Logistics and Transportation Part 9

1. Important Dates
▶ Assignment 2/13/2024
▶ Midterm 2/15/2024
▶ Assignment 2/22/2024
▶ Final 2/27/2024
This Photo by Unknown Author is licensed under CC BY-SA-NC

2. Assignment
Review

3. Four General Types of
Economic Utility
▶ The four general types of economic
utility are possession, form, time, and
place.
• Utility, in economics, refers to the
usefulness or enjoyment a consumer
can get from a service or good.
• Although the concept of utility is
abstract, it is a useful way to explain
how and why consumers make their
decisions.
• In behavioral economics, the four
types of economic utility are form
utility, time utility, place utility, and
possession utility. These terms refer
to the psychological importance
attached to different forms of utility.

4. Lean Supply Chains
▶ Lean supply chains are focused on
eliminating all waste, including time,
and ensuring a level schedule.
• A lean supply chain is all about
delivering a product to the end
customer in the most efficient way and
with the least amount of waste. It’s not
about cost advantages alone. It’s the
elimination of unnecessary elements
and steps that ultimately lead to a
substantial reduction in lead time –
from manufacturing to delivering the
end product. This builds supply chain
resilience.
• With increasing complexity in global
supply chains, the lean supply chain
model has become a top priority for
global organizations that do not want
any lag in responding to changing
market demands.

5. Fragmented logistics
structure
▶ Fragmented logistics structure
are logistics activities managed
in multiple departments
throughout an organization.
• Fragmented logistics structure is
where multiple departments
handle the logistics activities in
the organization. In such a
structure the functions of each
department tend to concentrate
in their own areas and there is
isolation from rest of the
departments.

6. Logistics
▶ Logistics as a strategic tool
reduce costs, improve customer
service, and increase sales.
• Logistics is the overall process of
managing how resources are
acquired, stored, and
transported to their final
destination.
• Poor logistics in a business can
impact its bottom line.
• Logistics is now used widely in
the business sector, particularly
by companies in the
manufacturing sectors, to refer to
how resources are handled and
moved along the supply chain.

7. Electronic data
interchange (EDI)
▶ Electronic data interchange
(EDI) is a computer-to-computer
exchange of data. It is a fast
and efficient way to exchange
information between different
organizations.
• EDI, which stands for electronic
data interchange, is the
intercompany communication of
business documents in a
standard format.
• The simple definition of EDI is a
standard electronic format that
replaces paper-based
documents such as purchase
orders or invoices.

8. Facility Location

9. Terminal Learning
Objectives
▶ To examine the strategic importance of
facility location
▶ To explain the general process of
determining the optimum number of
facilities
▶ To describe the major factors that
influence facility location
▶ To examine a site’s specialized location
characteristics
▶ To explain location decisions using
simple grid systems
▶ To learn about facility relocation and
facility closing

10. The Strategic
Importance of Facility
Location
▶ Logistics managers face a
marketplace that is dynamic and
ever-changing. This dynamism and
change are two reasons why facility
location has evolved from a tactical to
a strategic consideration. Facilities
such as manufacturing plants and
warehousing represent fixed points
where goods are produced,
processed, assembled, or stored.
Because these facilities can be very
expensive to lease or build,
companies are often hesitant to close
them. However, poorly located
facilities can negatively impact
logistical effectiveness (e.g., due to
longer and less reliable delivery
times) and efficiency (e.g., due to
increased delivery costs).
This Photo by Unknown Author is licensed under CC BY

11. Cost Considerations
▶ Cost considerations are hardly new to
logistics managers. Today’s cost
considerations arise because many
consumers have become sensitized to
buy products only when prices are low,
due in part to lingering effects from the
2007–2009 recession. Businesses have
also contributed to consumer fixation
with low prices, as illustrated by the
following quote: “Price cuts are like
management heroin. They’re addictive.
Customers develop a craving for big
discounts and an aversion to full
prices.” If retailers offer consistently low
prices, then their costs must also be
consistently low for organizations to be
profitable. For many years, this low
price/low-cost framework led many
companies to manufacture in countries
characterized by plentiful and low-cost
labor. In recent years, however, some
organizations, particularly those with
more than $1 billion (U.S. dollars) in
sales, are reexamining the low-cost
labor paradigm.

