Page 272 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 12: Network Integration

An increasing amount of ATO operations are performed in market-positioned warehouses as Notes
contrasted to centralized manufacturing locations. Assembly in close proximity to major markets
allows the benefits of postponement while avoiding the high cost and time related to long-
distance direct shipment.

12.2.4 Warehouse Justification

Warehouses are justified in a logistical system when a service or cost advantage results from
their positioning between suppliers, manufacturers, and customers. Competitive advantage
generated by establishing a warehouse network can result from lower total cost or faster to-
destination service. From the viewpoint of transportation economies, cost advantage results
from using the warehouse to achieve freight consolidation. However, freight consolidation
typically requires inventory to support assembly of customized orders. Alternatively,
consolidation or assortment may be achieved by establishing flow-through facilities or cross-
dock sortation that operates without preestablished inventories.
Such continuous movement effectively converts warehouses from inventory storage to mixing
facilities. Of course, some business situations will justify a combination of inventory storage
and continuous flow-through to effectively and economically service customers. From the
perspective of integrative management, the key logistics system design questions become:
How many and what kinds of warehouses should a firm establish? Where should they be
located? What services should they provide? What inventories should they stock? And which
customers should they service? This sequence of interrelated questions represents the classical
logistics network design challenge. For manufacturing firms, network design begins with
marketing strategy and continues into manufacturing and procurement planning. In retailing
and wholesaling enterprises the framework spans from purchasing to market distribution
strategies.

Self Assessment

Fill in the blanks:
3. Warehouses used support market distribution is often referred to as ……………………
warehouses.
4. A primary advantage of a manufacturing demand facing …………………… is the ability
to offer customers full line product assortment on a single invoice at truckload
transportation rates.
5. The …………………… of a market area served from a support warehouse depends on the
desired service speed, size of average order, and cost per unit of local delivery.
6. An increasing amount of …………………… are performed in market-positioned
warehouses as contrasted to centralized manufacturing locations.

12.3 Total Cost Integration

Economic forces such as transportation and inventory determine a firm’s most appropriate
network of warehouse facilities. This discussion identifies cost trade-offs related to transportation
and inventory followed by integration to identify the least total cost facility network.

12.3.1 Transportation Economics

The key to achieving economical transportation is summarized in two basic principles. The first,
often called the quantity principle, is that individual shipments should be as large as the involved

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