What is Logistics Network Design

The question of the number, size and location of facilities in a company’s distribution system is a complex one. There are many different elements that go to make up the distribution mix, and it is necessary to take into account all of these when considering the question of network structure or facilities location. Prior to the DC location decision, a lot of work must be undertaken. This is necessary to help to understand the key requirements of the company and to collect and collate sufficient data that represent a numerical picture of the distribution structure so that appropriate analysis can be carried out to test potential options for improvement.

Before trying to determine the most appropriate number and location of DCs, it is also necessary to ensure that there is an efficient flow of products from source to final destination. This assessment of the different patterns of product flows is known as sourcing analysis.

The complexity of sourcing and location decisions has led to the development of some quite sophisticated mathematical models that attempt to find the optimum flows and the optimum number of DCs to serve a system. The detailed mathematical principles used as the basis for these models will not be covered, but consideration will be given to the relationships involved, and the approaches that can be undertaken when making location decisions.

Logistics network design is concerned with the purpose of the number and site of warehouses and manufacturing plants, allocation of customer demand, distribution of warehouses to production plants. The best configuration must be able to deliver the goods to the customers at the least cost (commonly used objective) while satisfying the service level needs. In most logistics network design models, the customer demand is exogenous and defined as a consistent quantity for each product. Such a uniform demand value does not take advantage of the possibility that different customers have different sensitivity to delivery lead-time.

Network design is a strategic subject for businesses. It calls for in-depth study to orientate crucial decisions such as:

• sitting, sizing the right number of factories, platforms and warehouses
• defining the physical flows between the various links in the supply chain and distribution flows
• specializing (or otherwise) factory production lines
• stocking items in the right place for the best customer delivery terms
• outsourcing certain activities such as distribution.

Developing a powerful logistics network is a competitive advantage in the current economic context where competitive pressure is rife, the market volatile and globalized and raw materials costs are rising. An optimized logistics network makes for lower costs, a grip on logistics flows and providing excellent customers service.

The primary driver for evaluating a logistic network design is sometimes an effort to reduce cost, sometimes an effort to improve service, and often, both. The right network design optimizes transportation, distribution operations, and inventory investment to strike the ideal balance of cost and service.