12. Cost Considerations
▶ As a result, organizations are
reconfiguring their network designs. The
rising labor costs in China have caused
some companies to move production to
lower-cost Asian-Pacific countries such
as Vietnam and Laos.4 Alternatively,
some organizations have adopted near
sourcing, in which companies
reconfigure their logistics networks to
bring some production facilities closer to
key consumer markets. For example,
Mexico is the most popular location for
near sourcing among companies that
do business in North America.
This Photo by Unknown Author is licensed under CC BY-SA

13. Customer Service
Expectations
▶ One point that has been repeatedly
emphasized in this text is that customer
service expectations continue to
increase over time. We know, for
example, that today’s customers are
looking for faster and more reliable
order cycles, but how are faster and
more reliable order cycles
operationalized from a facility location
perspective? Should an organization
rely on one or two facilities to serve its
customers, or should it rely on multiple
facilities to serve them? The former
alternative leads to fewer facilities and
lower inventory costs, but higher
transportation costs; the latter leads to
more facilities and higher inventory
costs, but lower transportation costs.
When the online retailer Amazon began
operations in the mid-1990s, it serviced
orders from only one facility located in
the United States. Today, by contrast,
Amazon services orders from more than
120 fulfillment centers located in the
United States, Europe, and Asia.

14. Location of Customer
or Supply Markets
▶ Improvements in transportation and
technology (e.g., air conditioning) allow
consumers to migrate relatively easily
from one region or country to another.
Economic growth is another variable
that influences the location of customer
markets; organizations sometimes
expand their geographic scope to serve
new customers. For example,
Starbucks, which at the beginning of
2016 operated approximately 2,000
stores in China, plans to open 500 new
stores per year there through 2020. The
sustainability concept is another
strategic consideration that can
potentially impact the location of supply
markets.

15. Magnitude of Inventory
Costs
▶ Table 9.1, lists the five most populous
states in the United States in 1970, 1990,
and 2014. Note that in 1970, three of the
five most populated states were in the
Northeast and Midwest, and thus in
relatively close geographic proximity. By
2014, the most populous states were
located in the West, Southwest,
Southeast, Northeast, and Midwest,
respectively—and thus are much more
geographically diverse than in 1970. This
population shift necessitates different
production and distribution facility
locations than in the 1970s. Cities like
Atlanta, Dallas, and Reno (Nevada) are
today important distribution hubs in the
United States.

16. Determining the
Number of Facilities
▶ Few firms start business on one day
and have a need for large-scale
production and distribution the next
day. Rather, distribution and
production facilities tend to be added
(or subtracted) over time, as needed.
Most analytical procedures for
determining the number of facilities
are computerized because of the vast
number of permutations involved and
the complementary relationships
between current facilities in a
distribution network. Fortunately, a
number of software packages are
available that help organizations
determine both the number and
location of facilities in their logistics
networks.
This Photo by Unknown Author is licensed under CC BY

17. General Factors
Influencing Facility
Location
▶ Tangible products are the
combination of raw materials,
component parts, and labor—with the
mixture varying from product to
product—made for sale in various
markets. Thus, raw materials,
component parts, labor, and markets
all influence where to locate a
manufacturing, processing, or
assembly facility. Warehouses,
distribution centers, and cross-
docking facilities exist to facilitate the
distribution of products. Their
locations are in turn influenced by the
locations of plants whose products
they handle and the markets they
serve. This Photo by Unknown Author is licensed under CC BY-NC

18. Natural Resources
▶ The materials used to make a
product must be extracted directly
from the ground or sea (as in the
case of mining or fishing) or indirectly
(as in the case of farm products). In
some instances, these resources
may be located great distances from
the point where the materials or their
products will be consumed. For
materials that lose no weight in
processing, known as pure materials,
the processing point can be
anywhere near the raw material
source and the market. However, if
the materials must be processed at
some point between where they are
gathered and where they are needed,
their weight-losing or weight-gaining
characteristics become important for
facility location. This Photo by Unknown Author is licensed under CC BY

19. Natural Resources
▶ If the materials lose considerable
weight in processing, known as
weight-losing products, then the
processing point should be near the
point where they are mined or
harvested, largely to avoid the
payment of unnecessary
transportation charges. If the raw
materials gain weight in processing,
known as weight-gaining products,
then the processing point should be
close to the market. Sugar derived
from sugar beets provides an
example of a weight-losing product (a
yield of roughly 1 pound of sugar
from 6 pounds of sugar beets),
whereas bottled soft drinks are an
example of a weight-gaining product.

