The Importance of Location Within The Supply Chain

Identifying optimal locations for Warehouses and other fixed facilities within the supply chain is a major decision for any business. Warehouse location drives transportation costs and where new supply routes are being introduced or an existing supply chain is being re-engineered, then full and comprehensive Warehouse location analysis needs to be undertaken.

Location analysis requires applied mathematics and is often referred to as ‘Centre of Gravity Modelling’. It is also known as p-media and the grid method, in principle the aim of the centre of gravity model is to identify the geographical location where distance and/or transport costs are minimised.

As transport costs usually have a linear relationship with distance and have a greater degree of variability than Warehouse costs across the UK, then identifying the right location for a Warehouse can significantly reduce operating costs.

The location of Warehouses and distribution centres within a logistics network is a major decision and requires detailed analysis of service and cost implications. The investment and implementation costs of new facilities are high and it is a long-term decision that needs to be supported by a robust business plan and thorough scenario modelling.

The location analysis modelling can also be performed on varying time horizons using different levels of aggregation in the data, for example an Organisation may have a relatively detailed one year forecast but an aggregate three year plan. In this instance an Organisation can model both time horizons separately assessing how the optimal location may be impacted between year one and the realisation of the three year plan.

Undertaking Warehouse location analysis for multiple facilities needs to consider several additional variables in addition to the analysis required for a single location. A determination firstly needs to be made on the optimal number of Warehouses and this is calculated through the balance of warehousing costs, transport costs and service time parameters. The allocation of demand between each Warehouse needs to be considered and this may vary in line with seasonality.

As Organisations grow, inventory orders, shipping, storage and selling increase and decisions need to be made about the need for increased Warehouse facilities. Storage becomes of paramount importance to enable an Organisations Products and/or Services to be distributed across a wider geographical location whilst also increasing the quantity?of Products and/or Services that are made available.

During this growth period a decision on whether to ship products from one centralised location or to have smaller Warehouses in different areas is crucial as both centralised and decentralised inventory Distribution systems and/or networks have advantages and disadvantages and should be employed based on the structure of the Organisation.

The decisions as to whether a centralised or decentralised Warehouse network is to be developed depends on an Organisations Service Policy to its Customers. The decision to where Warehouses should be located will have a direct impact on the Organisations Inventory Management Policy as it is within a Warehouse that Inventory is kept and stored.

A centralised Inventory is an inventory management system whereby operations are carried out in a central location whereas on the other hand, decentralised inventory is an inventory management system where products move from a central location to other locations that are close to the Customer. The advantages of using centralised Inventory network include:

1. It makes it easier to foster and maintain the company culture?
2. There is a significant reduction in operating costs such as rent and other utilities
3. Higher margins are achieved because of cost reductions
4. Provision of better Customer service through a focus on skilled workers
5. Concerns arising from products and processes are handled promptly by the Management Team

A decentralised Inventory network is an inventory management system where products move from a central Warehouse to a network of Regional Warehouses that are close to the Customer. A major advantage associated with the decentralised inventory is that local Customer service is often increased by fast deliveries as well as the ability to quickly respond to Customer queries. Other advantages of using decentralised inventory include:

1. The supply chain can be tuned in accordance with specific locations demand?
2. Rush deliveries can be carried out at reasonably low costs?
3. It makes it easier to test markets, systems and products before launching them
4. The use of local branding options on product packaging and shipping labels increases Customer loyalty to the Organisation

However, there are some disadvantages of a decentralised inventory network which may include:

1. Company operations and culture may be diluted?
2. The bargaining power may be affected by suppliers no longer shipping in bulk to a single location
3. High shipping costs especially in the long term and rush deliveries may be passed onto the Customer
4. Leads to competition for resources such as human resource

More articles can be found at?Procurement and Supply Chain Management Made Simple. A look at procurement and supply chain management issues to assist organisations and people in increasing the quality, efficiency, and effectiveness in the supply of their products and services to customers' delight. ??? Simon Callier. All rights reserved.

#procurement?#procurementtransformation?#procurementmanagement?#procurementstrategy?#supplychainmanagement?#supplychain?#supplychainexcellence?#purchasing?#purchasemanagement?#commerical?#business?#managementconsulting