Strategic Factors for Logistics Network Design

From Sam Lampropoulos,

Strategic Factors for Network Design

When designing a logistics network, strategic factors such as speed to market, infrastructure and network size are pivotal to determining a network that will deliver the intended level of customer service. Managing the trade-offs among these levers properly is the key to getting it right.

Speed to Market

While many organizations outsource production to low-cost countries to have a competitive advantage, it’s important to consider what impact that has on customer service levels. If your organization is following a low-cost strategy, it makes sense to source where it is most cost effective. However, if speed to market is also a differentiator for your product as it has a very short cycle time, then sourcing facilities in close proximity to the consumer market would be a better strategy.

Zara, a Spanish clothing manufacturer, sources all of its direct materials locally from Spain. The short lead times to receive and then process raw material to finished goods enables it to react two to three times as fast as its nearest competitor to new fashion styles which has helped tremendously in its success over traditional apparel manufacturers and retailers.

Economic Factors

Economic factors such as taxes and exchange rates play a pivotal role in the location design decision. For example, one unit of measure that an apparel company used to benchmark its distribution network was units process per labor dollar. It was converting everything to US dollars for this metric. Hence, if the exchange rates are unfavorable, workers must work harder to catch up to the other DC’s that they are being benchmarked against! Many countries also offer tax incentives (example: pay no taxes for 10 years) to companies in an effort to attract them to invest in their country.

Infrastructure

Access to infrastructure must also be taken into account. Services such as water/drainage, consistent supply of electricity and the quality and proximity to main transportation routes are vital. Although they have a major cost impact, labor and land costs should not be selected simply because they are the most cost-effective. If access to a skilled work force is not available, special incentives may be required to entice workers that live further away to make a longer commute, which will result in higher labor costs.

Logistics Costs and Network Size

As the number of facilities increases, facility costs and inventory costs will increase. Transportation costs will decrease. Thus, these trade-offs must be analyzed in order to arrive at the best solution. Different scenarios may be analyzed to determine the impact on cost of changing some of the variables. Companies typically use network optimization software such as CAST for global supply chain modeling. Once the solution has been decided upon, it is also necessary to perform a capacity analysis to determine the proper sizing of the facilities.