the square root law number of facilities factors influencing logistic networks customer service

1. Supply Chain Logistics part 3
Mcenroe ng

2. Facilities: How many and where?
• When you build your logistics network you have to determine how many facilities do
need, such as warehouses, terminals and so on.
• And where to locate them, that is a very important decision. And how to pick the right
locations is really an art form, because you don't know what your needs are going to be
in the future.
• Nevertheless good planning pays off, so when we look at our logistics network we have
to make the decision.
• When you have fewer warehouses the advantages are that you locate your inventory in
fewer locations, you pool your risk, and therefore are able to hold less inventory. When
you have many facilities, you will carry more inventory, but your access to your customer
is going to be much quicker, so the decision is a tradeoff. Do you want to save money
building facilities and holding inventory, or do you want quicker access to your
customers?
• The thing about inventory is that if it is in fewer locations, you need less of it, and that
has to do with a safety stock.

3. Facilities: How many and where?
• Because you can spread your safety stock over a larger area. The risk of stocking
out is less with fewer locations. If you have more locations, each location needs
their own safety stock, thus we have more safety stock overall in the system.
• you typically follow a center of gravity approach that puts you as close to the
customer as possible. But you also have to consider that you do not stock every
item in every warehouse, because some items may be needed In certain locales.
• Such as, in the north we need more winter coats than we do in the desert.
• Another interesting way to think about it is that you can use your transportation
network as a storage device. For example, carmakers sometimes put several
weeks worth of inventory Into trains and rail yards before they get to the dealers.
That gives them a storage option even though it is transportation, per se.

4. The Square Root Law

5. Factors influencing logistics networks.
• you trade-off two important factors.
• The one is cost, the other one is service. If we want better service to
our customers, we probably have to spend more money. But logistics
networks are already expensive, so most companies try to reduce
those costs as much as possible while still maintaining a high-level of
service.
• The cheapest logistics network looks different from the most
expensive one. Nevertheless, the concept of cost versus service
always applies and you can have a logistics network with only one
warehouse and overnight transportation, which will give you great
service, but it will be very expensive.

6. Factors influencing logistics networks.
• Or you can be like Amazon and have top customer service, two-hour
deliveries in some cases, but you need over 100 warehouses for that.
• Nevertheless, you have to pick the network that minimizes cost and
gives you the best service possible.
• Two major drivers affecting logistics network are the cost of money,
interest rates and the cost of fuel driven by the cost of crude oil.

7. Factors Influencing Logistics Networks
• When interest rates are high, the cost of holding inventory goes up,
because most of the money spent holding inventory is cash tied up
that you could use otherwise.
• When fuel costs are going up, remember, fuel costs are the single
largest expense of most transportation, the overall cost of
transportation goes up.
• So when transportation is expensive, you want to have less of it.
Therefore, you need more warehouses.
• When you have to spend a lot of money holding inventory, you want
fewer warehouses.

8. Factors Influencing Logistics Networks
• So as you see those two economic drivers that most companies do
not have any control over, impact how their logistics networks should
look.
• It is important to anticipate where does factors are going to be in the
future, so your network Is as up to date as possible.
• Nevertheless, you can make small adjustments by using rented
warehouses and evolve it over time to make sure that your cost is as
low as possible while delivering the best service possible.

9. Striving for Logistics Customer Service
• Striving for the best logistics customer service. The goal of your logistics network is to make sure
your customers are happy, and you keep them happy by keeping your promises to them. So for
example, if you tell your customer you will buy a product from me and two days later, it will be at
your door step, you should make it happen.
• In order to provide your customers with that top logistics customer service, you can have no
stock-outs and you should have the lead time that you advertise, two concepts I will discuss next.
• Lead time is one of the most metrics and logistics, it's measured from the time of order
submission to the time of order receipt. And we want it to be short, as short as possible but we
also do not want it to vary at all because we cannot plan for variability.
• An example of that would be if you're shipping parts to a car manufacturer and that line is
moving, if your part is delayed and they cannot build their cars, the cost of waiting for a part is
astronomical.
• So you want to avoid any delays in your lead times as much as possible. An equally important
metric is fill rate, which is defined as the percentage or orders that is shipped from inventory.

10. Striving for Logistics Customer Service
• Lead time will be affected by the fill rate because if you don't have the item
in inventory, you will not be able to meet your aggressive lead time.
Therefore we need to maintain enough inventory to ensure our fill rate is
as high as possible and we don't have any stock-outs.
• The overall goal of logistics is to deliver the right product, at the right
price, to the right customer, at the right place, at the right time, in the
right quantity, in the right condition. Those are known as the seven Rs of
logistics, companies are striving to achieve the seven Rs, but there's a
wrinkle.
• Not every item that they sell is equally important. So, for example, we
have different SKUs, known as stock keeping units, and some sell a lot,
others sell a lot less.

11. Striving for Logistics Customer Service
• In general, for most companies, there are a few products that sell the
most, also known as our A items. While we have B items and C items,
and there are lots of them, they are not as critically important to our
success because we don't make as much money on them.
• Our A items is where we need our best fill rate and our lowest lead
time. And then, the other items, we can reduce cost while offering
lower levels of service. And that is how most companies achieve low
cost in logistics while maximizing their service levels when it matters.

12. Reference
• Rutgers the State University of New Jersey