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Chapter 14

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					Chapter 14:

      Network Design and Facility
                       Location
Learning Objectives -          After reading this
chapter, you should be able to do the following:

    Identify factors that may suggest a need to
     redesign a logistics network.
    Structure an effective process for logistics
     network design.
    Be aware of key locational determinants and
     the impact they may have on prospective
     locational alternatives.



 Chapter 14     Management of Business Logistics, 7th Ed.   2
Learning Objectives
   Understand the different types of modeling
    approaches that may be used to gain insight
    into logistics network design and facility
    location.
   Apply the simple “grid” or center-of-gravity
    approach to facility location.
   Have knowledge of certain ways in which
    transportation and transportation costs affect
    the location decision.
Chapter 14     Management of Business Logistics, 7th Ed.   3
    Logistics Profile:
    Need for Speed…
   Globalization was supposed to mean that most
    of the world’s manufacturing jobs would shift to
    low cost locations in Asia.
   Technology companies cannot afford the two
    weeks transportation time from Asia, so NAFTA
    has empowered Guadalajara, Mexico to become
    the home to many highly efficient
    manufacturers.
   Tax breaks, low cost land and labor, and a
    friendly government have fueled the revolution.
    Chapter 14   Management of Business Logistics, 7th Ed.   4
The Need for
Long-Range Planning
   In the short run, the logistics managers must work
    with the current facility locations.
      Site availability, leases, contracts, and investments

       make changing facility locations impractical in the
       short run.
   However, in the long run, the firm’s facility locations
    are considered variable, and are subject to change.
   Facilities design and location have become
    strategically important in today’s highly competitive
    business environment.

Chapter 14        Management of Business Logistics, 7th Ed.   5
The Strategic Importance
of Logistics Network Design
   Considering the rate at which the business
    environment is changing, logistics facilities
    are under pressure to keep current.
   In many companies, change has happened
    recently or is scheduled for the near future.
   With capital being both scarce and expensive,
    facilities decisions become more important.



Chapter 14     Management of Business Logistics, 7th Ed.   6
The Strategic Importance of
Logistics Network Design
   Critical variables in network design:
      Changing Customer Service Requirements

      Shifting Locations of Customer and/or

       Supply Markets
      Change in Corporate Ownership

      Cost Pressures

      Competitive Capabilities

      Corporate Organizational Change


Chapter 14    Management of Business Logistics, 7th Ed.   7
The Strategic Importance of Logistics
Network Design: Changing Customer
Service Requirements

   A customer’s business has changed and the
    company may need to change some aspect(s)
    of its service to those customers.
   Some customers will be looking for new
    supply chain partners and the
    company needs to be responsive
    to these potential new business
    partners.


Chapter 14    Management of Business Logistics, 7th Ed.   8
The Strategic Importance of Logistics
Network Design: Shifting Locations of
Customer and/or Supply Markets
   Geographic locations of markets often shift over time
    and the company needs to position its logistics
    network to be responsive to these shifts. (the
    collapse of economic and political walls in Eastern
    Europe, plus the unification initiatives of the
    European Union)
   Similarly, global competition often results in
    geographic shifts for not only new customers, but
    also new markets.
   Companies tuned to these changes have a head start
    in establishing new business.

Chapter 14       Management of Business Logistics, 7th Ed.   9
The Strategic Importance of Logistics
Network Design: Change in Corporate
Ownership

   Mergers, consolidations and divestiture may
    mean new logistics and market patterns for
    the surviving entity.
   Once again, companies tuned to these
    changes have a head start in establishing
    new business.




Chapter 14     Management of Business Logistics, 7th Ed.   10
The Strategic Importance of Logistics
Network Design: Cost Pressures

   As competition increases, firms must seek
    ways to continue growth.
   One such way is to find areas where the costs
    of key business processes can be reduced.
   Often the pressure to reduce costs can be
    applied to areas for which the logistics
    department has responsibility.
   Inventory and transportation can be such
    sources.
Chapter 14     Management of Business Logistics, 7th Ed.   11
The Strategic Importance of Logistics
Network Design: Competitive Capabilities

