Page 275 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes
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Caution In either situation, the base stock determination is independent of the number of
warehouses included in the logistical system.
Transit Inventor: Transit stock is inventory captive in transportation vehicles. While in transit,
this inventory is available to promise but it cannot be physically accessed. Available to promise
means it can be committed to customers by use of a reservation or inventory mortgaging
capability in the order management system. As more performance cycles are added to a logistical
network, the anticipated impact is that existing cycles will experience a reduction in transit
inventory.

Notes This reduction occurs because the total network transit days are reduced.

Safety Stock Inventory: Safety stock is added to base and transit stock to provide protection
against sales and performance cycle uncertainty. Both aspects of uncertainty are time-related.
Sales uncertainty is concerned with customer demand that exceeds forecasted sales during the
replenishment time. Performance cycle uncertainty is concerned with variation in the total days
required to replenish the inventory of a warehouse. From the viewpoint of safety stock, the
expected result of adding warehouses will be an increase in average system inventory. The
purpose of safety stock is to protect against unplanned stockouts during inventory replenishment.
Thus, if safety stock increases as a function of adding warehouses, then the overall network
uncertainty must also be increasing.

12.3.4 Total Cost Network

Total cost related to average inventory commitment increases with each additional warehouse.
For the overall system, the lowest total cost network is 6 locations. The point of lowest inventory
cost would be a single warehouse.

Trade-off Relationships

The minimal total cost point for the system is not at the point of least cost for either transportation
or inventory. This is the hallmark of integrated logistical analysis.
In actual practice, it is difficult to identify and measure all aspects of total logistical cost. Many
assumptions are required to operationalise logistical network analysis.

Critical Assumptions and Limitations

Transportation requirements are represented by a single average size shipment. In actual
operations, it is likely that neither of these simplifying assumptions will be valid. First, the
nature of logistical network design is not a short-term planning problem. When facility decisions
are involved, the planning horizon extends across several years and must accommodate a range
of different annual sales projections. Second, actual shipment and order sizes will vary
substantially around an average.
A realistic approach to planning must incorporate a range of shipment sizes supported by
alternative logistical methods to satisfy customer service requirements. In actual operation,
alternative modes of transportation are employed, as necessary, to upgrade the speed of delivery.

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