Page 276 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 12: Network Integration

Significant cost trade-offs exist between inventory and transportation. Inventory cost as a function Notes
of the number of warehouses is directly related to the desired level of inventory availability. If
no safety stock is maintained in the system, total inventory requirement is limited to base and
transit stock. Under a no safety stock situation, the total least cost for the system would be at or
near the point of lowest transportation cost. Thus, assumptions made with respect to the desired
inventory availability and fill rate are essential to trade-off analysis and have a significant
impact on the least total cost design solution.

Self Assessment

Fill in the blanks:
7. The basic economic principle justifying establishment of a warehouse is ……………………
consolidation.
8. The …………………… of inventory in a logistical system potentially improves service
response time.
9. In …………………… procurement situations, base stock is determined by the discrete
order quantity required to support the planned manufacturing run or assembly.
10. The purpose of …………………… is to protect against unplanned stockouts during
inventory replenishment.

12.4 Formulating Logistical Strategy

To finalize logistical strategy, it is necessary to evaluate the relationships between alternative
customer service levels and associated cost. While substantial difficulties exist in the measurement
of revenue, the comparative evaluation of marginal service performance and related cost offers
a way to approximate an ideal logistical system design. The general approach consists of
(1) determining a least total cost network, (2) measuring threshold service availability and
capability associated with the least total cost system design, (3) conducting sensitivity analysis
related to incremental service and cost directly with revenue generation, and (4) finalizing the
plan.

12.4.1 Cost Minimization

Just as a physical replication of a geographical area illustrates elevations, depressions and
contours of land surface, an economic map can highlight logistical cost differentials. Generally,
peak costs for labour and essential services occur in large metropolitan areas. However, because
of demand concentration, least total logistics cost resulting from transportation and inventory
consolidation benefits is often minimized in metropolitan areas.
A strategy of least total cost seeks a logistical system network with the lowest fixed and variable
costs. A system design to achieve least total cost is driven purely by cost-to-cost trade-offs. The
level of customer service that is associated with a least cost logistical design results from safety
stock policies and the locational proximity of warehouses to customers.

Did u know? The overall level of customer service associated with any given least total
cost system design is referred to as the threshold service level.

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