   Obsolete facilities signal the company that a
    logistics examination is necessary.
   Companies that have not analyzed the
    changes in their environment are risking both
    profitability and solvency.
   Many firms locate distribution facilities near
    hub operations of FedEx, UPS, Airborne,
    Emery and DHL so that access to time-critical,
    express transportation services is facilitated.
Chapter 14     Management of Business Logistics, 7th Ed.   12
The Strategic Importance of Logistics
Network Design: Corporate
Organizational Change

   Downsizing and re-engineering cause the firm
    to reexamine its logistics division for potential
    savings.
   Many logistics facilities have faced various
    levels of change because of re-engineering
    efforts in the organization.
   Logistics functions can be provided by third
    party vendors (3PLs) where the firm cannot
    accommodate the necessary changes.
Chapter 14      Management of Business Logistics, 7th Ed.   13
    Logistics
    Network Design
    Figure 14-1 on the next slide identifies six major steps
     associated with the process of Logistics Network
     Design.
    Step 1: Define the Logistics Network design Process
    Form a design team
       Aware of overall corporate and business strategies

       Establish design parameters and objectives

           Issues pertaining funding, people, and systems

            must be understood at an early stage
       Establish availability of resources and potential
        involvement of 3PLs.
    Chapter 14       Management of Business Logistics, 7th Ed.   14
Figure 14 – 1 Key Steps in the
Logistics Network Design Process




Chapter 14   Management of Business Logistics, 7th Ed.   15
        Logistics Network Design
   Step 2: Perform a Logistics Audit
      Forces a comprehensive perspective

      Helps to gather essential types of information

         Customer requirements and key environmental factors

         Key logistics goals and objectives

         Profile of the current logistics network and the firm’s

          positioning in respective supply chain(s)
         Benchmark, or target, values for logistics costs and key

          performance measurements
         Identification of gaps between current and desired

          logistics performance (qualitative and quantitative)
         Key objectives for logistics network design, expressed in

          terms that will facilitate measurement
        Chapter 14       Management of Business Logistics, 7th Ed.   16
Logistics Network Design
   Step 3: Examine the Logistics Network Alternatives
      Use modeling to provide additional insights

         Applying suitable quantitative models to the

          current logistics system as well as to the
          alternative systems and approaches under
          consideration
      Develop preliminary designs

         By optimization, simulation, or heuristic

      Test model for sensitivity to key variables

         “What if” types of analysis




Chapter 14       Management of Business Logistics, 7th Ed.   17
Figure 14-2
Key Steps in a Logistics Audit

                  Step 6: Logistics Strategic Plan

                 Step 5: Strategic Logistics Issues

         Step 4: Logistics Provider Selection and Evaluation

                   Step 3: Key Logistics Activities

                      Step 2: Logistics System

             Step 1: Fundamental Business Information




Chapter 14            Management of Business Logistics, 7th Ed.   18
           Logistics Network Design
   Step 4: Conduct a Facility Location
                                                                      Supplier networks
    Analysis                                                      

                                                                     Land costs and utilities
      Analyze attributes of candidate sites
                                                                     Company preference
          Quantitative and qualitative

           aspects
                Labor climate                            Apply screening to reduce
                Transportation issues
                                                           alternative sites
                                                              Eliminates areas that are
                Proximity to markets and
                 customers                                     uneconomical from a
                Quality of life                               logistics perspective
                Taxes and industrial
                 development incentives

           Chapter 14            Management of Business Logistics, 7th Ed.                   19
Logistics Network Design
   Step 5: Make Decisions regarding Network and
    Facility Location
      Evaluate sites for consistency with design criteria.

      Confirm types of change needed to the firm’s
       logistics network
      Feasibility of involving third-party suppliers should
       have been incorporated into the alternatives that
       were evaluated in the two preceding steps,the
       decision to involve external suppliers will have
       cost and service implications as well as strategic
       ones.

Chapter 14        Management of Business Logistics, 7th Ed.   20
Logistics Network Design
   Step 6: Develop an Implementation Plan
      Plan serves as a road map in moving from

       current system to the desired logistics
       network.
      Firm must commit funds to implement the

       changes recommended by the
       re-engineering process.



Chapter 14     Management of Business Logistics, 7th Ed.   21
Major Locational Determinants

   The focus of step 4 is on analyzing the
    attributes of specific regions and areas that
    are candidates for sites of logistics facilities.
   Major Locational Determinants
    are summarized in Table 14-1.
   These determinants are subcategorized into
    regional and site specific factors.
   Take a minute and review these factors now.

