Supply Chain Logistic Networks

Supply Chain Logistic
Networks
Chapter 13
Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-1

What is a Facility Location?
Facility Location
The process of determining
geographic sites for a firm’s
operations.
Distribution center (DC)

A warehouse or stocking point
where goods are stored for
subsequent distribution to
manufacturers, wholesalers,
retailers, and customers.

Factors Affecting Location Decisions
1. The Factor Must Be Sensitive to Location
2. The Factor Must Have a High impact on the

Company’s Ability to Meet Its Goals

• Dominant Factors in Manufacturing
– Favorable Labor Climate
– Proximity to Markets
– Impact on Environment
– Quality of Life
– Proximity to Suppliers and Resources
– Proximity to the Parent Company’s Facilities
– Utilities, Taxes, and Real Estate Costs
– Other Factors
• Dominant Factors in Services

– Proximity to Customers
– Transportation Costs and Proximity to Markets
– Location of Competitors
– Site-Specific Factors

Load-Distance Method
• Load-Distance Method
– A mathematical model used to evaluate
locations based on proximity factors
• Euclidean distance
– The straight line distance, or shortest possible path,
between two points
• Rectilinear distance
– The distance between two points with a series of 90-
degree turns, as along city blocks

Application 13.1
What is the distance between (20, 10) and (80, 60)?
Euclidean distance:
dAB = (xA – xB)2 + (yA – yB)2 = (20 – 80)2 + (10 – 60)2 = 78.1
Rectilinear distance:
dAB = |xA – xB| + |yA – yB| = |20 – 80| + |10 – 60| = 110

Load-Distance Method
• Calculating a load-distance score
– Varies by industry
– Use the actual distance to calculate ld score
– Use rectangular or Euclidean distances
– Find one acceptable facility location that minimizes the
ld score
• Formula for the ld score

ld =  lidi
i

Application 13.2
Management is investigating which location would be best to
position its new plant relative to two suppliers (located in
Cleveland and Toledo) and three market areas (represented by
Cincinnati, Dayton, and Lima). Management has limited the
search for this plant to those five locations. The following
information has been collected. Which is best, assuming
rectilinear distance?
Location x,y coordinates Trips/year
Cincinnati (11,6) 15
Dayton (6,10) 20
Cleveland (14,12) 30
Toledo (9,12) 25
Lima (13,8) 40

Application 13.2
Location x,y Trips/year
coordinates
Cincinnati (11,6) 15
Dayton (6,10) 20
Cleveland (14,12) 30
Toledo (9,12) 25
Lima (13,8) 40
Cincinnati = 15(0) + 20(9) + 30(9) + 25(8) + 40(4) = 810

Dayton = 15(9) + 20(0) + 30(10) + 25(5) + 40(9) = 920
Cleveland = 15(9) + 20(10) + 30(0) + 25(5) + 40(5) = 660
Toledo = 15(8) + 20(5) + 30(5) + 25(0) + 40(8) = 690
Lima =
15(4) + 20(9) + 30(5) + 25(8) + 40(0) = 590

Center of Gravity
• Center of Gravity
– A good starting point to evaluate locations in the target
area using the load-distance model.
– Find x coordinate, x*, by multiplying each point’s x

coordinate by its load (lt), summing these products li xi,
and dividing by li
– The center of gravity’s y coordinate y* found the same way
i li xi i li yi
x* = y* =
i li i li
Example 13.1
A supplier to the electric utility industry produces power
generators; the transportation costs are high. One market area
includes the lower part of the Great Lakes region and the upper
portion of the southeastern region. More than 600,000 tons are to
be shipped to eight major customer locations as shown below:
Customer Location Tons Shipped x, y Coordinates
Three Rivers, MI 5,000 (7, 13)
Fort Wayne, IN 92,000 (8, 12)
Columbus, OH 70,000 (11, 10)
Ashland, KY 35,000 (11, 7)
Kingsport, TN 9,000 (12, 4)
Akron, OH 227,000 (13, 11)
Wheeling, WV 16,000 (14, 10)
Roanoke, VA 153,000 (15, 5)
Example 13.1
Customer Tons x, y
Location Shipped Coordinates
What is the center of gravity Three Rivers, MI 5,000 (7, 13)
Fort Wayne, IN (8, 12)
for the electric utilities 92,000
supplier? Columbus, OH 70,000 (11, 10)
Ashland, KY 35,000 (11, 7)

