11.1 Reaching Market Demand

As outlined in Chapter 2, one of the fundamental value propositions that business firms must deliver to their customers is the timely and efficient availability of products in the market. Achieving this objective is closely tied to the geographical positioning of production facilities relative to target markets. Consequently, location strategy becomes a critical component of operational planning.

However, in the dynamic landscape of modern commerce, firms are continually exploring and entering new and geographically dispersed markets. These markets may lie far from existing production sites, thereby introducing logistical challenges and escalating transportation costs—factors that can significantly erode profit margins.

To address this, firms often employ strategic tools to optimize their distribution networks. One such method, discussed in Chapter 9, is the Center of Gravity technique. This analytical approach enables firms to identify an optimal location for a Distribution Center (DC) that minimizes the total transportation cost to multiple market destinations. By situating the DC at the “center of gravity” of their customer base, firms can streamline logistics: products are shipped in bulk from the production facility to the DC and then distributed to individual markets based on demand.

This hub-and-spoke model not only reduces transportation expenses but also enhances responsiveness to market needs. Figure 9.3.1 illustrates this concept, showing how strategic placement of a DC can serve as a cost-effective intermediary between production and consumption points.

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The configuration described above enables flexible and agile delivery of products to the identified markets. However, as market populations grow and demand increases, the capacity of a single Distribution Center (DC)—which is inherently limited by its storage and handling capabilities—may become insufficient. To address these evolving challenges, firms often opt to establish additional DCs.

This expansion leads to a more complex logistics structure in which multiple DCs serve multiple markets. Typically, each DC is strategically positioned to efficiently supply a cluster of markets—often three or more—based on proximity and demand patterns. The resulting configuration forms what is known as a Transportation Network, illustrated in Figure 5.3.2.

While the presence of multiple DCs enhances the firm’s ability to meet market demand promptly, it also introduces a new layer of complexity: How should goods be allocated from each DC to the various markets to ensure demand fulfillment while minimizing transportation costs?

To answer this question, firms rely on Transportation Models—a class of quantitative methods designed to optimize the flow of goods across a distribution network. These models help determine the most cost-effective shipping routes and quantities, ensuring that supply chain operations remain both responsive and economically efficient.