are important. The linear programming and centroid methods are quantitative and may be tied to cost and service-related criteria. The statistical techniques are good when there is significant variability in criteria measures. The techniques are often used in combination to solve a real problem!

Factor-Rating Systems

are perhaps the most widely used-of the general location techniques because they provide a mechanism to combine diverse factors in an easy. to-understand format.

Factor-rating system Def

An approach for selecting a facility location by combining a diverse set of factors. Point scales are developed for each criterion. Each potential site is then evaluated on each criterion, and the points are

Living conditions

combined to calculate a rating for the site.

Transportation Method of Linear Programming

The transportation method

is a special linear programming method. (Note that linear programming is developed in detail in Appendix A.) It gets its name from its application to problems involving transporting products from several sources to several destinations. The two common objectives of such problems are either

(1)

(2)

minimize the cost of shipping n units to m destinations or maximize the profit of shipping n units to m destinations.

Transportation method Def

A special linear programming method that is useful for solving problems involving transporting products from several sources to several destinations.

centroid method

is a technique for locating single facilities that considers the existing facilities, the distances between them, and the volumes of

Page 467

goods to be shipped. The technique is often used to locate intermediate or distribution warehouses. In its simplest form, this method assumes that inbound and outbound transportation costs are equal, and it does not include special shipping costs for less than full loads.

Locating Service Facilities

Because of the variety of service firms and the relatively low cost of establishing a service facility compared to one for manufacturing, new service facilities are far more common than new factories and warehouses. Indeed, there are few communities in which rapid population growth has not been paralleled by concurrent rapid growth in retail outlets, restaurants, municipal services, and entertainment facilities.

Services typically have multiple sites to maintain close contact with customers. The location decision is closely tied to the market selection decision. If the target market is college-age groups, locations in retirement communities-despite desirability in terms of cost, resource availability, and so forth-are not viable alternatives. Market needs also affect the number of sites to be built and the size and characteristics of the sites. Whereas manufacturing location decisions are often made by minimizing costs, many service location decision techniques maximize the profit potential of various sites.