Chief executive officers and supply chain executives typically ask two questions with
respect to warehouse location decisions.
Firstly, how many distribution centres do I need to adequately service my customers?
Secondly, how can I minimise the cost of warehousing?
Finding answers to these questions can be perplexing.
So as a starting point, let’s focus for a moment on 5 cost impacts of multiple distribution
centres.
You may like to refer to the model displayed on the screen or the Logistics Bureau website
to view the model.
Firstly, Multiple Warehouses means higher storage and management overheads and running
costs.
Secondly, Inventory Holding Costs, otherwise known as the Cost of Capital, increase when
inventory is held in multiple locations.
This is re-enforced by a landmark study by D.H.
Maister, published in the International Journal of Physical Distribution in 1975.
This study quantified the reduction of inventory holding applicable when the number of distribution
centres in a network is decreased.
Known as the square root law, Maister determined that the total inventory in a network is proportional
to the square root of the number of locations at which product is held.
For example, if I reduce my warehouses down from say 8 to 2, by calculation, the law says
that I will reduce my total inventories by 50%.
If I was to reduce my warehouses from 8 to 1, that increases to 65%.
So the key learning point here is that reducing warehouses decreases stock holding and the
associated working capital to finance it.
Now for points 3 and 4, I’m going to touch on transport.
Point 3, primary line haul costs for transport between facilities are much higher for multiple
facilities as more ton kilometres are travelled to replenish distant warehouses.
And for point 4, the converse applies.
Point 4, customer delivery costs from multiple regional warehouses, otherwise known as secondary
transport, tend to be lower because with more facilities, the end distance between the warehouse
and customer is reduced.
So, for your network design purposes and your assessment with the most appropriate delivery
service times for your customers, you may like to note these rules of thumb for operations
within Australia.
If a warehouse is 12 hours or less drive from your customer, for example from Melbourne
to Sydney or Sydney to Brisbane, delivery into store can be made the very next business
day after dispatch.
For customers, 12 to 24 hours’ drive away, such as from Brisbane to Melbourne, then delivery
will be two days.
For deliveries exceeding 24 hours’ drive, as is the case with Sydney to Perth, lead
times of 3 to 4 days are typical.
Now these rules are useful in balancing warehouse cost with transport delivery charges.
Finally, let's look at point 5, It deals with control and systems.
For multiple distribution centres, warehouse management systems costs increase markedly
as more licenses interfaces and hardware requirements cause cost to rise.
So to plan and control these 5 expense areas, the objective within any distribution network
is to find the optimum number of facilities that will reduce the total cost curve while
still maintaining appropriate levels of customer service.
So, you might say how do I define what is optimal?
Well, during the design process, executives should use a blend of common sense and appropriate
use of optimisation tools for important network decisions.
Be cautious here, even the best designers using excellent optimisation tools and modelling
can overlook the basics.
For example, one model I have seen showed that the best geographical location for a
national distribution centre in Australia was in Western New South Wales.
I will not argue about the geographical justification for this, however, the solution did not take
into account the significant population centres on the Eastern seed board of Australia, nor
the incumbent transport hub and sport networks and infrastructure in coast of Australia.
Taking these into account will often reveal a different solution.
For instance, for a company supplying consumer durables to the Australian market place it
is common for a national distribution centre to be placed in either Sydney or Melbourne,
with an additional 2 regional distribution centres, one in Perth and a second in either
Brisbane or Northern Queensland.
In this way, the rule of thumb service times as mentioned earlier can be achieved.
In this short module, I have covered some brief insights and rules of thumb which can
be applied to warehouse location decisions.
I trust that they have been helpful to you and wish you well as you determined the optimal
number of warehouses in your network.