When building your logistics network, you must trade off two important factors:
- Cost
- Service
If you want to provide better service to your customers, you may need to spend more money. However, logistics networks are already expensive, so most companies strive to reduce costs as much as possible while maintaining a high level of service.
The cheapest logistics network will look different from the most expensive one. Nevertheless, the concept of cost versus service always applies. For instance, you can have a logistics network with only one warehouse and overnight transportation, which provides great service but is very expensive. Alternatively, you could follow Amazon’s model, offering top customer service and, in some cases, two-hour deliveries, but requiring over 100 warehouses to achieve that.
Ultimately, you need to choose a network that balances cost and provides the best service possible.
Consider Urban Outfitters, a major clothing retailer based in Philadelphia, Pennsylvania. They decided to build their warehouse in Lancaster County. The reasons for this choice likely include:
- Proximity to their home office
- Commitment to the local area
- Ability to distribute up and down the eastern seaboard from this location
- Lower land costs compared to other areas
- Opportunity to bring jobs to an economically distressed region
Two major drivers affecting the logistics network are:
Cost of fuel (driven by the cost of crude oil)
Cost of money (interest rates)