Question:
Assume you are the logistics vice president for a major airline seeking to expand its international operations. What factors would you consider when determining where to locate parts and maintenance warehouses and facilities? What are the cost trade-offs involved?
Read the text below to answer the question:
Spectrum of Location Decisions
In terms of logistical system design, transportation offers the potential to link geographically dispersed manufacturing, warehousing, and market locations into an integrated system. Logistical system facilities include all locations at which materials, work-in-process, or finished inventories are handled or stored. Thus, all retail stores, finished goods warehouses, manufacturing plants, and material storage warehouses represent logistical network locations. It follows that selection of individual locations, as well as the composite locational network, represents important competitive and cost-related logistical decisions. A manufacturing plant location may require several years to fully implement. For example, General Motors' decision to build a new Cadillac assembly plant in Lansing, Michigan, spanned over five years from concept to reality. In contrast, some warehouse arrangements are sufficiently flexible to be used only at specified times during a year. The selection of retail locations is a specialized decision influenced by marketing and competitive conditions. The discussion that follows concentrates on selecting warehouse locations. Among all the location decisions faced by logistical managers, those involving warehouse networks are most frequently reviewed.
Local Presence: An Obsolete Paradigm
A long-standing belief in business is that a firm must have facilities in local markets to successfully conduct business. During development of the North American economy, erratic transportation service created serious doubt about a firm's ability to promise delivery in a timely and consistent manner. In short, customers felt that unless a supplier maintained inventory within the local market area it would be difficult, if not impossible, to provide consistent delivery. This perception, commonly referred to as the local presence paradigm, resulted in inventories being maintained in a numerous local markets. As recently as the early 1960s it was not uncommon for manufacturers to operate 20 or more warehouses to service the U.S. mainland. Some firms went so far as to have full-line inventory warehouses located near all major sales markets. When a tradition such as local warehousing is part of a successful strategy, it is difficult to change. However, for the past several decades the cost and risk associated with maintaining local presence have forced reexamination. Transportation services have dramatically expanded, and reliability has increased to the point where shipment arrival times are dependable and predictable. Rapid advances in information technology have reduced the time required to identify and communicate customer requirements. Technology is available to track transportation vehicles, thereby providing accurate delivery information. Next-day delivery from a warehouse facility located as far away as 800 to 1000 miles is common practice. Transportation, information technology, and inventory economics all favor the use of fewer rather than more warehouses to service customers within a geographical area. In many situations, customer perceptions concerning local presence continue to influence decentralization of inventory. The answer to the question “How much local presence is desirable?” is best understood by carefully examining the relationships that drive logistical system design.
Warehouse Requirements
Warehouses are established in a logistical system to lower total cost or to improve customer service. In some situations, the benefits of cost reduction and improved service can be achieved simultaneously. Warehouses create value through the processes they support. Manufacturing requires warehouses to store, sort, and sequence materials and components. Facilities used for inbound materials and components are often referred to as supply facing warehouses. Warehouses are also used to store, sequence, and combine inventory for consolidated shipment to next-destination customers in the supply chain. Warehouses used to support customer accommodation are often referred to as demand facing warehouses. Demand facing warehouse requirements are directly related to manufacturing and marketing strategies. Due to the specialized materials handling, inventory process requirements, and just-in-time manufacturing process warehouses typically specialize in performing either supply or demand facing services. Warehouses committed to supporting manufacturing are typically located close to the factories they support; in contrast, warehouses dedicated to customer accommodation are typically strategically located throughout the geographical market area serviced. The combinations of information technology, e-procurement fulfillment, and response-based business strategies have combined to radically alter how and why warehouses are used. The economic justification and desired functionality of a warehouse is typically distinctly different for facilities dedicated to procurement, manufacturing, or customer relationship management.
Procurement drivers
as discussed in Chapter 4, center on using warehouses to help purchase materials and components from suppliers at the lowest total inbound cost. Sophisticated purchasing executives have long realized that a combination of purchase price, quantity discount, payment terms, and logistical support is required to achieve lowest delivered cost for materials and components. In an effort to develop and support dedicated and customized working relationships, most firms have reduced their overall number of suppliers. The logic is the development of a limited number of supplier relationships that can be operationally integrated into a firm's supply chain. The goals of relational buying are to achieve lowest total landed cost eliminate waste, duplication, and unplanned redundancy. In an effort to improve overall operating efficiency, life cycle considerations have become prominent in purchase decisions. This relational dynamic of working with limited suppliers is based on a cradle-to-grave philosophy, spanning from new product development to reclamation and disposal of unused materials and unsold inventory. Such a closed-loop focus results from buying practices that directly impact the requirements and functionality of supply facing warehousing. Value-added services related to procurement are increasingly being debundled from purchase price. The shared goal is to develop procurement relationships that meet service requirements at lowest total landed cost. For example, manufacturers have begun to unbundle transportation or sequencing responsibility from suppliers to better understand total landed cost. Such debundling facilitates functional absorption and spin-off between manufacturers and their suppliers. There is also a trend toward more response-based business strategies, which is redefining expectations concerning supplier support and participation in the value-added process. The result is new structural relationships, such as tier one suppliers and lead facilitators. Finally, the seasonality of selected supplies, opportunities to purchase at reduced prices, and the need to rapidly accommodate accelerated manufacturing plans continues to make selected warehousing of materials a sound business decision. As a result of these trends, the role of supply facing warehouses continues to change. Warehouses were traditionally used to stockpile raw materials and component parts. Today such facilities place greater emphasis on sorting, sequencing, and light assembly of materials and components as they flow into manufacturing. The goal is to streamline flow of materials and components by eliminating duplicate handling and storage of identical inventories at multiple locations throughout the material supply network.