Akron, OH 227,000 (13, 11)
Wheeling, WV 16,000 (14, 10)

The center of gravity is calculated as shown below:
Roanoke, VA 153,000 (15, 5)
i li = 5 + 92 + 70 + 35 + 9 + 227 + 16 + 153 = 607
i li xi = 5(7) + 92(8) + 70(11) + 35(11) + 9(12) + 227(13)
+ 16(14) + 153(15) = 7,504
i li xi 7,504
x* = = = 12.4
i li 607

Example 13.1
Customer Tons x, y
Location Shipped Coordinates
What is the center of gravity Three Rivers, MI 5,000 (7, 13)
for the electric utilities Fort Wayne, IN (8, 12)
92,000
supplier?
Columbus, OH 70,000 (11, 10)
Ashland, KY 35,000 (11, 7)
Akron, OH 227,000 (13, 11)
i li yi = 5(13) + 92(12) + 70(10) + 35(7) + 9(4) + 227(11)

Wheeling, WV (14, 10)
16,000
+ 16(10) + 153(5) = 5,572
Roanoke, VA (15, 5)
i li yi 5,572
153,000
y* = = = 9.2
i li 607

Example 13.1
Customer Tons x, y
Using rectilinear distance, Location Shipped Coordinates
Three Rivers, MI 5,000 (7, 13)
what is the resulting load–
Fort Wayne, IN (8, 12)
distance score for this 92,000
location? Columbus, OH 70,000 (11, 10)
Ashland, KY 35,000 (11, 7)

The resulting load-distance score is Akron, OH 227,000 (13, 11)
ld =  lidi = 5(5.4 + 3.8) + 92(4.4 + 2.8)WV

Wheeling, + 70(1.4 + 0.8) + 35(1.4
(14, 10)
i 16,000
+ 2.2) + 90(0.4 + 5.2) + 227(0.6 + 1.8) + 16(1.6 +
Roanoke, VA 153,000 (15, 5)
0.8) + 153(2.6 + 4.2)
= 2,662.4
where di = |xi – x*| + |yi – y*|

Application 13.3
A firm wishes to find a central location for its service. Business
forecasts indicate travel from the central location to New York
City on 20 occasions per year. Similarly, there will be 15 trips to
Boston, and 30 trips to New Orleans. The x, y-coordinates are
(11.0, 8.5) for New York, (12.0, 9.5) for Boston, and (4.0, 1.5) for
New Orleans. What is the center of gravity of the three demand
points?
i li xi [(20  11) + (15  12) + (30  4)]
x* = = = 8.0
i li (20 + 15 + 30)
i li yi [(20  8.5) + (15  9.5) + (30  1.5)]

y* = = = 5.5
i li (20 + 15 + 30)

Break-Even Analysis
• Compare location alternatives on the basis of
quantitative factors expressed in total costs
1. Determine the variable costs and fixed costs for
each site
2. Plot total cost lines
3. Identify the approximate ranges for which each
location has lowest cost
4. Solve algebraically for break-even points over
the relevant ranges
Example 13.2
An operations manager narrowed the search for a new facility
location to four communities. The annual fixed costs (land,
property taxes, insurance, equipment, and buildings) and the
variable costs (labor, materials, transportation, and variable
overhead) are as follows:
Community Fixed Costs per Year Variable Costs per Unit

A $150,000 $62
B $300,000 $38
C $500,000 $24
D $600,000 $30

Example 13.2
• Step 1
– Plot the total cost curves for all the communities on
a single graph. Identify on the graph the
approximate range over which each community
provides the lowest cost.
• Step 2
– Using break-even analysis, calculate the break-even
quantities over the relevant ranges. If the expected
demand is 15,000 units per year, what is the best
location?