Chapter 14      Management of Business Logistics, 7th Ed.   22
Major Locational Determinants
   The importance varies among industries and among
    individual companies within specific industries
      Such as textile (織品), furniture and household

       appliances place significant emphasis on the
       availability and cost of labor
      Computers and peripherals, semiconductors, and

       engineering and scientific instruments place great
       emphasis on assuring the availability of a highly
       qualified workforce with very specific technical
       skills and proximity (接近) to customer markets

Chapter 14       Management of Business Logistics, 7th Ed.   23
      Table 14-1
      Major Locational Determinants
   Regional Determinants                Site-Specific Determinants
Labor climate                          Transportation access
Availability of transportation         ●       Truck
Proximity to markets                   ●       Air
Quality of life                        ●       Rail
Taxes & other incentives               ●       Water
Supplier networks                      Inside/outside metro area
Land costs and utilities               Availability of workforce
Company preference                     Utilities

      Chapter 14       Management of Business Logistics, 7th Ed.     24
Key Factors for Consideration
   Labor Climate
      The cost and availability of labor are major issues

       of concern
      Workforce’s degree of unionization (組織化)

      Skill level

      Work ethic (倫理)

      Productivity (value added per employee)

      Enthusiasm of local public officials

      The rate of unemployment in the local areas



Chapter 14        Management of Business Logistics, 7th Ed.   25
Key Factors for Consideration
   Availability of Transportation
      Interstate highway access

      Availability of intermodal or local rail

       facilities
      Convenience of a major airport facility

      Proximity to inland or ocean port facilities




Chapter 14      Management of Business Logistics, 7th Ed.   26
Key Factors for Consideration
   Proximity to Markets and Customers
      Usually considers both logistics and competitive

       variables
         Availability of transportation

         Freight cost

         Geographical market size that can be served,

          for example, on a same-day or next-morning
          basis.
      An overly complex logistics network can be

       disadvantageous from a cost perspective.
Chapter 14       Management of Business Logistics, 7th Ed.   27
Key Factors for Consideration
   Quality of life.
     Affect the well-being (福利) of employees

      and the quality of the work they are
      expected to perform.
     Rates the quality of life in metropolitan
      areas in terms of climates, housing costs,
      health care and environment, crime,
      passenger transportation, education,
      recreation, the arts, and economic
      opportunities.
Chapter 14     Management of Business Logistics, 7th Ed.   28
Key Factors for Consideration
   Taxes and Industrial Development Incentives (招商).
      Revenue or income taxes, inventory taxes,
       property taxes, and so on will have a significant
       impact on the cost of operating a business.
      Personal taxes that may affect the attractiveness
       of a particular region or local area
      Entice companies to locate in some area:

         Tax incentives (reduced rates or tax

          abatements (減稅))
         Financing arrangements (state loans)

         Reduced water ans sewage rates

         Rent-free buildings
Chapter 14       Management of Business Logistics, 7th Ed.   29
Key Factors for Consideration
   Supplier Networks
      For a manufacturing facility, the availability

       and cost of raw materials and component
       parts, as well as the cost of transporting
       these materials to the proposed plant site,
       are of significance.
      The cost and service sensitivity of the

       inbound movements from suppliers will be
       important to consider.
Chapter 14      Management of Business Logistics, 7th Ed.   30
Key Factors for Consideration
   Land Costs and Utilities
      Local building codes and cost of

       construction are important to consider
      The availability and expense of utilities

       such as electrical power, sewage, and
       industrial waste disposal need to be
       factored into the decision-making process.



Chapter 14     Management of Business Logistics, 7th Ed.   31
Key Factors for Consideration
   Company Preference
      A company may prefer to locate all new facilities
       in rural ares within fifty miles of a major
       metropolitan area
      A company may wish to locate its facilities in areas
       where competitors already have a presence
      A firm may wish to locate facilities in an area
       where it may enjoy common access with other
       firms to benefits such as a skilled labor supply,
       excellent marketing resources, or proximity to key
       supplier industries.