Manufacturing Drivers
Warehouses that support manufacturing are used to consolidate finished product for outbound customer shipment. The capability to consolidate a variety of products differs from individual product shipment. A primary advantage of a manufacturing demand facing warehouse is the ability to provide customers full-line product assortment on a single invoice at truckload transportation rates. In fact, a manufacturer's capability to provide such consolidation may be the primary reason for selection as a preferred supplier. Leading examples of demand facing warehouses are the networks used by such firms as General Mills, Johnson & Johnson, Kraft, and Kimberly-Clark. At Johnson & Johnson, warehouses are used to support hospital and consumer business sectors by serving as inventory consolidators for a variety of different business units. As a result, customers can purchase full assortments of products from different business units on a single invoice for shipment on one order. Kimberly-Clark produces a wide variety of individual products on specific manufacturing lines at specialized plants. Such products as Kleenex, Scott Tissue, and Huggies disposable diapers are manufactured at economy-of-scale volume, then temporarily positioned in demand facing warehouses. Customer-specific truckloads of assorted products are assembled at the warehouse. At the Nabisco Division of Kraft, branch warehouses are located adjacent to individual bakeries. Inventories of all major products are maintained at each branch to facilitate full-service shipments to customers. The primary determinant of the warehousing required to support manufacturing is the specific production strategy being implemented. In Chapter 5, three basic manufacturing strategies—make to plan (MTP), make to order (MTO), and assemble to order (ATO)—were discussed. The extent of demand facing warehousing can be directly linked to the requirements of each manufacturing strategy. In a general sense, MTO manufacturing strategies require supply facing warehousing support but little, if any, demand facing storage. Conversely, MTP manufacturing strategies, which focus resources to achieve maximum manufacturing economy of scale, require substantial demand facing warehouse capacity.
Customer Relationship Drivers
Customer relationship warehouses create value by providing customized inventory assortments to wholesalers and retailers. A warehouse located geographically close to customers seeks to minimize inbound transportation cost by maximizing shipment consolidation and length of haul from manufacturing plants followed by relatively short outbound movement to customers. The geographic size of a market area served from a support warehouse depends on the number of suppliers, the desired service speed, size of average order, and cost per unit of local delivery. The warehouse facility exists to provide customers inventory assortment and replenishment. A warehouse is justified if it offers a way to achieve a competitive service or cost advantage.
Rapid Replenishment
Customer warehouses have traditionally provided assortments of products from varied manufacturers and various suppliers to retailers. A retail store typically does not have sufficient demand to order inventory in large quantities directly from wholesalers or manufacturers. A typical retail replenishment order is placed with a wholesaler that sells a variety of different manufacturer products. Customer warehouses are common in the food and mass merchandise industries. The modern food warehouse usually is located geographically near the retail stores it services. From this central warehouse, consolidated product assortments can rapidly replenish retail inventories because of the close geographical proximity. Large retail stores may receive multiple truckloads from the warehouse on a daily basis. Location of the warehouse within the market served is justified as the least-cost way to rapidly replenish an assortment of inventory to either an end customer or a retailer.
Market-Based ATO
The design of a customer relationship warehouse network is directly related to inventory deployment strategy. The establishment of a customer relationship warehouse is a result of forward inventory deployment in anticipation of future demand. This assumption means that a manufacturing firm utilizing such a distributive network is to some degree dependent upon forecasting inventory requirements to offset response time to meet customer requirements. The preceding discussion indicated inventories deployed forward after manufacturing are typical in situations where firms are manufacturing to plan or when they are engaged in decentralized assembly to order. In assemble to order (ATO) situations, common or undifferentiated components are stocked in warehouse inventory in anticipation of performing customized manufacturing or assembly at the warehouse upon receipt of customer orders. An increasing amount of ATO operations are performed in warehouses located close to customers, as contrasted to centralized manufacturing locations. Assembly in close proximity to major markets allows the benefits of form postponement while avoiding the high cost and time related to long-distance direct shipment.
Total Cost Network
As noted earlier, the identification of the least-total-cost-network design is the goal of logistical integration. The basic concept of total cost for the overall logistical system is illustrated in Figure 12.6. The low point on the total transportation cost curve is between seven and eight facilities. Total cost related to average inventory commitment increases with each additional warehouse. For the overall system, the lowest total cost network is six locations. The point of lowest inventory cost would be a single warehouse.
Trade-off Relationships
The identification of the least-total-cost network of six warehouses in Figure 12.6 illustrates the trade-off relationships. Note that the minimal total cost point for the system is not at the point of least cost for either transportation or inventory. This trade-off illustrates the hallmark of integrated logistical analysis.