Example 13.2
To plot a community’s total cost line, let us first compute the
total cost for two output levels: Q = 0 and Q = 20,000 units
per year. For the Q = 0 level, the total cost is simply the fixed
costs. For the Q = 20,000 level, the total cost (fixed plus
variable costs) is as follows:
Variable Costs Total Cost

Community Fixed Costs (Cost per Unit)(No. of Units) (Fixed + Variable)
A $150,000 $62(20,000) = $1,240,000 $1,390,000
B $300,000 $38(20,000) = $760,000 $1,060,000
C $500,000 $24(20,000) = $480,000 $980,000
D $600,000 $30(20,000) = $600,000 $1,200,000

Example 13.2
The figure shows the A
1,600 –
graph of the total cost
Annual cost (thousands of dollars)

(20, 1,390)
1,400 –
lines. (20, 1,200) D
B
• A is best for low volumes 1,200 – (20, 1,060)
C
1,000 –
• B for intermediate volumes (20, 980)
800 –
• C for high volumes. Break-even
point
600 –
• We should no longer Break-even
400 –
consider community D, point
200 – A best
because both its fixed and B best C best
its variable costs are higher |

–
0 2
| |
4 6
| | | | |
8 10 12 14 16 18 20 22
| | | |
than community C’s. 6.25 14.3

Q (thousands of units)
Figure 13.3

Example 13.2
The break-even quantity between A and B lies at the end of
the first range, where A is best, and the beginning of the
second range, where B is best.
(A) (B)
$150,000 + $62Q = $300,000 + $38Q
Q = 6,250 units
The break-even quantity between B and C lies at the end of

the range over which B is best and the beginning of the final
range where C is best.
(B) (C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units
Example 13.2
The break-even quantity between A and B lies at the end of
the first range, where A is best, and the beginning of the
second range, where B is best.
No other break-even quantities are
needed. The break-even point
(A) (B) between A and C lies above the
$150,000 + $62Q = $300,000 + $38Q shaded area, which does not mark
either the start or the end of one
Q = 6,250 units of the three relevant ranges.
The break-even quantity between B and C lies at the end of the

range over which B is best and the beginning of the final range
where C is best.
(B) (C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units
Application 13.4
By chance, the Atlantic City Community Chest has to close
temporarily for general repairs. They are considering four
temporary office locations:
Property Address Move-in Costs Monthly Rent
Boardwalk $400 $50
Marvin Gardens $280 $24
St. Charles Place $360 $10
Baltic Avenue $60 $60
Use the graph on the next slide to determine for what length of
lease each location would be favored?
Hint: In this problem, lease length is analogous to volume.

Application 13.4
500 –
Fs + csQ = FB + cBQ Boardwalk
–
St Charles Place
FB – Fs 400 –
Q=
cs – cB –
Total Cost →
$60 – $360 Marvin
300 –
= Gardens
$10 – $60 –
Baltic Avenue
– 300 200 –
= = 6 months
– 50
–
The short answer: Baltic 100 –

Avenue if 6 months or less, –
St. Charles Place if longer | | | | | | | | |
–
0 1 2 3 4 5 6 7 8
Months →
What is a GIS?
GIS – Geographical
Information System
A system of computer
software, hardware, and
data that the firm’s
personnel can use to
manipulate, analyze, and
present information
relevant to a location
decision.

The GIS Method
for Locating Multiple Facilities
• A five step GIS framework
Step 1: Map the data
Step 2: Split the area
Step 3: Assign a facility location
Step 4: Search for alternative sites
Step 5: Compute ld scores and check capacity

Inventory Placement
• Centralized placement
– Keeping all the inventory of a product at a single location such
as at a firm’s manufacturing plant or a warehouse and shipping
directly to each of its customers
• Inventory pooling
– A reduction in inventory and safety stock because of the
merging of variable demands from customers
• Forward placement
–Locating stock closer to customers at a warehouse, DC,
wholesaler, or retailer
A Systematic Location
Selection Process
Step 1: Identify the important location factors and

categorize them as dominant or secondary
Step 2: Consider alternative regions; then narrow to
alternative communities and finally specific sites
Step 3: Collect data on the alternatives
Step 4: Analyze the data collected, beginning with the
quantitative factors
Step 5: Bring the qualitative factors pertaining to each
site into the evaluation
Example 13.4
A new medical facility, Health-Watch, is to be located in Erie,
Pennsylvania. The following table shows the location factors,
weights, and scores (1 = poor, 5 = excellent) for one potential
site. The weights in this case add up to 100 percent. A
weighted score (WS) will be calculated for each site. What is
the WS for this site?
Location Factor Weight Score
Total patient miles per month 25 4
Facility utilization 20 3
Average time per emergency trip 20 3
Expressway accessibility 15 4
Land and construction costs 10 1
Employee preferences 10 5

