12 – Network Integration

Introduction

When managers are invited to engage in logistical system reengineering, they are usually confronted with a new and challenging project. Managers should expect significant discontinuity when attempting to use existing experience to drive the creation and integration of new logistical capabilities due to the rapid rate of change in practically every aspect of logistical operations. As a result, success or failure may be determined by the planning team’s ability to quantify the factors at work and rationalise them into a transparent and credible action plan. Understanding the theoretical structures that serve as the foundation of logistical integration is a critical step toward conceptualising an integrated strategy.

Previously, the essence of logistics strategy was described as obtaining the lowest overall cost operations while keeping flexibility. Flexibility is essential for providing high-quality basic customer service while keeping enough operating capacity to meet and exceed critical customer expectations. To capitalise on flexibility, a company must attain a high level of logistical process integration. At two operational levels, integration is required. First, logistics operations must be coordinated throughout a facility network that serves market distribution, manufacturing, and procurement requirements. Such network integration is necessary for a company to obtain a competitive edge through logistical expertise. Second, integration must go beyond a single company by fostering ties throughout the supply chain. This unit provides a framework to help managers achieve such integration.

12.1 Enterprise Facilities Network

Before the emergence of low-cost, dependable land transportation, most of the world’s business was carried out by water. Commercial activity was focused on port cities during this early period. Goods were transported overland, which was both expensive and time-consuming.

For example, ordering tailored apparel from across the continental United States could take up to 9 months.

Although there was a need for quick and efficient transportation, the transportation technology revolution in the United States did not begin until the advent of the steam locomotive in 1829. This country’s transportation system is now a highly developed network of rail, water, air, highway, and pipeline services. Each mode of transportation provides a distinct sort of service for usage within a logistical system. The availability of low-cost transportation opens up the possibility of establishing a competitively superior facility network to serve clients.

Since the middle of the nineteenth century, when the German economist Joachim von Thunen published The Isolated State, the importance of location network analysis has been recognised. The fundamental factor of economic progress, according to von Thunen, was the price of land and the cost of transporting items from farm to market. The worth of land was thought to be closely tied to the cost of transportation and a product’s capacity to command a sufficient price to cover all expenses and result in a profitable enterprise. Von Thunen’s fundamental idea was that the value of specific produce in the growing area declines as one moves away from the principal selling market.

Following von Thunen’s footsteps, Alfred Weber extended the location theory from an agricultural to an industrial society. Weber’s theoretical system comprises several places consumed, distributed across a geographical area, and connected by linear weight-distance transit costs. Weber devised a system for categorising key elements as either ubiquitous or confined. Ubiquitous materials were present in all locations. Localized raw materials were mineral resources found only in specific localities. Weber created a material index based on his study. This was the final product’s weight divided by the weight of the localised raw material. Based on the material index, several industries were assigned a locational weight. Weber generalised that industries would site facilities near the point of consumption when the manufacturing process was weight-gaining and near the end of raw material deposit when the manufacturing process was weight-losing using these two measures. Finally, corporations would choose plant locations in the middle if the production process were neither weight-gaining nor weight-losing.

12.1.1 Spectrum of Location Decision 

Transportation can connect geographically dispersed manufacturing, warehousing, and market locations into an integrated system in terms of logistical planning. All places where commodities, work-in-process inventory, or finished inventories are handled or stored are considered logistical system facilities. As a result, all retail outlets, completed goods warehouses, production plants, and material storage warehouses are logistical network nodes. As a result, both the selection of individual locations and the overall locational network represent critical competitive and cost-related logistical decisions.

It may take several years to implement a manufacturing plant location completely.

Example: From concept to reality, General Motors’ decision to develop a new Cadillac assembly facility in Lansing, Michigan, took 5 years.

On the other hand, some warehouse arrangements are sufficiently adaptable to be used at specific times of the year. Retail location selection is a specialised decision impacted by marketing and competitive considerations. The following discussion focuses on warehouse location. Those concerning warehouse networks receive the most scrutiny among all the placement decisions that logistics managers must make.

12.1.2 Local Presence: An Obsolete Paradigm

A long-held idea in business is that to do effective business, a company must have facilities in local markets. During North America’s economic expansion, inconsistent transportation services cast severe doubt on a firm’s capacity to offer delivery in a timely and consistent manner. In brief, buyers believed continuous delivery would be difficult, if not impossible unless a provider maintained inventories in local market areas. This notion, colloquially as the local presence paradigm, resulted in logistical tactics devoted to inventory forward deployment. It was not uncommon for manufacturers to have 20 or more distribution warehouses to service the continental United States as recently as the early 1960s. Some companies went so far as to have full-line inventory warehouses near their key sales offices.

