Chapter 15- Facility Location Decision

Facility Location Decision Making

Supply Chain Network Design Influencers: Cost versus Service

Customer Perspective

  • Lead Time – The amount of time for a customer to receive an order.
  • Product Variety- The number of different products offered by a distribution network.
  • Product Availability- The likelihood of a product being in stock when the customer places their order.
  • Customer Experiences- May have many dimensions, including how easy it is for customers to place and receive orders as well as how much the experience is customized.
  • Time to Market- The time it takes to develop new product and bring them to market.
  • Order Visibility- The ability of customers to track orders from time of placement to delivery.
  • Returnability- How easy it is for a customer to return merchandise and the efficiency of the network to handle these returns.

Supply Chain Costs

  • Inventories- The more locations, the harder to accurately forecast demand because of the small demand groupings which makes the target smaller and harder to hit. Safety stock requirements go up exponentially.
  • Transportation- We want a long in and short out to gain economies in transportation on the inbound end but it can reach a point of diminishing returns.
  • Facilities and Handling- Certain economies of scale are gained by operating fewer warehouses. This can result in lower unit handling costs and storage costs.

Types of Distribution Networks

Manufacturer storage with Direct Shipping

In this type of distribution network design products are shipped directly from the manufacturer to the end customer. This bypasses the need for retailers or sellers. This is also referred to as drop shipping, where the product is delivered directly from the manufacturer to the customer.

What’s the use?

This is used for a large variety of low-demand, high- value stream items where customers are willing to wait for delivery and accept several partial shipments.

Impact on costs:

  • Advantages: Facility costs lower due to aggregation of low-demand items; Inventory costs lower due to minimal number of facilities; Handling costs low due to direct shipping
  • Disadvantages: Transportation costs are greater due to individual shipping; design requires large investment in information infrastructure as manufacturer and retailer need to be tightly integrated.

Impact on service:

  • Advantages: Product variety and availability are easy to process; Home delivery increases customer satisfaction; Distributions design can get products to market quickly.
  • Disadvantages: Fairly long response/lead time (1-2 weeks); customer visibility and product returnability may be difficult and costly.

Manufacturer Storage with Direct Shipping and In-Transit Merge

In-Transit Merge by a carrier combines pieces of an order coming from different locations so that the customer gets a single delivery.

Example- Customer order a PC from HP with a Samsung monitor, the pacage carrier pics up the PC from the Samsung factory and monitor from HP in a single delivery.

Whats the use?

Best for low-to medium-demand, high value items that a retailer is sourcing from a relatively low number of manufacturers.

Impact on costs:

  • Advantages: Inventory costs are similar to that of Drop Shipping; Transportation and recieveing costs are somewhat lower than drop shipping
  • Disadvantages: Handling and information investment costs may be higher than drop shipping due to more coordination required to combine shipment

Impact on Services:

  • Advantages: Product variety and availability; customer service better than drop shipping because of single order
  • Disadvantages: Long response time and expensive cost to return items

Distributor Storage with Carrier Delivery:

This network design places inventory with distributors, instead of being held by manufacturers at the factories. Distributors that would hold this inventory include retailers in intermediate warehouses, and package carriers used to transport products from the intermediate location to the final customer.

Whats the use?

Works well for medium-to fast- moving items. Also used when customer want delivery faster than is offered by manufacturer storage.

Impact on costs:

  • Advantages: Transportation costs are lower than manufacturer storage with a simpler information infrastructure.
  • Disadvantages: Inventory and warehousing operations costs are higher

Impact on service:

  • Advantages: Faster response time; order visibility and returns are easier for the customer
  • Disadvantages: Less product variety and higher product availability costs.

Distributor Storage with Last-Mile Delivery:

This is the same as Distributor Storage with Carrier delivery, instead of using package carriers distributors/retailers deliver the product directly to the customers home.

What’s the use?

Used in areas with high labors costs. It is difficult to justify based on efficiency. Only used if there is a large demand for it.

Impact of Costs:

  • Advantages: Warehousing costs are lower than costs of retail chain
  • Disadvantages: Increased inventory costs compared to distributor storage with package carrier delivery; higher transportation costs; higher warehousing operations costs

Impact of Service

  • Advantages: Service response times are very quick; High customer satisfaction (particularly for bulky items); Product variety is higher than retail stores; easier returnability
  • Disadvantages: Less product variety than distributor storage with package carrier delivery

Manufacturer or Distributor Storage with Customer Pickup:

Inventory is stored at the manufacturer or distributor warehouse but customers place order via phone or online and travel to designated pickup points to collect their merchandise. Orders are shipped from storage site to the pickup locations as needed. This type of network improves the economies from existing infrastructure.

Impact on costs:

  • Advantages: Low transportation costs (no need for package carriers); Customers pick up product themselves; Low warehousing costs if facilities are already in place.
  • Disadvantages: Warehousing operations can be expensive if facilities are needed; Information costs to provide infrastructure have the potential to be high.