Example 13.4
Location Factor Weight Score
The WS for this particular Total patient miles per month 25 4
site is calculated by Facility utilization 20 3
multiplying each factor’s Average time per emergency
trip 20 3
weight by its score and Expressway accessibility 15 4
adding the results: Land and construction costs 10 1
Employee preferences 10 5
WS = (25  4) + (20  3) + (20  3) + (15  4) + (10  1) + (10  5)

= 100 + 60 + 60 + 60 + 10 + 50
= 340
The total WS of 340 can be compared with the total

weighted scores for other sites being evaluated.
Application 13.5
Management is considering three potential locations for a
new cookie factory. They have assigned scores shown below
to the relevant factors on a 0 to 10 basis (10 is best). Using
the preference matrix, which location would be preferred?
Location Weight The Sesame Ronald’s

Factor Neighborhood Street Playhouse
Material Supply 0.1 5 0.5 9 0.9 8 0.8
Quality of Life 0.2 9 1.8 8 1.6 4 0.8
Mild Climate 0.3 10 3.0 6 1.8 8 2.4
Labor Skills 0.4 3 1.2 4 1.6 7 2.8
6.5 5.9 6.8

Solved Problem 1
The new Health-Watch facility is targeted to serve seven census
tracts in Erie, Pennsylvania, whose latitudes and longitudes are
shown below. Customers will travel from the seven census-tract
centers to the new facility when they need health care. What is the
target area’s center of gravity for the Health-Watch medical facility?
LOCATION DATA AND CALCULATIONS FOR HEALTH WATCH
Census Tract Population Latitude Longitude Population  Population 

Latitude Longitude
15 2,711 42.134 –80.041 114,225.27 –216,991.15
16 4,161 42.129 –80.023 175,298.77 –332,975.70
17 2,988 42.122 –80.055 125,860.54 –239,204.34
25 2,512 42.112 –80.066 105,785.34 –201,125.79
26 4,342 42.117 –80.052 182,872.01 –347,585.78
27 6,687 42.116 –80.023 281,629.69 –535,113.80
28 6,789 42.107 –80.051 285,864.42 –543,466.24
Total 30,190 1,271,536.04 –2,416.462.80
Table 13.1

Solved Problem 1
Next we solve for the center of gravity x* and y*. Because the
coordinates are given as longitude and latitude, x* is the longitude
and y* is the latitude for the center of gravity.
1,271,536.05
x* = = 42.1178
30,190
– 2,416,462.81
y* = = – 80.0418
30,190
The center of gravity is (42.12 North, 80.04 West), and is

shown on the map to be fairly central to the target area.

Solved Problem 1
Figure 13.9

Solved Problem 2
The operations manager for Mile-High Lemonade narrowed the
search for a new facility location to seven communities. Annual
fixed costs (land, property taxes, insurance, equipment, and
buildings) and variable costs (labor, materials, transportation, and
variable overhead) are shown in the following table.
a. Which of the communities can be eliminated from further
consideration because they are dominated (both variable and
fixed costs are higher) by another community?
b. Plot the total cost curves for all remaining communities on a
single graph. Identify on the graph the approximate range over
which each community provides the lowest cost.
c. Using break-even analysis, calculate the break-even quantities
to determine the range over which each community provides
the lowest cost.
Solved Problem 2
FIXED AND VARIABLE COSTS FOR MILE-HIGH LEMONADE
Community Fixed Costs per Year Variable Costs per Barrel
Aurora $1,600,000 $17.00
Boulder $2,000,000 $12.00
Colorado Springs $1,500,000 $16.00
Denver $3,000,000 $10.00
Englewood $1,800,000 $15.00
Fort Collins $1,200,000 $15.00
Golden $1,700,000 $14.00
Table 13.2

Solved Problem 2
Location costs (in millions of dollars)
10 –
8–
Break-even
Golden
point
6–
Break-even
4– point
2– Fort Collins Boulder Denver
| | | | | | |
–
0 1 2 2.67 3 4 5 6
Barrels of lemonade per year (in hundred thousands)

Figure 13.10

Solved Problem 2
a. Aurora and Colorado Springs are dominated by Fort
Collins, because both fixed and variable costs are higher
for those communities than for Fort Collins. Englewood is
dominated by Golden.
b. Fort Collins is best for low volumes, Boulder for

intermediate volumes, and Denver for high volumes.
Although Golden is not dominated by any community, it
is the second or third choice over the entire range.
Golden does not become the lowest-cost choice at any
volume.

