Factors influencing logistics networks.

 
When you build your logistics network, you trade off two important factors, 
the one is cost, the other one is service. 
If we want better service to our customers, 
we probably have to spend more money. 
But logistics networks are already expensive so most companies try to reduce 
those costs as much as possible while still maintaining a high level of service. 
The cheapest logistic network looks different from the most expensive one. 
Nevertheless, the concept of cost versus service always applies. 
And you can have a logistics network with only one warehouse and overnight 
transportation, which will give you great service, but it will be very expensive. 
Or you can be like Amazon and have top customer service, 
to our deliveries in some cases, but you need over 100 warehouses for that. 
Nevertheless, you have to pick the network that minimizes cost and 
gives you the best service possible. 
We're in the middle of Amish country. 
And Urban Outfitter, a major clothing retailer based in Philadelphia, 
Pennsylvania, decided to build their warehouse, right here.
Play video starting at :1:27 and follow transcript1:27
The reason why this location was, and there goes a UPS truck. 
The reason why Urban Outfitters chose this location, 
probably has to do with the proximity to their home office, 
their commitment to the local area, and the ability to distribute up and 
down the eastern seaboard right from here in Lancaster county. 
It also behooved them that land was much cheaper here than in other locations. 
And they were able to bring jobs to an economically distressed area. 
Two major drivers affecting logistics network are the cost of money, 
interest rates, and the cost of fuel, driven by the cost of crude oil.
Play video starting at :2:16 and follow transcript2:16
The way the impact logistics network is as follows.
Play video starting at :2:21 and follow transcript2:21
When interest rates are high, 
the cost of holding inventory goes up, because most 
of the money spent holding inventory is cash tied up that you could use otherwise.
Play video starting at :2:36 and follow transcript2:36
When fuel costs are going up, remember, fuel costs are the single largest 
expense of most transportation, the overall cost of transportation goes up.
Play video starting at :2:48 and follow transcript2:48
So when transportation is expensive, 
you want to have less of it, therefore, you need more warehouses.
Play video starting at :2:57 and follow transcript2:57
When you have to spend a lot of money holding inventory, 
you want fewer warehouses. 
So as you see, those two economic drivers that most companies 
do not have any control over, impact how their logistics network should look. 
And it is important to anticipate where those factors are going to be 
in the future, so your network is as up to date as possible. 
Nevertheless, you can make small adjustments by using rented warehouses and 
evolve it over time to make sure that your cost is as low as 
possible while delivering the best service possible.