Chapter 14       Management of Business Logistics, 7th Ed.   32
        Major Locational Determinants: Current
        Trends Governing Site Selection
   Strategic positioning of inventories, with faster moving items
    located at “market-facing” logistics facilities, and slower
    moving items at national or regional sites.
   Direct plant-to-customer shipments which can reduce or
    eliminate the need for company-owned supply or
    distribution facilities.
   Growing need and use of “cross-docking” facilities that serve
    as transfer points for consolidated shipments that need to
    be disaggregated or mixed into typically smaller shipments
    for delivery to individual customers..
   Use of third party logistics companies which negate the
    need for the firm to maintain or establish its own distribution
    facilities. 14
          Chapter            Management of Business Logistics, 7 Ed.
                                                  th                 33
     On the Line:
     Tennessee---Choice Site
   Dell Computer selected Nashville, Tennessee as
    its production site for a new line of computers.
   Tennessee has the transportation infrastructure,
    business tax reforms, and telecommunications
    capabilities that firms consider when they need
    to locate a facility.
   Dell will be responsible for an additional 11,000
    jobs and $690 million in economic output.

     Chapter 14    Management of Business Logistics, 7th Ed.   34
Modeling Approaches:
   The techniques discussed here are applicable
    to a wide range of issues pertaining to the
    locations of plants, distribution centers, and
    customers and to the flows of product and
    information to support the functioning of the
    logistics network.
   Comparison => select => identify if it is
    consistent with the key objectives => “what
    if” types of analyses conducted to test the
    sensitivity
Chapter 14     Management of Business Logistics, 7th Ed.   35
    Modeling Approaches:
    Optimization Models
    Based on precise mathematical procedures
     guaranteed to find the “best” solution from
     among a number of feasible solutions.
    Key issues are listed in Figure 14-3.
    One approach is Linear Programming (LP).
       Useful in linking facilities in a network.

       Defines optimum distribution patterns.

       Modern computers facilitate LP modeling.



    Chapter 14    Management of Business Logistics, 7th Ed.   36
Figure 14-3 Strategic Issues Relevant to
Logistics Network Modeling




Chapter 14   Management of Business Logistics, 7th Ed.   37
Figure 14-4 Supply Chain
Scenario for Network Analysis




Chapter 14   Management of Business Logistics, 7th Ed.   38
Figure 14-5 Example “Geographical-
Mapping” Representation




Chapter 14   Management of Business Logistics, 7th Ed.   39
    Modeling Approaches:
    Simulation Models
    Based on developing a model of a real system
     and conducting experiments with this model.
    In location theory, a firm can test the effect of
     various locations on costs and profitability.
       The modeling requires extensive data

        collection and analysis to determine how
        system factors such as transportation,
        warehousing, inventory, materials handling,
        and labor costs interact.
    Chapter 14    Management of Business Logistics, 7th Ed.   40
Modeling Approaches:
Simulation Models
   Does not guarantee an optimum solution but
    evaluates through the iterative process.
   Simulations are either static or dynamic depending
    upon how whether they incorporate data from each
    run into the next run.
   Although simulation models are not designed to
    produce optimum solutions, they are very capable in
    terms of their ability to incorporate relatively
    comprehensive and detailed problem descriptions.


Chapter 14       Management of Business Logistics, 7th Ed.   41
Modeling Approaches:
Heuristic Models
    Based upon developing a model that can
     provide a good approximation to the least-cost
     location in a complex decision problem.
    Can reduce a problem to a manageable size.
    This approach can be as sophisticated as
     mathematical optimization approaches.
    The “Grid Technique” is an example of a
     heuristic approach and will be demonstrated in
     the next few slides.

    Chapter 14   Management of Business Logistics, 7th Ed.   42
Modeling Approaches:
Heuristic Models
   For example, the location team may consider
    an optimum warehouse site to be
      Within twenty miles of a major market area

      At least 250 miles from other company

       distribution centers
      Within three miles of an interstate highway

      Within forty miles of a major airpot facility




Chapter 14      Management of Business Logistics, 7th Ed.   43
Modeling Approaches:
Heuristic Models
   Potential Supply Chain Modeling Pitfalls to Avoid
      Short-term horizon  significant

       suboptimization is likely to occur.
      Too little or too much detail.

