In addition to enhancing the efficiency and effectiveness of a logistics operation, the redesign of a firm’s logistics network can help to differentiate a firm in the market place. For example, firms may expand or shrink their logistics networks by increasing or decreasing their distribution centres, or consolidate their existing systems to improve logistical customer service and to differentiate their services compared to competition in the market place.
Firm consider the impact of such decisions to redesign their logical networks on total logical costs. Also use of currently available information technology, transportation services etc. can enhance responsiveness and the level of service experienced by customers.
The need for Long Range Planning
In the short-run, for a given logistics network and location of the key facilities of a firm, the logistics manager must operate within the constraints imposed by the facility locations. Changing facility locations in the short-run becomes impractical because of site availability leases, contracts and investments. But in the long run, management should consider the logistics network design as a variable factor and should take decisions to change the network to meet the logistics requirements imposed by customers, suppliers and competitive changes.
Further, a facility properly located based on today’s economic, competitive and technologies conditions may not be optimum location under future conditions. Also today’s location decision will have profound effect on future costs in such areas as logistics, marketing, manufacturing and finance. Hence, the facility location must seriously consider anticipated business conditions and recognize the critical need to be flexible and responsive to customer needs as they may change in the future.
The Strategic Importance of Logistics Network Design
All businesses operate in a very dynamic environment in which change is inevitable. Characteristics of consumer, industrial buyer demand, technology, competition, markets and suppliers are constantly changing. As a result, businesses must redeploy their resources in response to and in anticipation of the ever-changing environment.
Because of the rate at which change is occurring, no existing logistics network can be truly up to date. Hence, any logistics network that has been existing for a number of years needs to be re-evaluated and redesigned.
There are many types of changes that may suggest a need to reevaluate and/or redesign a firm’s logistics network. They are:
(i) Changing customer service requirements
(ii) Shifting locations of customer and / or supply markets.
(iii) Change in corporate ownership.
(iv) Cost pressures.
(v) Competitive capabilities and
(vi) Corporate organizational change.
These changing elements of the business environment are briefly
discussed in the following section:
(i) Changing Customer Service Requirements: The logistics requirements of customers are changing in many ways. As a result, the need to reevaluate and redesign logistics networks is of great contemporary interest.
(ii) Shifting Locations of Customer and / or Supply Markets: The manufacturing and logistics facilities are positioned in the supply chain between customer and supply markets and any changes in these markets force the firm to reevaluate its logistics network. When the location of customer markets shift geographically, new warehouses and distribution facilities are established following the changing geolocation trends. On the supply side, the service and cost requirements of firms practicing JIT – based manufacturing have forced the suppliers, firms to examine the locations of logistics facilities. Many suppliers have selected nearby points for manufacturing and / or parts distribution faculties.
(iii) Change in Corporate Leadership: Ownership-related change associated with a merger, acquisition or divestiture is a common occurrence for a firm now a days. In such instances, many firms choose to be proactive and to conduct a formal evaluation of new logistics networks versus previous logistics networks before implementing such a change this approach will facilitate to ensure that the newly merged or newly independent firm will have fully anticipated the logistics impacts of the change in corporate ownership.
(iv) Cost Pressures: Many firms consider today their major priority is to figure-out new and innovative ways to remove cost our of their key business processes including those related to logistics. A reevaluation of the logistics network and of the functioning of the overall supply chain can help to find new sources of cost savings. Such sources could be transportation, inventory or warehousing. Companies considering modernization needs of plant also benefit from a comprehensive cost analysis along with a revaluation of the logistics network.
(v) Competitive Capabilities: Competitive pressures may force a firm to examine its logistics service levels and the costs generated by its network of logistics facilities. To remain competitive in the market place or to develop a competitive advantage, a firm should frequently examine the relative locations of its facilities toward the goal of improving service and / or lowering costs.
(vi) Corporate Organizational Change: Even when a firm considers any major corporate organizational change such as downsizing, 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.
Logistics network design process
The task of designing an appropriate logistics network should be coordinated closely with the identification and implementation of key corporate and overall business strategies.
The six major steps involved in the Logistics Network Design Process are as follows:
(i) Define the logistics network design process.
(ii) Perform a logistics audit.
(iii) Examine the logistics network alternatives.
(iv) Conducting a facility location analysis
(v) Make decisions regarding network and facility location.
(vi) Develop an implementation plan.
Step 1: Defining the Logistics Network Design Process
A logistics network reengineering team should be formed and made responsible for all elements of the logistics design process. This team needs to become aware of overall corporate and business strategies and the underlying business needs of the firm and the supply chains in which it is a participant.
Step 2: Performing Logistics Audit
The logistics audit provides members of the reengineering team with a comprehensive perspective on the firm’s logistics process. Further, it helps to collect essential types of information which will be useful throughout future steps in the redesign process.
The types of information that should become available as a result of the logistics audit are:
(i) Customer requirements and key environmental factors.
(ii) Key logistics goals and objectives.
(iii) Profile of the current logistics network and the firm’s position in the respective supply chain.
(iv) Bench-mark or target values for logistics costs and key performance measurements.
(v) Identification of gaps between current and desired logistics performance (both qualitative and quantitative).
(vi) Key objectives for logistics network design, expressed in term that will facilitate measurements.
Step 3: Examining the Logistics Network Alternatives
This step involved application of suitable quantitative models to the current logistics system as well as to the alternative systems and approaches that are being considered. These models provide considerable insight into the functioning and cost / service effectiveness of the various possible networks.
Some of the modeling approaches are:
(ii) simulation and
(iii) heuristic approach. While optimization approaches search for the “best” solution, simulation models replicate the functioning of the logistics network.
Heuristic technique can accommodate broad problem definitions but do not provide optimum solutions.
Step 4: Conducting a Facility Location Analysis
Once a general configuration of the desired logistics network has been decided, the next task is to carefully analyse the attributes of specific regions and cities for sites of logistics facilities. These analysis will have both quantitative and qualitative aspects. The quantitative aspects include economic (or cost) factors (i.e. land costs, cost of utilities, labour cost, material cost energy cost etc.) whereas the qualitative factors include such considerations as labour attitude, transportation issues (i.e., availability), proximity to market and customers, quality of life, industrial development incentives, supplier networks, and company preference.
A location selection team is formed which will collect information on specific attributes such as those mentioned earlier. Further, this team should be able to examine potential sites in terms of topography, geology and facility design.
Step 5: Making Decisions Regarding Network and Facility Location
In this step, the network and specific sites for logistics facilities recommended should be evaluated for consistency with the design criteria that were identified in step no. 1. This step should confirm the types of change that re needed to the firm’s logistic network and should do so in the context of overall supply chain positioning.
Step 6: Developing an Implementation Plan
The development of an effective implementation plan is a critical activity. This plan should serve as a useful roadmap for moving from the current logistics network to the desired one. It is important that the firm commits the resources necessary to assure a smooth, timely implementation.
Major Locational Determinants
Regional Determinants Site-specific Determinants
(i) Labour climate
(ii) Availability of Transportation facilities
(iii) Proximity to market and
(iv) Quality of Life
(v) Taxes and incentives
(vi) Supplier networks
(vii) Land Costs and Utilities
(viii) Company preference
(i) Transportation access (e.g.. truck, air, water and rail)
(ii) Inside/outside metropolitan area
(iii) Availability of labour (work force)
(iv) Land costs and taxes
Location determinants can be classified as:
(i) Regional determinants and
(ii) Site-specific determinants.
The importance of major locational determinants varies among industries and among individual companies within specific industries.