Optimizing the supply chain involves satisfying or exceeding customer demands, at the lowest operating cost. While this is generally true, there are organizations that move to a higher cost facility network to provide the best level of customer service. This is seen in the growing trend to have more, smaller distribution centers located closer to an organizations end customers. Wal-mart is an exception to this trend, with many distribution centers, strategically located, but many over a million square feet.
And, with a growing number of companies acquiring other businesses with existing distribution centers, another network trend is consolidation. The challenge then is which facilities to close, and where to locate the consolidated facility. With so many factors involved in deciding how many facilities to operate, where to locate them, what customers to serve from each, what inventory to store where, and what size to make each facility, there is a growing need for organizations to understand the basics of supply chain optimization. Supply Chain Consultants
The four main logistics cost drivers are information, inventory, facilities and transportation. Information costs become more important with shorter delivery lead-times. If delivery lead-times are short, it is important to monitor shipment information to allow adjustments to transportation modes and carriers. This can increase the cost of information system software and hardware. Most companies hold a minimum safety stock or inventory level for the same products at each distribution center.
As a result, inventory costs increase as facilities are added to the network. If products are dedicated to specific facilities, then increases in inventory costs can be minimized. Facility costs increase as the number of distribution centers or space is increased. The objective is to exploit economies of scale to keep facility costs low. However, if your network has only two distribution centers, you may incur higher transportation costs and longer delivery lead-times. This leads to the transportation factor, which is often the key to optimizing the supply chain network. Transportation has many associated costs and options that should be evaluated to satisfy customer demand and control transportation costs.
Transportation costs have two factors: outbound to customers and inbound from suppliers. Typically, outbound transportation costs drive the total cost of freight due to a higher number of less-than-truckload (LTL) and small parcel shipments. The industry average for outbound transportation costs is 70% to 80% of the total transportation costs. The inbound shipments are typically truckload (TL) and / or rail shipments at lower rates. As a result, a common strategy is to add distribution centers to get closer to the customers. The addition of facilities leads to an initial reduction in total transportation costs. However, if too many facilities are added to the network, the increase in LTL shipments from inbound suppliers can increase transportation costs.