         Too little  difficult to implement results due

          to insufficient information
         Too much  create unnecessary complexity,

          making it difficult to understand the results and
          more difficult to implement effectively
      Thinking in two dimensions


Chapter 14        Management of Business Logistics, 7th Ed.   44
Modeling Approaches:
Heuristic Models
        Using published costs
           “published” costs tend to represent “list” prices

            that need to be modified to reflect what may
            result after significant negotiations occur
            between buyers and sellers of transport
            services
        Inaccurate or incomplete costs
           Analyses based on insufficiently accurate

            information lead to invalid results
           Inaccurate cost forecasts result in suboptimal

            allocations of resources, typically leading to
            seriously flawed strategies
Chapter 14          Management of Business Logistics, 7th Ed.   45
Modeling Approaches:
Heuristic Models
        Use of erroneous analytical techniques
           The selected techniques and approaches

            should be matched with the level of precision
            desired
        Lack of appropriate robustness analysis
           Since most or all model inputs have at least an

            element of uncertainty, it is important to
            understand the consequences that could result
            from variation in actual behavior of key model
            inputs

Chapter 14         Management of Business Logistics, 7th Ed.   46
Example of a Heuristic Modeling
Approach: The Grid Technique
   The Grid Technique attempts to locate a fixed facility
    such that the location represents the least-cost
    center for moving inbound materials and outbound
    product within a geographic grid.
   It finds the ton-mile center of mass (center of
    gravity); that is, the geographic point where
    transportation costs are minimized.
   This simple approach works where all transportation
    rates are the same.
   However, we know that freight rates for raw
    materials are generally lower than those for finished
    goods.

Chapter 14       Management of Business Logistics, 7th Ed.   47
    Example of a Heuristic Modeling
    Approach: The Grid Technique
   When we use different freight rates, the grid
    model will tend to pull the location of our fixed
    facility toward the higher rated areas.
   Thus, the location of a production plant will
    tend to be nearer the market, reducing the
    overall transportation of the higher rated
    finished goods in favor of increasing
    transportation of lower rated raw materials.


    Chapter 14     Management of Business Logistics, 7th Ed.   48
Example of a Heuristic Modeling
Approach: The Grid Technique




   The text example will attempt to locate a new plant
    receiving inbound materials from Buffalo, Memphis,
    and St. Louis, serving markets in Atlanta, Boston,
    Jacksonville, Philadelphia, and New York City.
   Examine Figure 14-6 and Table 14-2 on the next two
    slides.

Chapter 14       Management of Business Logistics, 7th Ed.   49
Figure 14-6 Grid Locations of
Sources and Markets




Chapter 14   Management of Business Logistics, 7th Ed.   50
      Center of mass
                                          m                      n

                                        d S D M  i   i               i       i
                              C           1
                                               m
                                                                 1
                                                                 n


Where
                                               S M
                                                1
                                                        i
                                                                 1
                                                                            i

C = center of mass, or ton-mile center
Di = distance from 0 point on grid to the grid location of finished good I
Di = distance from 0 point on grid to the grid location of raw material I
Mi = weight (volume) of finished goods sold in market I
Si = weight (volume) of raw material purchased at source i
      Chapter 14            Management of Business Logistics, 7th Ed.               51
        Consider transportation rates
                                                 m                       n
  Assume that this company
  produces only one type of
                                               rd S  R D M
                                                       i    i   i            i   i       i
  finished god, so that each         C          1
                                                     m
                                                                         1
                                                                         n

                                                     rS  R M
finished good’s transportation
        rate is the same
                                                            i   i            i       i
                                                      1                  1
      Where
      Ri = finished good transportation rate/distance unit for finished good I
      ri = raw material rate/distance unit for raw material i



        Chapter 14               Management of Business Logistics, 7th Ed.                   52
Table 14-2 Grid Technique Analysis
of Plant Location Example




Chapter 14   Management of Business Logistics, 7th Ed.   53
Table 14-3 Impact of Rate
Change on Least-Cost Location
                                                         Sensitivity
                                                          Analysis




Chapter 14   Management of Business Logistics, 7th Ed.                 54
Table 14-4 Impact of Supply Source
Change on Least-Cost Location
                                                         Sensitivity
                                                          Analysis




