Warehouse Network Design

Learning objectives

Evaluate facility count through total logistics cost and service requirements.
Compare private, public, and contract warehousing.
Relate site criteria to demand, accessibility, labor, and land.
Explain how changes in sourcing and logistics costs affect network design.

Number of Distribution Facilities

Network design decisions

This phase of strategic planning consists of determining:

inventory positioning
number and location of distribution facilities
ownership of facilities in the network

These decisions are interdependent: inventory positioning affects facility count, while location and ownership affect cost and service (Coyle et al. 2020).

Facility number and market scope

Inventory positioning and market scope influence the number of stocking facilities.

The greater the centralization of the inventory, the fewer the number of facilities needed to distribute the product.

Market scope also impacts the decision.

Small- and medium-sized companies with a regional market area often will need only one distribution facility.
Large companies with national or global market areas need to consider using multiple facilities, some of which may have different distribution roles.

Cost trade-off: Increasing inventory and warehousing costs offset decreasing transportation costs and the cost of lost sales.

Total logistics cost trade-offs

Figure 1: As the number of warehouses increases, transportation and lost sales costs decline, but inventory and warehousing costs increase (Coyle et al. 2020)

Facility count: cost and service example

Compare two illustrative networks under a maximum delivery-time requirement of 8 hours.

Table 1: Hypothetical annual costs in €1,000.

Warehouses	Facility cost	Transport cost	Inventory cost	Total cost	Delivery time
1	100	160	20	280	10 h
2	180	80	35	295	6 h

Which configuration has the lowest cost among those meeting the service requirement?

The two-warehouse network is feasible: \(180+80+35=295\). The one-warehouse network costs less, but exceeds the 8-hour limit.

The greater the centralization of the inventory, the fewer the number of facilities needed to distribute the product.

An increase in the number of warehouses brings the warehouses closer to the customer and market area, reducing outbound transportation distance and costs.

(Coyle et al. 2020, 379)

a higher number of stocking points increases the overall safety stock levels and inventory carrying costs in the supply chain.

A larger number of facilities increases administrative and operational costs.

(Coyle et al. 2020, 380)

The drawback of centralized inventory is the longer distances to customers, which extend lead times and result in higher transportation costs.

(Coyle et al. 2020, 378)

The costs and delivery times are hypothetical. Compare total costs only among configurations that meet the service requirement.

Facility Ownership and Outsourcing

Private, public, and contract warehousing

Table 2: Warehousing arrangements (Coyle et al. 2020).

Arrangement	Organization	Main implication
Private	Company operates owned or leased facilities	Control and committed resources
Public	Provider offers capacity on a short-term transactional basis	Flexibility and shared resources
Contract	Provider dedicates resources under a tailored agreement	Specialized services and longer-term alignment

Ownership of the building and responsibility for operations are separate decisions.

Private warehousing

Company-operated facilities provide control over fulfillment and inventory. Buildings may be owned or leased.

Private operations are most attractive when:

throughput is high and demand is stable;
the facility serves a dense market;
the firm has distribution expertise and investment resources.

Economies of scale depend on using the committed capacity (Coyle et al. 2020).

Public and contract warehousing

Table 3: Comparison of outsourcing arrangements (Coyle et al. 2020).

Decision aspect	Public warehousing	Contract warehousing
Capacity arrangement	Short-term, transactional	Resources dedicated to client needs
Service scope	Standard or product-specific storage services	Integrated, customized distribution services
Suitable requirement	Flexible access to capacity	Specialized handling and stable service alignment

Shipper and service provider perspectives

Table 4: Economic rationale for outsourced distribution (Coyle et al. 2020).

Perspective	Main considerations
Shipper	Capital investment, access to capacity, geographic flexibility, and operational responsibility
Logistics service provider	Shared investment, expertise, and capacity across customers

The arrangement must specify service requirements and how capacity changes with demand.

Factors affecting distribution facility ownership

Table 5: Besides cost, service factors and demand characteristics must also be analyzed in the warehouse “make vs. buy” decision (Coyle et al. 2020).

Firm characteristics	Favors private distribution	Favors 3PL distribution
Throughput volume	Higher	Lower
Demand variability	Stable	Fluctuating
Market density	Higher	Lower
Special physical control needs	Yes	No
Security requirements	Higher	Lower
Customer service requirements	Higher	Lower
Multiple use needs	Yes	No

Distribution cost comparison

Figure 2: Variable-cost-only nature of purchased 3PL distribution services vs. fixed-cost plus lower variable-cost structure of private operations (Coyle et al. 2020)

Site Selection and Network Evaluation

Demand, products, and service requirements

Table 6: Commercial and logistics factors (Onstein et al. 2019).