Changing a tradition that is part of a successful approach is challenging. However, over the last several decades, the inventory cost and the risk associated with local presence have prompted a re-examination. Transportation services have expanded substantially, and reliability has improved so that arrival times are dependable and predictable. Rapid advancements in information technology have shortened the time required to discover and express client requirements. Vehicles may now be tracked using technology, delivering exact delivery information. Next-day shipping from a warehouse facility 800 to 1000 miles away is regular.

Transportation, information technology, and inventory economics favour fewer distribution warehouses to service clients within a geographical area rather than a more significant number of distribution warehouses.

12.2 Warehouse Prerequisites

Warehouses are set up in a logistical system to reduce overall costs or to increase customer service. Sometimes, the advantages of lower costs and improved service might be realised simultaneously. Warehouses add value to the processes that they support. Warehouses are needed in the manufacturing industry to store, sort, and sequence supplies and components. Supply-facing warehouses are facilities that receive inbound supplies and components. Warehouses are also used to store, sequence, and combine inventory for centralised distribution to the supply chain’s next-level clients. Demand-facing warehouses are used to assist market distribution.

Warehouses often specialise in either supply- or demand-facing services due to particular material handling and inventory process requirements. Warehouses dedicated to manufacturing support are usually positioned close to the plants they assist; in contrast, warehouses dedicated to marketing distribution are typically strategically located throughout the geographical market region covered.

Information technology, e-procurement fulfilment, and response-based business strategies have fundamentally altered how and why warehouses are used. A warehouse’s economic justification and desired usefulness might differ significantly depending on whether it is used for procurement, production, or market distribution.

12.2.1 Procurement Drivers

Procurement drivers revolve around using warehouses to assist in purchasing goods and components at the lowest total cost. Sophisticated purchasing executives have long recognised that achieving the lowest delivered cost requires a mix of purchase price, quantity discount, payment terms, and logistics performance. Most businesses have reduced the number of suppliers with whom they do business to create and encourage better working relationships. The concept is cultivating several supplier relationships that can be operationally integrated into a company’s supply chain.

Life cycle factors have become more prevalent in buying decisions to improve operating efficiency. Working with a small number of suppliers creates a relational dynamic that is built on a cradle-to-grave concept. The partnership is designed to focus on all areas of the product life cycle, from new product creation to the reclamation and disposal of unwanted resources and unsold product inventory. A life cycle emphasis is the result of various purchasing strategies that directly impact the nature and functionality of supply-faced warehousing. Procurement-related value-added services are increasingly being separated from the purchase price. This type of decoupling promotes functional absorption and spin-off between manufacturers and their suppliers. Moving toward more response-based business strategies also changes expectations around supplier assistance and engagement in the value-added process. As a result, new structural relationships, such as tier-one suppliers and lead facilitators, have emerged. Finally, the seasonality of selected supplies, the availability of discounted purchases, and the necessity to quickly accommodate manufacturing increases make material warehousing a sensible financial decision.

As a result, the function of supply-facing warehouses is evolving. Traditionally, warehouses were used to stockpile raw materials and parts. Nowadays, such facilities emphasise sorting and sequencing materials as they pass through the production process. The separation of services from the cost of commodities has eased the outsourcing of warehouse requirements in many enterprises. Lead suppliers or integrated logistics service providers are increasingly providing warehouse services to most efficiently support manufacturing. The goal is to simplify the flow of materials and components by minimising redundant handling and storage of identical inventory across the material supply network.

12.2.2 Manufacturing Drivers

Manufacturing warehouses are used to assemble finished goods for shipping to customers. In contrast to individual order shipment, the opportunity to aggregate is available. The capacity to provide clients with a full-line product selection on a single invoice at truckload shipping prices is a fundamental advantage of a manufacturing demand-facing warehouse. Indeed, a manufacturer’s ability to deliver such consolidation may be the primary basis for its selection as a preferred supplier.

The networks utilised by General Mills, Johnson & Johnson, Kraft, Kimberly-Clark, and Nabisco Foods are prime examples of demand-facing warehouses. Johnson & Johnson uses warehouses to consolidate various business units, assisting the healthcare and consumer sectors. As a result, consumers can receive comprehensive assortments of products from several business units on a single invoice for dispatch in a single vehicle. Kimberly-Clark manufactures an extensive range of individual items on dedicated lines in specialised plants.

