Centralized or decentralized approaches based on need

The logistics network structure has a horizontal and a vertical dimension. The horizontal dimension involves the number of warehouses of a stage. The vertical dimension comprises the various storage stages - that is, factory, central, regional and distribution warehouse. In addition to efficiency considerations, cost factors play a particularly important role in the optimal allocation of warehouses. In consideration of these factors, decisions on organizing a warehouse in a centralized or decentralized manner are made.

The number of storage forms

In a vertically centralized system, a decision must be made about whether a factory or central warehouse should be supplied directly or indirectly through other warehouse steps.
In indirect delivery, one transport and one picking Picking are conducted in at least two warehouse steps. The strength of this process is that the warehouse step located near the customer can be supplied with large transport units at low transport costs. In addition, the higher transport costs for the small transport units are incurred only during short deliveries to the customer. The benefits of creating an additional warehouse step increase [1]:

  • as the difference of both transport cost unit rates rises,
  • as the costs for the additional warehouse step decrease and
  • as the distance of the customer from the existing warehouse increases.

Warehouse-grouping systems

One way to exploit the strengths of centralization while avoiding the weaknesses is warehouse-grouping systems. These include networked, decentralized warehouse systems that are linked by cross deliveries. Inventories are virtually and not physically centralized with the help of information systems. When necessary, inventories can be shifted [1].

The number of warehouses in a warehouse step

In horizontal centralization - that is, the optimal number of warehouses in a warehouse step - logistics costs play an important role in addition to efficiency factors.
A warehouse’s turnover of goods is dependent to a large degree on the number of warehouses. The larger the number of warehouses per step, the lower the turnover of goods per warehouse. The total volume remains constant as a result. In addition to these logistics costs, imputed costs in the form of shortage costs can be included. They tend to sink as the number of warehouses rises. As the number of warehouses falls, however, site selection becomes increasingly important because the cost weaknesses created by suboptimal locations cannot be offset by deliveries from other warehouses [2].

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Inventory costs

Inventory costs rise with the number of warehouses. This is because the average inventory to meet a predetermined availability level in a market rises as the number of warehouses whose inventories are held to supply the market climbs. The effect is primarily caused by the safety stocks Safety stock in each individual warehouse [1].

 

Warehouse costs

Warehouse costs rise along with the number of warehouses because more warehouses have to be built, maintained or leased. As a result of experience and economies of scale, the costs will rise subproportionally. The costs of a warehouse drop as centralization increases because economies of scale can be achieved with larger storage cycles to a certain level.
In addition, the strengths of automation and more highly qualified workers can generally be exploited only when a warehouse reaches a certain size [1].

 

Transport costs

Transport costs tend to fall as the number of warehouses increases because the delivery costs decrease as a result of shorter delivery distances to the customer. The delivery costs to the customer tend to rise as centralization increases because the average distance between warehouses and customers is longer.
On the other hand, transport costs related to warehouse supply rise as the number of warehouses increases because relatively small quantities have to be transported over longer distances. The delivery and supply costs of a warehouse drop as centralization increases because a warehouse’s procurement volume climbs and, as a result, economies of scale can be tapped [1].

Recommended reading

Logistikmanagement | Pfohl 2004

Strategic Logistics Management | Stock / Lambert 2001

European Distribution Report 2006 | Cushman & Wakefield 2006

References

[1] Logistikmanagement | Pfohl 2004
[2] Strategic Logistics Management | Stock / Lambert 2001

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