20. Natural Resources
▶ In addition to its use for bottling,
water (of one type or another) is a
requirement for the location of many
facilities. Land requirements are
another natural resource
consideration in facility location, and
distribution and production facilities
may require large parcels of land to
facilitate effective and efficient
operations. Historically, the
relationship between natural
resources and facility location
revolved around how the natural
resources would be incorporated into
products making their way toward
consumers.

21. Population
Characteristics—
Market for Goods
▶ Population can be viewed as both a
market for goods and a potential
source of labor. Customer
considerations, particularly as they
affect customer service, play a key
role in where consumer goods
companies tend to locate their
distribution facilities. Planners for
consumer products pay extremely
close attention to various attributes of
current and potential consumers. In
an effort to learn more about
population size and characteristics,
many countries conduct a detailed
study, or census, typically once every
10 years or so.

22. Population
Characteristics—Labor
▶ Labor is a primary concern in
selecting a site for manufacturing,
processing, assembly, and
distribution. Organizations can be
concerned with a number of labor-
related characteristics: the size of the
available workforce, the
unemployment rate of the workforce,
the age profile of the workforce, its
skills and education, the prevailing
wage rates, and the extent to which
the workforce is, or might be,
unionized. Labor wage rates are a
key locational determinant as supply
chains become more global in nature.
For example, hourly compensation
data (including benefits) among
manufacturing firms in 2012 indicate
average compensation of $63.36 in
Norway, $45.79 in Germany, and
$35.67 in the United States.

23. Population
Characteristics—Labor
▶ In relative terms, a company could
have approximately similar
compensation costs by hiring either
six Mexican workers or one U.S.
worker. This wage differential at least
partly explains the popularity of the
maquiladora plants, assembly plants
located just south of the U.S.–
Mexican border. These plants, which
began in the mid-1960s, provided
much needed jobs to Mexican
workers and allowed for low-cost,
duty-free production so long as all the
goods were exported from Mexico.
Maquiladoras continue to be popular
today in part because of a substantial
narrowing of the wage gap between
Mexico and China in recent years.
This Photo by Unknown Author is licensed under CC BY-ND

24. Population
Characteristics—Labor
▶ Companies interested in locating in countries
with low-cost labor should recognize that
there are sometimes limits to the number of
supervisory personnel that can be brought in
from other countries. The host country’s
government may also insist that its own
nationals be trained for and employed in
many supervisory posts. In addition,
countries with low-cost labor may house a
multitude of sweatshops, which can be
viewed as organizations that exploit workers
and that do not comply with fiscal and legal
obligations toward employees. A workforce’s
union status is also a key locational
determinant for some organizations. From
management’s perspective, unions tend to
result in increased labor costs, due to higher
wages, and less flexibility in terms of job
assignments, which often forces companies
to hire additional workers. As a result, some
organizations prefer geographic areas in
which unions are not strong; in the United
States, for example, some states have right-
to-work laws, which mean that an individual
cannot be compelled to join a union as a
condition of employment. This Photo by Unknown Author is licensed under CC BY-NC-ND

25. Population
Characteristics—Labor
▶ Racial, ethnic, and cultural
considerations may also be
important population characteristics
that factor into facility location
decisions. Organizations are
sometimes hesitant to establish
facilities in areas that are not
racially, ethnically, or culturally
diverse because of the difficulty in
attracting workers to transfer to such
locations. Employees who are sent
to other countries for extended
periods of time are known as
expatriate workers. These workers
often present unique managerial
challenges. For example, expatriate
assignments can be costly, ranging
up to $1 million per assignment, and
turnover rates can run between 20
and 40 percent.