Chapter 14   Management of Business Logistics, 7th Ed.                 55
Example of a Heuristic Modeling
Approach: The Grid Technique
   In the example, the plant’s least-cost center is 655 in
    the horizontal direction, and 826 in the vertical
    direction.
   Both distances are measured from the grid’s zero
    point.
   The least-cost center is in southwestern Ohio or
    northern West Virginia in the Wheeling-Parkersburg
    area.
   We can conclude from these sensitivity analyses that
    the rates, product volumes, and source/market
    locations do affect plant’s least-cost location.
Chapter 14        Management of Business Logistics, 7th Ed.   56
Example of a Heuristic Modeling
Approach: The Grid Technique
   Advantages
      Simple to use

      Provides a starting point for
       further analysis
      Can accommodate “what if”
       questions
   Limitations
      Static approach

      Linear rates (for transportation)

      No consideration of topography

      Does not consider direction of movement (straight
       line movement)
Chapter 14       Management of Business Logistics, 7th Ed.   57
Transportation
Pragmatics
   Tapering rates
      Rates increase with distance, but not in

       direct proportion to distance.
      Results from the carriers ability to spread

       certain fixed costs(loading, billing, and
       handling) over a greater number of miles.
      Tends to pull the location to either the

       source or market, but not in between.

Chapter 14      Management of Business Logistics, 7th Ed.   58
    Table 14-5 Locational Effects of Tapering
    Rates with Constant Rate Assumption
                  Transport                          Transport Total Trans -
Miles from S                      Miles to M
                 Rate from S                        Rate from M port Rate

     0             $0.00              200                $3.70         $3.70

    50              2.00              150                 3.50         5.50

    100             3.00              100                 3.00         6.00

    150             3.50               50                 2.00         5.50

    200             3.70                0                 0.00         3.70

    Chapter 14             Management of Business Logistics, 7th Ed.           59
Figure 14-7 Locational Effects of Tapering
Rates with Constant Rate Assumption




Chapter 14   Management of Business Logistics, 7th Ed.   60
    Table 14-6 Locational Effects of Tapering
    Rates without Constant Rate Assumption
                  Transport                          Transport Total Trans -
Miles from S                      Miles to M
                 Rate from S                        Rate from M port Rate

     0             $0.00              200                $5.20         $5.20

    50              2.00              150                 5.00         7.00

    100             3.00              100                 4.50         7.50

    150             3.50               50                 3.50         7.00

    200             3.70                0                 0.00         3.70

    Chapter 14             Management of Business Logistics, 7th Ed.           61
Figure 14-8 Locational Effects of Tapering
Rates without Constant Rate Assumption




Chapter 14   Management of Business Logistics, 7th Ed.   62
Transportation
Pragmatics
   Blanket rates
      Rates do not increase with distance, but
       remains the same from one origin to any
       destination in the blanket area.
      Results from the carriers desire to maintain
       competitive prices for a product in a given
       area.
      Is a mutation of the basic rate-distance
       relationship.

Chapter 14      Management of Business Logistics, 7th Ed.   63
Transportation Pragmatics
   Commercial Zones
      A specific blanket area that includes a municipality

       (當局) and the surrounding area.
      Impact is at end of location process when a

       company picks a specific site.
      Site outside the commercial zone reduces carrier

       availability, especially the availability of motor
       carriers that define their operating scopes in terms
       of point-to-point operations.


Chapter 14        Management of Business Logistics, 7th Ed.   64
Transportation Pragmatics
   Foreign Trade Zones
      Geographic zone into which importers can

       enter a product and hold it without paying
       duties, only paying when product enters
       U.S. customs territory.




Chapter 14     Management of Business Logistics, 7th Ed.   65
Transportation
Pragmatics
   Transit Privileges
      Permits a shipper to stop a shipment in transit and
       perform some function that physically changes the
       product’s characteristics. (e.g., wheat to flour (小
       麥粉))
      This can make intermediate locations optimum
       rather than focus only on sources and markets.
      Like the blanket rate, the transit privilege is not
       available at all locations or for all commodities –
       only those sites and commodities the carrier
       specidies.

Chapter 14       Management of Business Logistics, 7th Ed.   66
          Chapter 14:
  Summary and Review Questions

 Students should review their knowledge of the
chapter by checking out the Summary and Study
           Questions for Chapter 14.
Study Question 14-9




Chapter 14   Management of Business Logistics, 7th Ed.   68
Case 14-1
Fireside Tire Company




Chapter 14   Management of Business Logistics, 7th Ed.   69
 End of Chapter 14 Slides


Network Design and Facility
        Location

				
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