How Location Decisions Impact a Lean Strategy
Companies often don’t consider the location decision to be a Lean concept, but they should. Moving goods efficiently from raw material sites to processing facilities, manufacturers, distributors, retailers, and customers is critical to remaining competitive in today’s global economy.
When manufacturers make location decisions, their priority is to minimize cost. Retailers look to maximize revenue where possible. Locating new facilities is a strategic decision that, once made, cannot be changed easily in the short term. Yet many organizations—especially small and mid-sized businesses—often neglect or delay this decision.
An entire organization can feel the impact of indecision—especially in today’s global economy, which is far from static. Risks include demand volatility, omni-channel distribution, shrinking lead times, reduced product development, and shorter product lifecycles.
The decision to open, close, or expand manufacturing or distribution locations can have a long-term impact on a product’s total cost. This decision can be heavily influenced not only by forecasted demand, but also by transportation costs, which can average three to five percent of sales, and warehousing costs as much as two percent on average.
The location decision certainly is a Lean concept in regards to your supply chain. Not understanding the importance of that decision in today’s business world can result in cost and service inefficiencies, and possibly a business failure.
One main reason why companies often neglect or delay this decision is the significant cost of performing the necessary analysis to optimize a manufacturing and distribution network—consultants can charge upwards of $100,000 for a study. The cost-benefit ratio can be significant, however, with savings often in the millions, and usually with improved service levels. Companies should conduct this analysis once every two or three years.
So, how do you go about this? A range of tools are available to help, from "back of the envelope" simplistic tools to complex optimization systems, including:
- Location cost-volume analysis: A simple location decision tool that looks at a future volume forecast, along with fixed and variable costs known for each location. This helps justify potential sites through predicted throughput volumes.
- Weighted factor rating method: Compares a number of locations using both quantitative and qualitative criteria, and applies ratings to each of the criteria to determine the winning location.
- Center of gravity method: Determines the approximate location of a distribution center that minimizes logistics costs, while considering the location of markets, volume of goods shipped, and shipping cost.
- Transportation problem model: Deals with distributing goods from several points of supply to multiple points of demand. It looks at the capacity of goods at each source, requirements at each destination, and a host of materials, manufacturing, transportation, and warehousing costs. The model then determines optimal location(s) that minimize total transport and production costs, while maintaining specified inventory and service level targets.
Companies that do not properly execute location decisions have the potential to create a huge amount of waste.
Parts of this column are adapted from Lean Supply Chain & Logistics Management (McGraw-Hill; 2012), Lean Retail and Wholesale (McGraw-Hill; 2014) and Supply Chain and Logistics Management Made Easy (Pearson, 2015) by Paul A. Myerson with permission from McGraw-Hill and Pearson, respectively.