Products like Kleenex®, Scott Tissue®, and Huggies® disposable diapers are mass-produced and temporarily positioned in demand-facing warehouses. At the warehouse, customer-specific truckloads of various products are assembled. Branch warehouses at Nabisco are placed next to separate bakeries. Each branch maintains inventories of all essential products to provide full-service shipments to customers.

The precise production strategy is the key determinant of the warehousing necessary to support manufacturing. There are three fundamental manufacturing strategies: make-to-plan (MTP), make-to-order (MTO), and assemble-to-order (ATO). The magnitude of warehousing demand is closely related to the support requirements of any manufacturing strategy. In general, MTO manufacturing techniques necessitate supply-side warehousing but little, if any, demand-side storage. MTP manufacturing systems, on the other hand, necessitate a significant amount of demand facing warehouse capacity to maximise the manufacturing economy of scale.

12.2.3 Market Distribution Drivers 

Market support warehouses add value to the supply chain by supplying inventory assortments to wholesalers and retailers. A warehouse near clients aims to reduce inbound transportation costs by optimising consolidation and haul length from manufacturing plants, followed by relatively short outbound movement to final destination customers. The required service speed, typical order size, and cost per local delivery unit determine the geographic area that a support warehouse serves. Third-party logistics service providers run many market distribution warehouses as public or contract facilities. Regardless of who operates the warehouse, the facility exists to provide customers with inventory assortment and replenishment. A warehouse is justified if it allows a means to offer a competitive service or gain a cost advantage.

Rapid Replenishment 

Market distribution warehouses have long offered retailers various products from multiple manufacturers and suppliers. Because a retail store often does not have enough demand to order significant amounts of products directly from wholesalers or manufacturers, a retail replenishment order is typically placed with a wholesaler who distributes several products from various manufacturers.

Market support warehouses are widely used in the food and retail industries. The modern food distribution warehouse is frequently placed near the retail businesses it serves. Because of the near geographical proximity, consolidated product assortments may quickly replace store inventories from this central warehouse. Daily, large retail establishments may get many truckloads from the warehouse.

Market-based ATO 

The inventory deployment strategy is intimately tied to the architecture of a market distribution warehouse network. Market distribution warehouses are built due to forward inventory deployment in anticipation of future market demands. This assumption implies that a manufacturing firm using such a distribution network relies on anticipatory inventory deployment to counterbalance reaction time to meet customer requirements. According to the preceding explanation, inventories deployed ahead after manufacturing are frequent when enterprises manufacture to plan and engage in decentralised assembly to order. Standard or undifferentiated components are placed in warehouse inventory with the expectation of executing customised manufacture or assembly at the warehouse upon receipt of customer orders in ATO circumstances.

More ATO operations are being done in market-located warehouses rather than centralised manufacturing facilities. An assembly near large markets allows for the benefits of delay while avoiding the high costs and time associated with long-distance direct shipment.

12.2.4 Warehouse Justification 

Warehouses are justified in a logistical system when their location between suppliers, manufacturers, and customers results in a service or cost advantage. Developing a warehouse network can create a competitive advantage by lowering total costs or speeding up to-destination service. Using the warehouse to achieve freight consolidation leads to a cost-benefit from the standpoint of transportation economics. However, freight consolidation often necessitates the purchase of inventory to facilitate the assembly of customised orders. Building cross-docking sortations without predetermined inventories or flow-through facilities can accomplish consolidation or assortment.

Due to such constant mobility, warehouses are effectively converted from inventory storage to mixing facilities. Of course, in some cases, a combination of inventory holding and continuous flow-through will be necessary to successfully and inexpensively service consumers. From the standpoint of integrative management, the key logistics system design questions become: How many and what kind of warehouses should a firm establish? What should their location be? What kinds of services should they offer? What types of inventory should they keep on hand? And who exactly should they serve? This series of interconnected questions represents the difficulty of traditional logistics network design. Network design in manufacturing enterprises begins with marketing strategy and progresses to manufacturing and procurement planning. The framework in retailing and wholesale firms extends from purchasing to market distribution methods.

12.3 Total Costs of Integration 

Economic variables such as transportation and inventory determine a company’s most appropriate network of warehouse facilities. This discussion discusses cost trade-offs in transportation and inventory, followed by integration to determine the lowest total cost facility network.

