3-8. The Crux of Logistics Facility Planning: Consolidation of Logistics Hubs (Locations) and Logistics Tradeoffs
In the modern supply chain, formulating an optimal logistics facility plan is one of the most critical management issues that dictates a company's profit margins and competitiveness. In particular, the selection of "logistics hubs (locations)"—how to reorganize distribution centers scattered across the country—has a profound impact that fundamentally alters the balance between a company's fixed and variable costs.
In this chapter, we use the dynamic reorganization of a daily miscellaneous goods company as an example. Through this case study, we deeply explain from a practical perspective the massive cost and personnel reduction effects generated when consolidating hubs (changing locations), as well as the structure of the "logistics tradeoff (antinomy)" that inevitably occurs behind the scenes.
1. Case Study of Logistics Hub (Location) Change in a Daily Miscellaneous Goods Company (Macro Perspective)
During the rapid economic growth period of the past, the correct answer was considered to be "placing hubs in fine detail at locations closer to consumers." However, a certain daily miscellaneous goods company made the decision to integrate its logistics hubs (locations) nationwide through a bold review of its logistics facility planning.
🔍 [Deciphering the Diagram] Specific Personnel Allocation Before/After Consolidation and the Mechanism of Reduction
A detailed analysis of the figures shown in the diagram above and the changes on the map of Japan reveals the dynamism of a strategic logistics hub (location) reorganization that goes beyond a mere decrease in numbers.
[Excessive Dispersion Before Consolidation (9-Hub Structure, Total 137 Personnel)]
In the past, sales company centers were finely distributed to match consumption areas across Japan. Particularly noteworthy is the Kanto area. With Saitama (28 personnel), Chiba (15 personnel), and Tokyo (25 personnel), three hubs mushroomed in very close proximity. In Kanto alone, they held a staggering total of 68 personnel, falling into an inefficient state where safety stock and management/maintenance costs were significantly duplicated. Besides that, 9 red dots were scattered across the country: Hokkaido (10 personnel), Miyagi (6 personnel), Nagoya (15 personnel), Osaka (18 personnel), Okayama (7 personnel), and Fukuoka (13 personnel).
[Transition to Wide-Area Hub Bases After Consolidation (5-Hub Structure, Total 93 Personnel)]
Unnecessary sales company centers were decisively abolished, and the logistics network was largely integrated into 5 wide-area blocks. The red dots on the map have been streamlined to 5 locations: Hokkaido, Tohoku, Kanto, Kansai, and Kyushu.
In particular, the excessively dense "Kanto/Tohoku area" integrated the 4 hubs of Miyagi, Saitama, Chiba, and Tokyo, drastically slimming down to a 40-person structure. Also, by placing hubs in the center of each block, such as the "Kinki/Chugoku area (integrating Nagoya, Osaka, and Okayama to 30 personnel)," it generated the powerful impact of cutting 44 personnel (approx. 32%) across the entire company.
As indicated in the bottom left of the diagram, although this consolidation caused the side effect of an "increase in transportation costs (deficit)," it yielded "inventory/personnel reduction effects" and "management/maintenance cost reduction effects" that far surpassed it, ultimately achieving a "16% total cost reduction effect." This is the essence of logistics facility planning.
Dramatic Change in Number of Hubs and Personnel
- Before Consolidation (9-Hub Structure): Distributed sales company centers as small logistics hubs (locations) in 9 locations nationwide.
➔ Total Personnel: 137 personnel - After Consolidation (5-Hub Structure): Redefined area boundaries and consolidated into large hub bases covering wide areas.
➔ Total Personnel: 93 personnel (Massive personnel reduction of 44 people / approx. 32%)
Total Cost Reduction Effect on Management
Total Logistics Cost Reduction Effect: 16% Reduction
By reducing the number of hubs, the disadvantage of increased delivery costs (freight rates), which will be discussed later, occurred. However, scale merits that far outweighed this realized reductions in fixed costs, personnel, and safety stock, achieving a massive compression (16% decrease) of logistics costs for the entire company.
2. Explanation of the Structure ("Logistics Tradeoffs" in Logistics)
When formulating advanced logistics facility planning, one inevitably faces the dilemma of the logistics tradeoff, where "satisfying one side compromises the other." Let's break down the antinomic structure of "costs reduced" versus "costs increased" that occurs when consolidating hubs (merging/abolishing from 9 hubs ➔ 5 hubs).
🔻 Cost Reduction Factors (Merits)
- Inventory Reduction: The duplication of wasteful safety stock held at each hub is completely eliminated, and the total inventory volume of the entire company decreases dramatically.
- Personnel Reduction: The duplication of workers performing picking on-site and managers overseeing each hub is eliminated, improving productivity (reduced from 137 personnel ➔ 93 personnel in the case study).
- Management & Maintenance Cost Reduction: Warehouse rents (land/building rent), utility costs, material handling equipment costs across multiple locations, and system maintenance costs like WMS are vastly reduced.
🔺 Cost Increase Factors (Demerits)
- Increase in Transportation Costs: A decrease in the number of logistics hubs (locations) means that the "physical last-mile distance" from each hub to the final delivery destination (store or individual home) is extended. Consequently, truck delivery fees (transport/delivery costs, gasoline costs, driver labor costs) inevitably increase.
3. Insights Implied by This Case Study (Summary of Key Points for Logistics Facility Planning)
From the case study of this daily miscellaneous goods company, the important insights we should learn for future logistics facility planning are summarized in the following two points.
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The Strategy to Master the "Logistics Tradeoff" and Win on "Total Costs" Even if Transportation Costs Increase
Because reducing hubs extends delivery distances, it is an absolute law of the logistics tradeoff that "transportation costs" will inevitably increase. However, in modern logistics facility planning, you must not evaluate based on transportation costs alone. The turning point between victory and defeat is whether you can generate reduction amounts in "inventory," "personnel," and "management/maintenance costs" on a scale that surpasses the increasing transportation costs. In this case study, they splendidly succeeded in an overall 16% cost down (victory in total costs).
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Macro Shift from "Finely Dispersed Hubs" to "Wide-Area Hub Bases"
This is a typical macro logistics reorganization model that aims for operational efficiency and advanced standardization (such as the introduction of automated equipment) of hub operations by abolishing sales company centers that were finely placed in each prefecture unit, and consolidating them into wide-area hub bases for each area. The new logistics hubs (locations) require prime locations capable of withstanding wide-area delivery, such as being within close proximity to expressway interchanges.