Page 274 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 12: Network Integration

Figure 12.1 illustrates the basic economic principle of warehouse justification. PL is identified as Notes
the manufacturing location, and WL is the warehouse location within a given market area. The
vertical line at point PL labeled P reflects the handling and shipping cost associated with
preparation of a 500-pound LTL shipment (C) and a 20,000-pound truckload shipment (A). The
slope of line AB reflects the truckload freight rate from the plant to WL, the warehouse, which is
assumed for this example to be linear with distance. The vertical line labeled WC at point WL
represents the cost of operating the warehouse and maintaining inventory. The lines labeled D
reflect delivery cost from the warehouse to customers within the market area Ma to Ma’. The
slope of line CD reflects the LTL rate from the plant to customers located between the plant and
the boundary Ma’. The shaded area represents the locations to which the total cost of a 500-
pound customer shipment using a consolidation warehouse would be lower than direct shipment
from the manufacturing plant.
From the perspective of cost alone, it would make no difference whether customers located
exactly at points Ma and Ma’ were serviced from the manufacturing plant or the warehouse.

12.3.3 Inventory Economics

Inventory level in a logistical system directly relates to the location network. The framework
for planning inventory deployment is the performance cycle. Although one element of the
performance cycle is transportation, which provides spatial closure, the key driver of inventory
economics is time. The forward deployment of inventory in a logistical system potentially
improves service response time.

Notes Such deployment also increases overall system inventory, resulting in greater cost
and risk.

Service-based Warehouse Justification

The use of warehouses can be a vital part of the logistics strategy of a firm engaged in national
distribution. The inventory related to a warehouse network consists of base, transit, and safety
stock. For the total logistical network, average inventory commitment is

n Q
I s SS ,
i
i 1 2
where I = Average inventory in the total network;
n = Number of performance cycles in the network;

Q = Order quantity for a given performance cycle identified by the appropriate subscript; and
s
SS = safety stock, for a given performance cycle identified by the appropriate subscript.
s
As warehouses are added to a logistics system, the number of performance cycles increases. This
added complexity directly relates to the quantity of inventory required across the network.

Base Inventory: The impact on base stock by adding inventory is not significant. The base stock
level within a logistical system is determined by manufacturing and transportation lot sizes,
which do not change as a function of the number of warehouses. The combination of maintenance
and ordering cost, adjusted to take into consideration volume transportation rates and purchase
discounts, determines the replenishment EOQ and the resultant base stock. In just-in-time
procurement situations, base stock is determined by the discrete order quantity required to
support the planned manufacturing run or assembly.

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