26. Taxes and Incentives
▶ Although labor considerations are
important for location decisions, taxes
can also be important, particularly
with respect to warehousing facilities.
Of particular interest to logisticians
and supply chain managers is the
inventory tax, analogous to personal
property taxes paid by individuals.
Fewer than 15 U.S. states currently
assess inventory taxes. As if
business taxes are not difficult
enough to understand, they represent
only one side of the coin; the other
side is to know the value of services
being received in exchange for the
taxes. A general rule of thumb is that
the services received represent only
about 50 percent of the taxes paid,
and this imbalance may cause
businesses to invest more money to
receive the required level of service.
To further complicate matters,
governments may offer incentive
packages as an inducement for firms
to locate facilities in a particular area.
This Photo by Unknown Author is licensed under CC BY

27. Transportation
Considerations
▶ Transportation considerations in the
form of transportation availability and
costs are a key aspect of facility
location decisions because
transportation often represents such
a large portion of total logistics costs.
Transportation availability refers to
the number of transportation modes
(intermodal competition) as well as
the number of carriers within each
mode (intramodal competition) that
could serve a proposed facility. As a
general rule, the existence of
competition, whether intermodal,
intramodal, or both, tends to have
both cost and service benefits for
potential users. Limited competition
generally leads to higher
transportation costs and means that
users have to accept whatever
service they receive. Geographically
central facility locations are often the
result of transportation costs and
service considerations.

28. Truck Distances from
Nebraska
▶ With respect to transportation costs,
centralized facilities tend to minimize
the total transit distances, which likely
results in minimum transportation
costs. A centralized location can also
maximize a facility’s service area, as
shown in Figure 9.2, which illustrates
truck distances from the state of
Nebraska. Note how many states are
located within 1,000 miles (generally
considered two-day service by truck)
of Nebraska.

29. Proximity to Industry
Clusters
▶ When looking at facility location
considerations, early business
logistics textbooks discussed the
agglomeration concept, which “refers
to the net advantages which can be
gained by a sharing of common
locations by various enterprises.”18
Although agglomeration continues to
be a key factor in facility location, it is
better known today as the industry
cluster concept. Industry clusters
differ in size and shape and, not
surprisingly, one type is focused on a
particular industry. Silicon Valley, a
collection of high-technology firms
located in the southern part of San
Francisco, California, is a well-known
cluster based on a particular industry.

30. Proximity to Industry
Clusters
▶ Another type of cluster offers
organizations proximity to key
suppliers. Proximity to key suppliers
has been the catalyst in the
development of supplier parks, a
concept that developed around
automakers and their suppliers in
Europe and has spread to other
continents, including North America.
Key suppliers locate on the site of, or
adjacent to, automobile assembly
plants, which helps reduce shipping
costs and inventory carrying costs.
Industry clusters can provide
potential advantages to prospective
participants in terms of facility and
transportation considerations.

31. Trade Patterns
▶ As pointed out earlier in this chapter,
firms producing consumer goods
follow changes in population to better
orient their distribution systems—and
there are shifts in the markets for
industrial goods as well. With respect
to commodity flows, logisticians are
especially interested in (1) how much
is being produced and (2) where it is
being shipped. The development and
implementation of multicountry trade
agreements have generated profound
impacts on trade patterns. Trade
patterns have also been influenced
among those countries that are
members of the European Union (EU).
When the EU consisted of 15
countries, the central location and
strong transportation infrastructures of
the so-called “Benelux” countries
(Belgium, the Netherlands, and
Luxembourg) were a favored location
for distribution facilities to serve EU
countries, and many companies
operated only one distribution facility
to serve their EU customers.

32. Quality-of-Life
Considerations
▶ An increasingly important locational
factor is what can broadly be called
quality-of-life considerations, which
incorporate nonbusiness factors into
the business decision of where to
locate a plant or distribution facility.
There are a number of reasons for
including quality-of-life considerations
as a factor in facility location. First,
employees who are able to live a
reasonable lifestyle tend to be happier
and more loyal; happy and loyal
employees are less likely to leave their
jobs and less likely to offend
prospective customers. Second,
because many organizations now
compete nationally and internationally
for talent, less-than-desirable
geographic locations might hinder the
recruiting process. Quite simply, the
quality of life in a region—is it a nice
place to live?—impacts both employee
retention and the ability to attract new
employees.
This Photo by Unknown Author is licensed under CC BY-NC-ND

33. Locating in Other
Countries
▶ The general factors (e.g., population,
transportation, quality of life, etc.) that
we’ve looked at also apply when
companies are thinking of locating
facilities in non-domestic countries.
For example, the Middle East has
been a hotbed of widespread political
instability in recent years; a short list
of Middle Eastern countries impacted
by political turmoil in recent years
includes Iraq, Libya, Syria, and
Yemen. One challenge of this political
instability is that alternative systems
of governance have been slow to
emerge, and this uncertainty is
causing many organizations to delay,
or even cancel, expansion into this
region.