12.3.1 Economics of Transportation

Two fundamental ideas summarise the key to obtaining cost-effective transportation. The first, the quantity principle, states that individual shipments should be as large as the associated carrier’s equipment can lawfully transport. The second guideline, the tapering principle, states that large cargoes should be transported over as long a distance as possible. Both of these approaches aim to distribute the fixed cost of transportation across as many pounds and kilometres as possible.

12.3.2 Cost-based Warehouse Justification

Transportation consolidation is the fundamental economic premise that justifies the creation of a warehouse. Manufacturers often sell their products throughout a broad geographic market. If most client orders are small, the potential cost savings from centralised transportation may give economic justification for creating a warehouse.

Economic justification of a warehouse facility based on transportation cost

Source: Donald J. Bowersox, David J. Closs, M. Bixby Cooper, “Supply Chain Logistics Management,”Michigan State University

Assume the average shipment size for a manufacturer is 500 pounds, and the corresponding freight charge to a client is $7.28 per hundredweight. Each shipment made directly from the manufacturing area to the market would cost $36.40 in transportation. For shipments weighing 20,000 pounds or more, the amount or volume shipping rate is $2.40 per hundredweight. Finally, local delivery costs $1.35 per hundredweight within the market region. Products sent to the market via quantity rates and distributed locally would cost $3.75 per hundredweight, or $18.75 for every 500-pound cargo, under these conditions. The overall cost of distributing to the market utilising a warehouse would be reduced if a warehouse could be created, supplied with merchandise, and run for less than $17.65 for each 500-pound shipment ($36.40 – $18.75) or $3.53 per hundredweight. Establishing a warehouse can lower total logistics costs, given these economic links.

12.3.3 Inventory Economics 

The inventory level in a logistical system is directly related to the geographical network. The performance cycle is the foundation for planning inventory deployment. Although transportation is a component of the performance cycle that offers spatial closure, time is the primary driver of inventory economics. Forward inventory deployment in a logistical system can potentially improve service response time.

Justification for a Service-Based Warehouse

Warehouses can be crucial to a company’s nationwide distribution logistics strategy. A warehouse network’s inventory includes base, transit, and safety stock.

Base Inventory: Adding inventory has no substantial influence on the base stock. Manufacturing and transportation lot sizes in a logistical system determine the base stock level, which remains constant as the number of warehouses rises. The replenishment EOQ and the resulting base stock are determined by the mix of maintenance and ordering costs, modified to account for volume shipping rates and purchase discounts. The discrete order quantity required to support the intended manufacturing run or assembly determines base stock in just-in-time procurement scenarios.

Transit Inventor: Transit stock is merchandise locked up in vehicles. This inventory is available to promise while in transit but cannot be physically accessed. Available to promise indicates that it can be committed to consumers using the order management system’s reservation or inventory mortgaging capacity. As more performance cycles are added to a logistical network, transit inventory is expected to decrease for existing cycles.

Inventory of Safety Stocks: To protect against sales and performance cycle unpredictability, safety stock is added to base and transit stock. Both dimensions of uncertainty are tied to time. Customer demand that exceeds expected sales during the replenishment period is the source of sales uncertainty. The performance cycle uncertainty concerns the fluctuation in the total days necessary to replace a warehouse’s inventory. The predicted outcome of additional warehouses in terms of safety stock is an increase in average system inventory. Safety stock is intended to prevent unforeseen stockouts during inventory replenishment. As a result, if the overall network uncertainty rises due to additional warehouses, the overall safety stock must also increase.

12.3.4  Total Cost Network

The total cost associated with average inventory commitments rises with each new warehouse. The lowest total cost network for the complete system has six locations, and the lowest inventory cost location would be a single warehouse.

Trade-off Relationships

The system’s minimal total cost point is not at the lowest cost for transportation or inventory. This is the distinguishing feature of integrated logistical analysis.

In practice, identifying and measuring all factors of total logistical cost is difficult. Many assumptions must be made for logistics network analysis to be operationalized.

Critical Assumptions and Limitations

A single, average-sized shipment is used to demonstrate transportation needs. In actual operations, neither of these simplistic assumptions is likely to be true. For starters, the nature of logistical network architecture is not a matter of short-term planning. Regarding facility considerations, the planning horizon spans several years and must fit a wide range of yearly sales estimates. Second, actual shipment and order sizes will vary significantly from the average.

A realistic approach to planning must include a range of shipment sizes supported by alternate logistical solutions to meet customer service needs. In practice, other modes of transportation are used as needed to increase delivery speed.