Factor	Questions for network design
Demand	Where is demand concentrated, and how volatile is it?
Service	What delivery lead time, frequency, flexibility, and reliability are required?
Products	How do value density, packaging density, and inventory policy affect flows?
Logistics cost	How do transport, inventory, handling, storage, and capital costs interact?

Accessibility, resources, and context

Table 7: Spatial and contextual factors (Onstein et al. 2019).

Factor	Site-selection considerations
Accessibility	Access to road, rail, air, and sea transport; congestion
Labor and land	Availability, cost, and expansion capacity
Business environment	Logistics real estate, business parks, insurance, and cost of doing business
Institutional context	Zoning, labor conditions, taxes, incentives, customs, and trade conditions

Integrated framework

Figure 3: Framework of factors influencing distribution structure selection (Onstein et al. 2019)

Strategic network design is iterative: changes in service requirements or operating conditions can require reconsidering the configuration (Onstein et al. 2019).

Service level versus logistics costs is the main trade-off influencing distribution structure selection (arrow 1).

The framework shows the factors and their interrelationships that appeared in the literature.

high value density will imply a preference for high speed

high volatility will require flexibility and responsiveness

Inventory costs are sensitive to packaging and value density (arrow 4); transport costs respond to absolute demand levels and spatial patterns of customers

logistics costs are determined by available capacity of labour and land (arrow 6) and transport options (arrow 7).

Accessibility influences labour availability by reducing interregional friction within the labour market (arrow 8).

the contextual factors identified have relations with accessibility, labour and land, and will also influence logistics costs directly (arrows 9–11).

(Onstein et al. 2019, 255, figure 3)

In practice, however, strategic decision-making is an iterative process.

(Onstein et al. 2019, 257)

Location and allocation criteria

After determining the number and roles of facilities, decide which candidate sites to use and which customers each facility will serve.

Objective: achieve the required customer service level at the lowest total logistics cost.

Effective facility location and customer allocation depend on:

the intended role of each facility
supply sources and volumes
customer locations and demand patterns
transport, inventory, and facility costs (Coyle et al. 2020)

Network planning scenarios

Consider two illustrative changes to a distribution network:

Table 8: Hypothetical network planning scenarios.

Change	Questions before implementation
A new sourcing country changes the inbound port	Are existing warehouses still well positioned? How do inbound and outbound costs change?
Online orders increase sharply	Can the facility process the order mix and peak volume? Does the network still meet its service requirements?

Reassess facility roles, capacity, location, and total cost before committing to the revised network.

Changes in Network Conditions

Drivers of centralization

High inventory costs favor fewer stocking locations and inventory pooling (Onstein et al. 2019).

Central stock reduces duplication of inventory across locations.
Local transshipment and break-bulk depots can reduce the delivery penalty while inventory remains centralized.
McKinnon’s 2009 analysis argues that large inventory and warehousing savings can make centralization resistant to transport-cost increases (McKinnon 2009).

Drivers of decentralization

Figure 4: Rising transportation costs (oil prices, environmental taxes, congestion charges) may tilt distribution costs to more decentralized stockholding patterns (McKinnon 2009)

Manufacturing offshoring and distribution

McKinnon (2009) examines how offshoring of UK manufacturing changed warehouse demand near ports (McKinnon 2009).

Figure 5: UK manufacturing offshoring shifts upstream storage requirements abroad and finished-goods storage toward import ports; analysis reported by McKinnon in 2009 (McKinnon 2009).

Cited literature

Coyle, John Joseph, C. John Langley, Robert A. Novack, and Brian J. Gibson. 2020. Supply Chain Management: A Logistics Perspective. 11th edition. Cengage.

McKinnon, Alan C. 2009. “The Present and Future Land Requirements of Logistical Activities.” Land Use Policy 26 (Supplement 1): S293–301. https://doi.org/10.1016/j.landusepol.2009.08.014.

Onstein, Alexander T. C., Lóránt A. Tavasszy, and Dick A. van Damme. 2019. “Factors Determining Distribution Structure Decisions in Logistics: A Literature Review and Research Agenda.” Transport Reviews 39 (2): 243–60. https://doi.org/10.1080/01441647.2018.1459929.