Location decisions are a basic determinant of profitability in logistics.
Decisions on where to manufacture, to assemble, to store, to tranship and to
consolidate can make the difference between profit and loss. Because of
differences in basic factor costs and because of exchange rate movements,
location decisions are very important. Location decisions can have a continuing
impact over time on the company’s financial and competitive position.
FACILITY LOCATION MODELS
• Break Even Analysis
• Transportation Models
• Transportation refers to the movement of product from one location
to another as it makes its way from the beginning of supply chain to
• Transportation is an important supply chain driver because products
are rarely produced and consumed in the same location.
ROLE OF TRANSPORTATION IN SUPPLY CHAIN
• Transportation refers to the movement
of product from one location to another.
• Transportation plays a major role in
increasing gross domestic product (GDP).
• Seven-Eleven Japan used transportation to achieve its strategic goals.
• Shipper (party that
requires the movement of
the product between two
points in the SC)
• Transportation cost
• Inventory cost
• Facility cost
• Carrier (party that moves
or transports the product)
• Vehicle-related cost
• Fixed operating cost
• Trip-related cost
• For example: DHL, FedEx
• Air freighting is commonly used by companies who work with short lead times, or advanced service
• Air transportation is best suited for small, high- value items or time sensitive emergency shipments
that have to travel a long distance.
• Air carriers normally move shipments that have high value but light weight .
o It is the fastest mode of transport.
o It is very useful in transporting goods to the area, which are not accessible by any other means.
o Reduces lead time.
o Improved service levels
o It is relatively more expensive mode of transport.
o It is not suitable for transporting heavy and bulky goods.
o It is not suitable for short distance travel.
• Package carriers are transportation companies which carry small packages. Examples: FedEx,
UPS, DHL. etc.
• Package carrier use air, truck and rail to transport the goods. Packages carriers also provide
other value added services that allow shippers to inventory flow and track order status, shipper
can proactively inform the customer about their packages.
• Package carrier is suited for e- business.
• Rapid and reliable delivery
• Preferred mode for e-businesses (e.g., Amazon, Dell, McMaster-Carr)
• Consolidation of shipments (especially important for package carriers that use air as a primary
method of transport)
• Small and time-sensitive shipments
• Road transport offers a complete freedom to road users to transfer the vehicle from one lane to the
other and from one road to another according to the need and convenience.
• The flexibility of changes in location, direction, speed, and timings of travel is not available to
other modes of transport.
o It is a relatively cheaper mode of transport as compared to other modes.
o It is a flexible mode of transport as loading and unloading is possible at any destination. It
provides door-to-door service.
o It helps to carry goods from one place to another, in places which are not connected by other
means of transport like hilly areas.
o Due to limited carrying capacity road transport is not economical for long distance transportation
o Transportation of heavy goods or goods in bulk by road involves high cost.
• Rail transport uses freight trains for the delivery of merchandise. Freight trains are usually powered by
diesel, electricity and steam.
• Rail is suited for bulk shipment of products like fertilizer, cement, food grains and coal etc. from the
production plant to the warehouses.
o It is relatively faster than road transport.
o It is suitable for carrying heavy goods in large quantities over long distances
o Cost effective.
o It is relatively expensive for carrying goods over short distances.
o It is not available in remote parts of the country.
o It provides service according to fixed time schedule and is not flexible for loading or unloading of
goods at any place.
o Pipeline is used primarily for the transport of crude petroleum, refined petroleum products and natural
o It include a significant initial fixed cost in setting up the pipeline and related infrastructure.
o Pipelines are not flexible and this scope is limited with respect to commodities.
o Unable to transport a variety of materials
o Supply through pipelines is very reliable.
o Reduction in cost of transportation
o In case of underground pipelines, the land in which pipeline is laid can still be used for agricultural use
o Illegal pilferage and wastage due to leak is a problem in pipelines
o In case of chemicals and petroleum pipelines any leak can cause a accident.
o Like other big linear structures patrolling and maintenance of pipelines is a huge task.
o Water transport uses ships and large commercial vessels that carry billions of tons of cargo.
o Water transport is used primarily for the movement of large bulk commodity shipments and it is the
cheapest mode for carrying such load.
o Water transport is particularly effective for significantly large quantities of goods that are non-
perishable in nature and for cities or states that have water access.
• Inland Waterways: Refer to using inland water bodies like rivers, canals, backwaters, creeks and etc.
• Ocean Waterways: Navigation along the coastal places and foreign countries take places with the help
o It is a relatively economical mode of transport for bulky and heavy goods.
o The cost of maintaining and constructing routes is very low most of them are naturally made.
o It promotes international trade.
o The depth and navigability of rivers and canals vary and thus, affect operations of different transport
o It is a slow moving mode of transport and therefore not suitable for transport of perishable goods.
o It is adversely affected by weather conditions.
o Sea transport requires large investment on ships and their maintenance.
• Intermodal Transportation is use of more than one mode of transport for the
movement of shipment from origin to its destination.
• Intermodal operation is used two or more mode of transport to take the advantage of
inherent economies of each and thus provide the
integrated service at lower cost.
• For example: truck/water/rail.
o Increased global trade has also increased use of intermodal transportation
o Grown considerably with increased use of containers
o More convenient for shippers (one entity provides the complete service)
o Lack of Reliability, i.e. exchange of information to facilitate transfer between different transport
o High Infrastructure Costs
Therefore, transportation plays very important role in the supply chain to
distribute the goods from one place to the another place.
Increased demand from customers for better performance on cost, quality and
Customers puts pressure on supply chain managers to continually improve