Solved Problem 2
c. The break-even point between Fort Collins and Boulder is
$1,200,000 + $15Q = $2,000,000 + $12Q

Q = 266,667 barrels per year
The break-even point between Denver and Boulder is
$3,000,000 + $10Q = $2,000,000 + $12Q

Q = 500,000 barrels per year

Solved Problem 4
An electronics manufacturer must expand by building a
second facility. The search is narrowed to four locations, all
of which are acceptable to management in terms of
dominant factors. Assessment of these sites in terms of
seven location factors is shown in the following table.
For example, location A has a factor score of 5 (excellent) for

labor climate; the weight for this factor (20) is the highest of
any. Calculate the weighted score for each location. Which
location should be recommended?

Solved Problem 4
FACTOR INFORMATION FOR ELECTRONICS MANUFACTURER
Factor Score for Each Location

Location Factor Factor Weight A B C D
1. Labor climate 20 5 4 4 5
2. Quality of life 16 2 3 4 1
3. Transportation system 16 3 4 3 2
4. Proximity to markets 14 5 3 4 4
5. Proximity to materials 12 2 3 3 4
6. Taxes 12 2 5 5 4
7. Utilities 10 5 4 3 3

Solved Problem 4
Based on the weighted scores shown below, location C is the
preferred site, although location B is a close second.
CALCULATING WEIGHTED SCORES FOR ELECTRONIC MANUFACTURER

Weighted Score for each Location
Location Factor Factor Weight A B C D
1. Labor climate 20 10 80 80 10
0 0
2. Quality of life 16 32 48 64 16
3. Transportation system 16 48 64 48 32
4. Proximity to markets 14 70 42 56 56
5. Proximity to materials 12 24 36 36 48
6. Taxes 12 24 60 60 48
7. Utilities 10 50 40 30 30
Totals 100 348 370 374 330

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Supply Chain Logistic

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-1

Distribution center (DC)

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1. The Factor Must Be Sensitive to Location

2. The Factor Must Have a High impact on the

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• Dominant Factors in Services

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• Formula for the ld score

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Cincinnati = 15(0) + 20(9) + 30(9) + 25(8) + 40(4) = 810

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-10

– Find x coordinate, x*, by multiplying each point’s x

supplier? Columbus, OH 70,000 (11, 10)

Ashland, KY 35,000 (11, 7)

Wheeling, WV 16,000 (14, 10)

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-13

Ashland, KY 35,000 (11, 7)

Kingsport, TN 9,000 (12, 4)

Akron, OH 227,000 (13, 11)

i li yi = 5(13) + 92(12) + 70(10) + 35(7) + 9(4) + 227(11)

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-14

location? Columbus, OH 70,000 (11, 10)

Ashland, KY 35,000 (11, 7)

Kingsport, TN 9,000 (12, 4)

ld =  lidi = 5(5.4 + 3.8) + 92(4.4 + 2.8)WV

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-15

i li yi [(20  8.5) + (15  9.5) + (30  1.5)]

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Community Fixed Costs per Year Variable Costs per Unit

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Variable Costs Total Cost

C $500,000 $24(20,000) = $480,000 $980,000

D $600,000 $30(20,000) = $600,000 $1,200,000

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-20

Annual cost (thousands of dollars)

its variable costs are higher |

than community C’s. 6.25 14.3

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The break-even quantity between B and C lies at the end of

The break-even quantity between B and C lies at the end of the

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-24

The short answer: Baltic 100 –

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-26

Step 1: Map the data

Step 2: Split the area

Step 3: Assign a facility location

Step 4: Search for alternative sites

Step 5: Compute ld scores and check capacity

Step 1: Identify the important location factors and

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-30

WS = (25  4) + (20  3) + (20  3) + (15  4) + (10  1) + (10  5)

The total WS of 340 can be compared with the total

Location Weight The Sesame Ronald’s

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-32

Census Tract Population Latitude Longitude Population  Population 

Copyright ©2016 Pearson Education, Inc. All rights reserved. 13-33

The center of gravity is (42.12 North, 80.04 West), and is