Impact on Service:

  • Advantages: Quick response time with same day delivery/pickup; order visability; Easy returns
  • Disadvantages: Lack of home delivery effecting customer satisfaction.

Retailer Storage with Customer Pickup:

This is the most common form of distribution network, where inventory is stored locally at retail stores. Inventory comes from retailer warehouse, distributor/wholesaler warehouse, or directly from manufacturer. Customers walk into the store and place an order to be piced up.

What’s the use?

Best for faster-moving items or items for which customers want quick response

Impact on Costs:

  • Advantages: Low transportations costs
  • Disadvantages: Highest inventory and warehouse operations costs; increased handling cost for online or phone order; increased investment in information infrastructure

Impact on services:

  • Advantages: Quick responses due to same-day pickup; Customer service can be positive or negative
  • Disadvantages: Good product variety, but lower than other options; product availability is more expensive

Impact of E-Business on the Distribution Network:

Cost Impacts:

  • Advantages: Reduction of inventory and costs by imporving supply chain coordination to match demand; Minimal operations and facility costs
  • Disadvantages: Aggregating inventory costs increases inbound transportation costs; no physical retail space

Service impacts on Distribution Networks:

  • Advantages: Response time is fast; larger selection than brick and mortar stores; greater access and speed to information on which customer demand is being reported; flexibility on orders
  • Disadvantages: Lacks direct contact with


Location Decisions

Strategic Considerations

Competitive Strategy will drive the design of your supply chain network (Cost leader vs. responsiveness). Objective of location strategy is to maximize the benefit of location to the firm.

Identify key competitors in each target market.

Steps to Select a New Facility

  1. Identify Important location factors and categorize them as key success factors (KSFs) or secondary facaators.
  2. Consider the potential countries, narrow them down to specfic regions, communities and finally to specific sites.
  3. Collect data on all potential locations.
  4. Analyze the data starting with quantitative factors.
  5. Megre relevant qualitative and quantitative factors into the evaluation of each site.

Country Decision

Factors to consider: Tariffs and tax incentives, infrastructure factors, exchange rate fluctuations and currency risk, demand and supply risk, competitive environment, political risks, government rules, attitudes and incentives, cultural and economic issues, location and demand of markets, labor talent, attitudes, productivity, costs, availability of supplies, communications, and energy.

Regional Decision

Factors to consider: Corporate desires, attractiveness of region, labor availability and costs, costs and availability of utilities, environmental regulations, government incentives and fiscal policies, proximity to raw materials and customers, land/construction costs.

Local Decision 

Factors to consider: Site size and cost, air, rail, and waterway systems, zoning restrictions, proximity of services/supplies needed, environmental impact issues.

Dominant Factors in Manufacturing 

  • Impact of location on sales and customer satisfaction
  • Proximity to customers
  • Transportation costs and proximity to markets
  • Location of competitors
  • Site-specific factors

Dominant Factors in Services

  • Impact of location on sales and customer satisfaction
  • Proximity to customers
  • Transportation costs and proximity to markets
  • Location of competitors
  • Site-specific factors

Location Techniques

Steps include gathering quantitative data and then combining qualitative and quantitative data to determine site location.

Location Cost- Volume Analysis 

Traditional breakeven analysis or crossover chart used to determine which candidate location can be justified by the predicted throughput volume. It’s based on a future volume forecast with fixed and variable costs.


  1. For each location alternative, determine the fixed and variable costs.
  2. For all locations, plot the total cost lines on the same graph.
  3. Use the lines to determine which alternatives will have the highest and lowest total costs for expected levels of output.

(Keep 4 assumptions in mind: Fixed costs are constant, variable costs are linear, required level of output can be closely estimated, focus on only one product)

After calculating total costs using: [(Fixed cost + (Variable cost x Volume)], select the location with the lowest total cost.

*Dependent on a volume forecast, you should conduct a what-if analysis with different levels of costs and volumes*

Weighted Factor Rating Method

Compares multiple locations using quantitative and qualitative criteria.


  1. Identify the factors that are key to the success of the facility at the location, and then assigns weights depending on the importance of the factor.
  2. Determine a score for each factor.
  3. Multiply the factor score by the weight and sum the weighted scores.

The location with the highest total weighted score is the recommended location.

(Often used for narrowing down a list of candidates and potentially selecting one.)

Center of Gravity Method

Used to determine the location of a facility that will either reduce travel time or lower shipping costs.

(Determines the location of a DC that minimizes distribution costs while considering the location of markets, volume of goods shipped to those markets, and shipping cost (or distance). Distribution costs seen as a linear function of distance and quantity shipped. This method uses a visual map and a coordinate system.)