Inventory and transportation have significant cost trade-offs. Inventory cost as a function of warehouse count is directly proportional to the desired degree of inventory availability. If there is no safety stock in the system, the overall inventory requirement is restricted to base and transit stock. Without a safety stock, the system’s lowest cost would be at or near the lowest transportation cost. As a result, assumptions about desired inventory availability and fill rate are critical to trade-off analysis and substantially impact the lowest overall cost design option.

12.4 Formulating of Logistical Strategy

The linkages between customer service levels and associated costs must be assessed to complete the logistical plan. While measuring income presents significant challenges, a comparative evaluation of marginal service performance and related costs provides a technique to approximate an optimal logistical system design. The general approach consists of

(1) determining the lowest total cost network,

(2) measuring the threshold service availability and capability associated with the lowest total cost system design,

(3) conducting sensitivity analysis related to incremental service and cost directly associated with revenue generation and

(4) finalising the plan.

12.4.1 Cost Minimization

An economic map can show logistical cost differentials in the same way that a physical copy of a geographical area illustrates hills, depressions, and curves of land surface. Peak labour and critical service expenses are typically found in large urban regions. However, because of demand concentration, urban locations frequently have the lowest total logistics costs due to transportation and inventory consolidation benefits.

A least total cost strategy aims for a logistics system network with the fewest fixed and variable expenses. A system designed to attain the lowest total cost is only motivated by cost-to-cost trade-offs. Safety stock regulations and the closeness of warehouses to clients determine the quality of customer service linked to a low-cost logistical architecture.

 12.4.2 Threshold Service

To achieve a threshold service level, network reengineering with policies governing desired inventory availability and capabilities must be initiated. It is typical to base customer service on the existing order entry and processing system, warehouse operations on regular order fulfilment time at existing facilities, and transportation delivery time on the capabilities of the least expensive transportation options. Given these assumptions, current performance is a starting point for assessing prospective service improvements.

The starting point of the standard customer service availability analysis is to assume acceptable fill rate performance. The current industry standard is frequently employed as a first approximation.

For example, suppose the safety stock availability goal is 97.75 percent for the combined probability of demand and lead time uncertainty. In that case, 98 out of 100 products ordered are expected to be supplied to specification.

Based on the original assumptions, each customer is assigned a shipment location based on the lowest total cost. The items held at each warehouse and the level of consolidation clients desire will determine the service regions chosen for each facility in multiproduct situations. Because expenses vary so widely across the country, the service area for any given facility will vary in size and layout.

12.4.3 Service Sensitivity Analysis 

The threshold service produced by the lowest total cost logistical design is the foundation for sensitivity analysis. A network’s fundamental service capabilities can be improved or decreased by changing the number of warehouses, one or more performance cycles to boost the speed or consistency of operations, and the safety stock policy.

Location Modification 

The logistical system’s warehouse structure establishes the service that can be realised without compromising the performance cycle or safety stock policy. To illustrate the relationship between the number of warehouses and the resulting service time, assume an essential measure is the percentage of demand satisfied within a specific time interval.

For starters, incremental service is a decreasing function.

For example, the first five warehouse facilities served 42 percent of all consumers 24 hours a day, seven days a week. To increase the percentage of 24-hour service from 42 to 84 percent, 9 more warehouses, for a total of 14, are needed.

Second, for longer performance intervals, high degrees of service are obtained considerably faster than for shorter intervals.

Four warehouse locations provide 85 percent performance within the 96-hour performance cycle. Increasing the total number of locations from four to fourteen improved 96-hour performance by only 9%. A total of 14 warehouses, on the other hand, cannot attain 85 percent performance in a 24-hour performance cycle.

Finally, the overall cost of each new location added to the logistical network skyrockets. As a result, while the incremental service provided by new locations decreases, the incremental cost associated with each new location rises: the service payoff for each new facility is increasingly lower.

Logistics managers are frequently asked to predict the impact of adding or deleting warehouses on inventory. The portfolio effect refers to the link between uncertainty and necessary inventory. The square root rule can be used to calculate the portfolio effect. According to Maister’s square root rule, the increase in safety stock due to adding a warehouse equals the square root of the ratio between the number of locations in the newly constructed network and the number of existing sites.

Performance Cycle Modification

By modifying some parts of the performance cycle, the speed and consistency of service can be tailored to a particular market or consumer. Electronic ordering and premium transportation can be used to improve service. As a result, physical closeness and the number of warehouses do not correlate to speedy or reliable delivery. The decision to boost service by implementing a faster performance cycle arrangement will almost always result in a rise in variable costs. In contrast, service enhancement by adding warehouses entails a significant fixed cost and may result in less total system flexibility.

