There are a number of reasons why DCs and warehouses are required. These vary in importance depending on the nature of a company’s business. In general, the main reasons are:
- To hold the inventory that is produced from long production runs. Long production runs reduce production costs by minimizing the time spent for machine set-up and changeover, enabling ‘lean’ manufacturing.
- To hold inventory and decouple demand requirements from production capabilities. This helps to smooth the flow of products in the supply chain and assists in operational efficiency, enabling an ‘agile’ response to customer demands. Note that many supply chains have strategic inventory located at several different points, whereas this buffer only needs to be held at what is known as the decoupling point: the point at which discrete product orders are received.
- To hold inventory to enable large seasonal demands to be catered for more economically.
- To hold inventory to help provide good customer service.
- To enable cost trade-off s with the transport system by allowing full vehicle loads to be used.
- To facilitate order assembly.
These reasons emphasize the importance of the facilities location decision, and also give an indication of the complex nature of that decision. It is possible to summarize the main reason for developing a logistics network as ‘the need to provide an effective service to the customer, whilst minimizing the cost of that service’. Service and cost factors are thus of paramount importance when determining the number, size and location of facilities.
For the best possible customer service, a DC would have to be provided right next to the customer, and it would have to hold adequate stocks of all the goods the customer might require. This would obviously be a very expensive solution.
At the other extreme, the cheapest solution would be to have just one DC (or central warehouse) and to send out a large truck to each customer whenever his or her orders were sufficient to fill the vehicle so that an economic full load could be delivered. This would be a cheap alternative for the supplier, but as deliveries might then only be made to a customer once or maybe twice a year, the supplier might soon lose the customer’s business.
There is obviously a suitable compromise somewhere between these extremes. This will usually consist of the provision of a number of DCs on a regional or area basis, and the use of large primary (line-haul) vehicles to service these, with smaller vehicles delivering the orders to customers. For certain operations, of course, even these simple relationships will vary because of the need for very high levels of customer service or the very high value of products.
