Businesses who operate multiple distribution centres or warehouses often end up with too much stock in one location and too little stock in another location. Factors such as lead time and cost of alternatives turn this into a complex decision. How do you decide whether its the right choice to redistribute this stock?
When deciding whether to move stock between warehouses to address shortage and surplus problems, typically you should consider at least two important factors:
Factor #1: Length of Lead Time
The longer the supply lead times, the more important it is to consider moving surplus stock between warehouses. This is simply because if you have long supply lead times you are more likely to get a shortage than if you have short lead times. Once you have a shortage, long lead times compound the problem because it takes a long time to source more from the normal point of supply. But where is the break even point in terms of lead-time.
Factor #2: Cost of Producing and Moving the Product
As always, cost is a key consideration. If the product is clearly cheap and easy to move, it’s often beneficial to move stock within a distribution network. Likewise if the product is super expensive to produce and/or purchase you would probably want to consider redistribution. However, it’s not always so clear cut – a product transport or production/purchase cost may be in the broad mid-range.
With each of these factors, things start to get a little less clear cut, and when you combine the factors, the traditional replenishment planning methods (such as DRP) fall short, because they assume static supply relations, and they usually don’t help in balancing out shortages against surplus.
What are the optimal quantities to move between warehouses?
Optimization is the best way to work out the optimal quantities to move between warehouses. It will help you balance the total cost of being out of stock versus the cost of moving stock. You can consider a range of parameters such as:
- future demand – based on customer orders and forecast
- sales prices
- min/max stock level targets
- transportation costs
- customer priorities
The optimized plan is sent back to the ERP system as firmed planned distribution proposals. This means that the next planning cycle can make use of this information, ensuring improved delivery service and lower supply costs to meet demand.
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