SupplyChainDigest
Editorial Staff
Paper
in the most recent Journal of Business Logistics by Ohio State
research Keely Croxton and Walter Zinn argues that the process
and tools for optimize logistics network design have not really
accounted for the costs of inventory in the solution –
focusing instead on warehousing and transportation costs.
Inventory requirements were then typically overlaid on that
optimal network design.
The paper is full of the usual academic muckety-muck (not
as bad as many), but there is some useful thinking here –
SCDigest will take the suffering for our readers and relay
the key insights between the endless citations to other research
and impossible to understand tables.
First, the authors argue that both mathematical models and
software tools to determine optimal network designs have not
well accounted for both traditional logistics costs and inventory.
The authors notes that: “Software companies have also
recognized the limitation. Insight, Inc., specializing in
network design software, and Optiant, specializing in inventory
deployment software, have recently formed an alliance to link
their systems so that the two problems can be solved in an
iterative, but still serial, fashion.”
The researcher propose a new set of algorithms for including
inventory in network design, and test their theory on the
network of a mid-size retailer (150 stores). There’s
a lot of math, but here’s the summary:
- Including inventory does reduce total system/network
costs, and will generally do so while either keeping the
total number of warehouses in the network the same, or reducing
the number. In the retailer analysis, the number of warehouses
in the design would be reduced from four to two, and total
network costs reduced by $4.5 million dollars, or about
10%.
- Obviously, the impact of the savings is greater depending
on the value of the inventory.
- There is an especially strong impact from including inventory
for C items, or items with highly variable demand.
- With growing use of third party providers, reducing or
eliminating many of the fixed costs of physical networks,
it becomes even more important to include inventory in the
optimization. In these cases, “If inventory cost is
included in network design, the network will increasingly
be determined by the trade-off between transportation and
inventory cost. Consequently, managers who reduce the fixed
warehousing cost and fail to include inventory cost in network
design will adopt a solution that has too many warehouses
and is unnecessarily costly.”
There’s a
lot more math for our APICS readers to wade through. Obviously,
many companies do consider inventory in network design, which
is one of the drivers behind the trend in some companies for
larger, fewer DCs. Nevertheless, it seems Croxton and Zimm
have applied some useful mathematical rigor to optimizing
the decision.
We can’t provide a link, but send an email at the Feedback
button and we will send you a copy of the paper.
Is the cost of inventory well considered in optimal network
design? Have we lacked the tools to do so effectively? Let
us know your thoughts.
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