There's a lot riding on where you decide to locate a distribution center or warehouse. The selection of a site will have a major impact not only on your company's operating costs but also on its customer service levels.

Unfortunately, many companies fail to understand this, and instead of basing their decisions on objective factors like a balance of cost and service, they base them on a gut feeling…or on where the owner likes to play golf.

One thing that deters companies from conducting a fact-based analysis is the daunting list of interrelated factors they must consider, including transportation costs and capacity, distance to the customer, labor costs and availability, inventory costs and levels, operational costs, and taxes and incentives. "Real estate costs are just the icing on the cake," says Kristian Bjorson, managing principal of the Logistics Practice Group at Staubach Co., a corporate real estate firm. "You also want to look at the costs that make up the cake."

Many shippers have found that distribution-network optimization and modeling software can help them visualize those costs. The software typically asks them to input information about customer and supply locations as well as desired service levels and lead times. It then runs a series of "what if" analyses that calculate the effects of tradeoffs between various cost and service factors and identifies optimal locations for warehouses and distribution facilities. (See the sidebar, "Balancing Cost and Service," below.)

For example, these tools use mathematical algorithms to conduct a "sensitivity analysis," which graphically represents how costs would increase the further away you move from a specified location. "The sensitivity analysis would show you where the theoretical ideal point is," explains Mike Hooban, president of Microanalytics, a provider of distribution-network planning software. "If you go 10 miles east, you'll still be okay, but if you go 20 miles north, costs will start to go up."

In short, the technology helps users make decisions based on facts instead of instinct. "It helps you identify a possibility that you might not have considered," says Hooban. "For example, everyone and their grandfather might think that you need to have a DC in Chicago to serve the Midwest. But maybe you shouldn't. Maybe the best location is not Chicago, it's Springfield."

Once you've decided to use a network modeling and optimization tool, you'll want to consider the various options for acquiring it. The most obvious approach is to buy a commercial solution, such as Insight's SAILS, Microanalytics' Optisite, LogicTools' LogicNet, and Supply Chain Designer from SSA Global (formerly CAPS Logistics). Additionally, supply chain planning software offered by some of the larger vendors, such as i2, includes network-optimization capabilities, while some shippers use their transportation management or routing systems to help with site selection.

Large shippers and those with complex supply chains often choose to buy a solution outright. These companies typically need to perform many network analyses and wish to keep that knowledge in-house. The cost to purchase one of these solutions will vary depending on the buyer's size and specific business situation as well as on the complexity of the model.

For example, Insight's SAILS21 product typically costs from $25,000 to $30,000 per user for a small division or company and $250,000 to $300,000 for a larger company, President Bob Belshaw points out. Microanalytics' Optisite, which is more modestly priced than some similar programs, starts at $10,000 for a base system, according to Hooban.

If you're thinking about buying a package outright, though, it's important to consider ease of use. According to David Simchi-Levi, co-founder and chair of LogicTools, more companies are choosing to purchase these tools as they become more user-friendly. For example, many solutions allow users to import and export data from programs they're already familiar with, such as Microsoft's Excel and Access products. "You don't need to be a mathematician to work with the software," he says. "It's designed for people with logistics and supply chain expertise. It's not just for operations researchers anymore."

Nevertheless, running a distribution-network analysis does require experience and skill, says Terry Harris, managing partner at Chicago Consulting. "The tools that are available on the marketplace are fairly complex, and they take a bit of learning," he says. "This is not desktop software. There is a learning curve." Continued...

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