  1. The x and y coordinate points are placed on an XY chart with an arbitrary starting point. They are located in similar positions for each location because they would be on a map and are treated as a set of numeric values when calculating averages.
  2. If the quantities shipped are the same (RARE), the center of gravity if found by taking the averages of the x and y coordinates.
  3. If the quantities shipped are different (TYPICAL), a weighted average is applied (weights are the quantities shipped).

Calculation (repeat for both x and y coordinates): [(Sum of shipping volume * x or y coordinate) / Total system shipping volume].
*Take the x coordinate and the y coordinate just calculated and place on XY chart*

The actual location can be approximated by placing a map over the chart to get down to the location decision.

The Transportation Problem Model 

Deals with the distribution of goods from several points of supply (sources) to a number of points of demand (destinations). The objective is usually to minimize total transportation and production costs while maintaining specified inventory and service- level targets.

(Usually given the capacity of goods at each source and the requirements at each destination as well as a variety of costs (materials, manufacturing, transportation, warehousing). Solutions are available today that can not only be the optimal solution in terms of number and location of distribution facilities in your network, but also through the use of what-if analysis. Most studies done by external consultants.)


  1. Collect a large amount of data including: material costs, manufacturing costs, warehousing costs, transportation costs, and demand. Put in model. *Hardest part is getting started*
  2. Data must be validated against previous periods to make sure it matches actual costs and service.
  3. A baseline or base case model is developed with future projections with the organization’s current supply chain network.
  4. Baseline is run against various optimization parameters (lowest cost, fewest DCs, etc.).
  5. Various what-if scenarios should be run to make sure that the optimal decision is also reasonable if conditions change.


Network optimization technology ranges from standalone systems to modules of larger supply chain systems that can be installed or on-demand cloud software systems.

Network optimization modules that are integrated with their other supply chain planning and execution modules:

JDA: JDA Software Group, Inc. is an American software and consultancy company that provides supply chain management, manufacturing planning, retail planning, store operations and collaborative category management solutions.

JD Edwards (Oracle): powerful, fully-integrated ERP software suite that provides more choice of databases and deployment options, including on-premise, private cloud, public cloud or hybrid cloud for maximized flexibility and low total cost of ownership.

SAP: one of the largest vendors of enterprise resource planning (ERP) software and related enterprise applications. The company’s ERP system enables its customers to run their business processes, including accounting, sales, production, human resources and finance, in an integrated environment.

Logility: software optimizes sales and operations planning, demand forecasting, demand planning, and inventory management.

These are standalone systems for lower upfront costs, but more data intensive:

IBM ILOG LogicNet Plus XE: focuses on supply chain network optimization and supply chain design including production sourcing, and enables you to conduct ongoing strategic planning

Logistix: specializes in the integration of information, transportation, inventory, warehousing, material-handling, and packaging


No specific career path for supply chain network analysis. Consultants perform this type of study, and software vendors that train users at organizations to use it for their company. This usually involves the internal logistics analyst with senior management making the actual decisions.

Technological and Geospatial Issues

  1. Amazon HQ

The mayor of Dallas explains why Dallas is a good fit for Amazon’s new HQ. He uses facility location influences as discussed in our chapter in his justification.

These factors include:

  • Texas centrally located in America. Able to fly to either coast in a reasonable time.
  • Dallas has cheap land, lower construction costs and a low cost of living compared to other cities being compared.
  •   Dallas is a “blue city in a red state’ — LGBT friendly, diverse city.
  •   Fastest growing metro area in the United States.
  • Home to a strong technology-based talent pool.

2. JDA Warehouse management

Amway is a multi-level marketing company selling health and beauty products. In June, it had used this JDA software to standardize warehouse operations and increase order fulfillment effectiveness in order to digitalize their supply chain. In addition to helping the company decide on the locations, JDA also manages inbound receipts, storage, order picking, packing and shipping to customers via delivery, and replenishment of DCs and pickup centers. Amway has implemented 50 strategic warehouse locations across the globe, and 28 warehouses in India alone in the past 4 months.

3. Humanness Distribution Networks:

Distribution networks that, in the future can potentially eliminate the use and cost of human beings, to transport packages and products globally. The implementation of these will not take away from the determination of location based on humans. Technological tools like GIS and a decision by a human will be used to determine location decisions. This technology requires plenty of automation. In some countries there are already autonomous distribution centers. This is important because this is the future, we still need people, and managers to make the decisions of what distribution networks to use, but autonomous machines will ensure the packages are being delivered.

Some missing technological pieces that are still needed are as follows:

  • High tech mailboxes
  • High tech mailing lables
  • Automated loading and unloading docs
  • Robotic customers agents


  • How to use the location factor rating and center of gravity method:                                                                                                         
  • Things to think about when determining a distribution network                                                                                                                 
  • Picking a new HQ                                                                                                                                                                                      

Link to Power point:




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