An article in the New York Times (February 12,2013) describes claims that the number of distribution centers to satisfy US demand has increased from two to seven, as retailers demand quick deliveries wile cutting their own inventories. In addition, rising truck fuel costs, increased insurance costs and weather related disruptions all decrease the supply chain benefits from inventory reduction and push the optimal configuration towards more distributed warehouses and higher overall inventories. A related shift is the movement from West Coast to East Coast ports in an effort to get goods closer to demand points. Is this shift a reflection of the low interest rates and thus low cost of carrying inventory or the rise in fuel costs and uncertainty in retail demand, or both ? Will the increased inventory locations be coupled with decreases in variety or will the deployment of inventory have to be synchronized with SKU velocity to manage costs ?
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The overall increase in distribution centers is likely caused by a combination of low interest rates on inventory and the attempt to get closer to eastern demand points. With rising fuel costs, it is only a matter of time until hauling from west to east coast becomes too expensive. More distribution points could also mean that variety will decrease, in order to avoid high carrying costs involved with managing an expanding number of distribution points.
It’s interesting that while discussing various issues in the class we touched upon how in order to survive in such a dynamic environment, you have to be able to change rapidly and address customer needs ASAP. This increase in inventory locations in the start of such a shift, where if you can’t deliver in a day or even hours, you lose business. I do think though that there will not be a decrease in variety, this aspect will still need to remain if a company wants to survive. The trick then being how to provide this variety with the aforementioned speed.
In the 1990s there was a trend in the other direction. During this time the off shore move was driven by low oil prices (about 15 USD/Barrel).
In 2013 the oil price was nearly seven times as high and the current drop wasn´t foreseeable. As a result regional distribution centers were more attractive because of the saved miles.
The low interest rates and the need for fast response to volatility in demand were accelerating the trend from “just in time” to “just in case”.
Regarding variety there is a distinct demand for an increasing range of products and faster shipping. There are different options to decrease variety, e.g. building separate DCs for slow-moving items. Nevertheless the challenge for the DCs will be to handle variety with lowest possible costs.
I sumarize the trend mentioned as that distributions increase and move near tho the demand end.
As for the reasons behind this phenomena, I can hardly agree with the two possible reasons listed by the author. Though Christian Lehr gave some materials to show the oil price does influence this trend, I think the key driving factor is from the market, from the customer demand instead of the change of transportation fees.
The logistics part is used to be treated as a center of cost, and that is why we used to manage the inventory in order to minimize the total cost. Nowadays, the competition increases and the differences between products seems to be smaller, thus, the service level including delivery time becomes an important factor to win customers. At this time, logistics is becoming a profit center which will create more value than it costs if managed well. Therefore, the problem becomes how to balance the service level and cost (maybe more other trade-off). If more distributions contribution to better service and then more market shares, it is a good deal to invest.
As for the second question, I don’t think the variety will decrease. If we set our goal is low cost, it is hard to take care of both inventory volume and variety at the same time. But when we set our goal to be better service with reasonable cost, it is possible to earn more revenue to make up the cost of keeping inventory variety. For the same reason, I don’t think the SKU velocity will decrease as the deployment of inventory.
I would say that companies are opening regional distribution centers to decrease the lead time to customers, but they remain focused on a lean “Just In Time” system focused on efficiency. (Based on my limited experience… but what I’ve witnessed in previous roles) Having main distribution centers and that distribute to smaller regional locations allows for control of the supply chain from ports of entry to customer locations. Warehouses remain concerned with inventory volumes, but would rather break down bulk deliveries in stages throughout the chain to meet local customer demand. There is also a great deal of focus on integrated, shared forecasting between main distribution centers and regional distribution centers (closer to customer demand). Holding inventory “Just In Case” to meet a low possible demand is usually only necessary for critical components or to meet guaranteed in-stock requirements.
Traditionally, both cycle inventory levels and safety stock have increased with the rise in distribution centers. However, much of the increase in this case is due to the rising US demand and the retailers therefore have to face growing inventory costs. In order to offset this, having the supply (products) more closer to the demand in the supply chain helps retailers reduce the lead time and its variability. This essentially brings down the safety stock and pipeline inventory. Lower interest rate helps keep the holding costs down.
With large number of distribution centers coupled with moderate inventory costs, retailers can now expand their SKU variety and optimize their distribution using techniques such as setting up buffer warehouses (demand pooling for slow moving items) or cross-docking fast moving items. This, as Yang pointed out, will maintain the service levels with increased volumes.
The shift as far as I concern is a result of both low cost of carrying inventory and the rise in fuel costs. It is cheaper to ship directly to the East Coast and to the demand points, then ship to the West Coast and take further to the demand points. This shift will save fuel costs. Also due to the low interest rates and low cost of carrying inventory, this shift can make benefits from it. I think this increased inventory locations could be coupled with decreases in variety. By knowing the top inventory in each different locations, we do not have to carry all the inventory in one location.
Having more distribution centers would make sense if these centers were more wide-spread geographically. This is because, in case of natural calamities and uncertain events, where such events occur in a concentrated area, if the centers were more widespread, there would not be loss of inventory and demand would be met.
Having more distribution centers and having slightly reduced inventory costs, would not reduce the variety and would lead to demands being met.
Will the increased inventory locations be coupled with decreases in variety or will the deployment of inventory have to be synchronized with SKU velocity to manage costs ?
I do not believe the increased locations will disrupt the variety offered, I feel the inventory will just have to be synrchronized better at a faster velocity. For example Amazon and their prediction of what you are going to order. This cuts cost and time but does not decrease the variety offered on its website.
There is no doubt about the fact that increasing the number of warehouses would increase the inventory levels and safety stocks to be maintained in totality. However, the benefits derived out of the move such as low inventory carrying costs, shorter lead times in delivery to retailers, mitigation of risks by weather disruptions and offsetting escalating insurance prices do make it a smart bet in the current scenario.
As far as the affect of increase in number of warehouses on variety of SKUs is considered, I believe that if an area wise demand/ consumption pattern is analysed, a probable SKU range for a particular geographic location could be forecasted, minimizing the anticipated loss of sales due to low SKU range availability.
I think both the low cost of carrying inventory and rise in fuel costs and uncertainty in retail demand have impact on the shift. Since the shift enables a closer distance between demand point, it is undoubtedly that the shift cut the transportation cost. Besides a closer distance helps retailers to better react to the uncertain demand.
The increased inventory locations are unlikely to cause a decreases in variety. After saving cost from inventory and transportation, retailers can spend more on ensuring the variety by monitoring and forecasting the demand. Obviously multiple inventory locations benefit retailers by saving their cost and improving lead time as well as meeting demand.
In my opinion, multi-factors attribute the inventory location shift from west coast to east coast. Low interest rate leads to low holding cost, while demand uncertainty results in safety stock. However, I think SKU velocity management hwlos decrease inventory level. Standing from a whole-picture view, demand fluctuation in retailer store will offset each other, thus stock quantity decreases in distribution centers.
I believe this shift is more reflecting the uncertainty in retail demand. I would say that companies are opening more inventory locations to handle uncertainties of retailers’ demand with decreased lead time. Consumers are, nowadays, getting more impatient and difficult to forecast their exact demands. Retailers should handle consumers’ these trends in the downstream of the supply chain. It is no wonder that the retailers want quick deliveries while cutting their inventories and having diversified items. Overall, supply chains are focusing more on handling uncertainties (Just in Case) than efficiency (Just in Time).