34. Specialized Location
Characteristics
▶ Land may be zoned, which means that
there are limits on how the land can be
used. For example, a warehouse might
be allowed only in areas set aside for
wholesale or other specified commercial
operations. Union locals have areas of
jurisdiction, and a firm’s labor relations
manager may have distinct preferences
for the locals with which he or she is
willing to deal. Even though an
individual union may ratify national labor
agreements, local supplemental
agreements often reflect the unique
characteristics of a particular area.
Another specialized characteristic
involves the weather, and location
decisions can be influenced by the
potential for tornadoes, floods, and
hurricanes, among others. The twenty-
first century has been characterized by
tremendous weather extremes and
there is little indication that these
extremes will diminish going forward in
time.

35. Free Trade Zones
▶ Highly specialized sites in which to
locate are free trade zones, also
known as foreign trade zones, export
processing zones, or special
economic zones. In a free trade zone
nondomestic merchandise may be
stored, exhibited, processed, or used
in manufacturing operations without
being subjected to duties and quotas
until the goods or their products enter
the customs territory of the zone
country.
Free trade subzones refer to specific
locations at an existing free trade
zone—such as an individual
company—where goods can be
stored, exhibited, processed, or
manufactured on a duty-free basis.
There are over 600 free trade
subzones in the United States; they
are particularly popular among
automotive manufacturers. For
example, 11 of the 16 subzones in
Detroit, Michigan, involve automobile
manufacturers.
This Photo by Unknown Author is licensed under CC BY

36. Finding the Lowest-
Cost Location Using
Grid Systems
▶ Many products are a combination of
several material inputs and labor.
Traditional site location theory can be
used to show that one or several
locations will minimize transportation
costs. Figure 9.3 shows a laboratory-
like piece of equipment that could be
used to find the lowest-cost location,
in terms of transportation, for
assembling a product consisting of
inputs from two sources and a market
in a third area.

37. Grid Systems
▶ Grid systems are important to
locational analysis because they
allow one to analyze spatial
relationships with relatively simple
mathematical tools. Grid systems are
checkerboard patterns that are
placed on a map, as in Figure 9.4.
The grid is numbered in two
directions: horizontal and vertical.
Recall from geometry that the length
of the hypotenuse of a right triangle is
the square root of the sum of the
squared values of the right triangle’s
two legs. Grid systems are placed so
that they coincide with north–south
and east–west lines on a map
(although minor distortion is caused
by the fact that east–west lines are
parallel, whereas north–south lines
converge at both poles).

38. Facility Relocation and
Facility Closing
▶ Two specialized situations
conclude this discussion of
location choice, one involving
facility relocation (associated
with business growth) and the
other involving facility closing
(associated with business
contraction). More specifically,
facility relocation occurs when a
firm decides that it can no longer
continue operations in its present
facility and must move operations
to another facility to better serve
suppliers or customers. Facility
closing, by contrast, occurs when
a company decides to discontinue
operations at a current site
because the operations may no
longer be needed or can be
absorbed by other facilities.
This Photo by Unknown Author is licensed under CC BY-SA

39. Conclusion
▶ This chapter discussed several issues
associated with the location of warehousing,
manufacturing, and assembly facilities.
Facility location has moved from a tactical to
a strategic consideration at many
organizations; this chapter analyzed the
strategic importance of facility location.
General factors in facility location were
reviewed, including population
characteristics and trade patterns.
Population characteristics are a double-
edged sword in facility location in that a
population serves both as a market for
goods as well as a source of labor.
Changing trade patterns, spurred in part by
multicountry trade alliances, have had a
profound influence on the location of
distribution facilities.
This chapter also discussed specialized
location characteristics and presented
several examples of how grid systems can
be useful for determining the lowest-cost
location for a facility. The chapter concluded
with a look at facility relocation and facility
closing; companies should be cognizant of
the human dimension associated with both
relocation and closing.