No generalisations can be made about the cost/service improvement ratio that can be obtained through performance cycle adjustment. The conventional premium-to-lowest-cost transportation relationship results in a strong incentive to transport large cargoes. Thus, if the order volume is significant, logistics economics can be expected to favour the use of a warehouse or consolidation point to service a market area.

Using premium transportation will raise the overall cost. Typically, deviations from the lowest total cost logistical system can be justified if the better service results in more significant income.

Safety Stocks Modification

The safety stockpiles necessary to accomplish each equal increment of availability rise at an increasing rate.

 12.4.4 Finalizing Strategy

Management frequently falls into the trap of excessively optimistic regarding customer service commitments. As a result, unduly high client expectations may be met with unpredictable performance. Part of the reason for such overcommitment is a misunderstanding of the expense required to sustain high-quality, zero-defect service.

The final phase in developing a plan is to assess the cost of increased service in revenue generation. Assume the present system is designed to service at least 90% of all customers with 95% inventory availability within 60 hours of order receipt. Assume that the current logistical system achieves these goals at the lowest overall cost by deploying a network of five warehouses. Marketing, on the other hand, is dissatisfied and believes that service capability should be expanded so that 90 percent of all consumers have 97 percent inventory availability provided within 24 hours. Logistics management must estimate the cost of this strategic commitment.

Maximum Service

A maximal service approach is rarely put into action. A system that provides the best possible service moves the design emphasis from cost to availability and delivery performance. Maximum service regions can be formed in the same way as low-cost service zones can. The competence to offer the requisite delivery determines the limitations of each facility’s service area. Like cost-oriented service areas, time-oriented service areas will be erratic due to transport-route arrangements. The total cost difference between a low-cost and a high-cost service system to serve the same clients will be significant. To service the whole US market overnight, 30 to 40 warehouses and very dependable transportation may be required. The usage of premium transportation could reduce the number of warehouses.

Maximum Profit

Most businesses aim to maximise profit in the design of logistics systems. In theory, each warehouse’s service area should be set by defining a minimal profit contribution for customers located at varied distances from the facility. Because warehouses are typically placed near high-volume marketplaces, the further a customer is from the service area centre, the higher the logistics cost. The warehouse service region’s periphery has lower client density and greater distance, which are the causes of this cost increase.

If a consumer receives better service, he or she is more likely to purchase more of a company’s overall product range. In theory, more services should be offered until marginally generated revenue matches marginal costs. No more service would be justified at this point of balance. Increasing the number of warehouses may or may not result in additional service. A direct or dual distribution supplemental delivery system may best provide the necessary service. The theoretical profit maximisation perspective is more straightforward to articulate than quantify.

Maximum Competitive Advantage

In some cases, maximising competitive advantage may be the best technique for leading logistics system design. Although other approaches exist to modify systems to achieve a competitive edge, two are offered to highlight strategic concerns.

-Service Segmentation: Improving service to safeguard major clients from competition is a standard adjustment in the least-cost design. Management must be concerned with how major consumers’ expectations are met. Suppose the current service policy can only provide 42 percent of customers with 24-hour delivery and 95 percent inventory availability. In that case, effort must be made to ensure that the most profitable customers receive the best service.

-Justified High-priced Warehouse: An economically justified high-cost warehouse is another application of design change to profit in competitive situations. This condition is especially relevant for smaller or specialist enterprises. Pricing policies are likely to be rigid due to the rigidities inherent in large enterprises. Antitrust laws serve to reinforce such rigidities. As a result, huge companies operating in broad geographical markets tend to ignore specific cost and demand situations in localised markets or find it practically impossible to alter marketing and logistical systems to suit such particular opportunities. This inflexibility presents opportunities for smaller enterprises, allowing them to spend heavily on logistical capabilities to attract a localised market niche.

Minimal Asset Deployment

A desire to reduce the assets committed to the logistical system may drive a final logistical strategy. A company that wants to be flexible may use variable-cost logistical components such as public warehouses and for-hire transportation. An approach like this could result in more significant total logistical costs than could be recovered through asset commitment to achieve economies of scale. However, the risk would be reduced, and the technique would provide greater flexibility.

Integrating a logistical plan to support entire corporate operations necessitates a precise commitment to customer care. Total least cost and associated threshold service provide an ideal foundation for conducting cost/service sensitivity analysis when constructing a logistical system.

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