Inventories

The first building block of a global distribution network is inventories. Inventories, also referred as stocks or warehouses, represent both facilities in a supply chain where companies store their goods and meeting places where products pass through from one vehicle to another (Watson et al. 2013, pp. 7). Inventories generally exist in the supply chain because of a mismatch between supply and demand, which they are trying to balance by storing and having the products readily available when customers need them (Chopra & Meindl 2013, pp. 59). Inventories usually come in various types and sizes and may be owned and operated by either the company itself or intermediaries such as third-party logistics (3PL) providers (Arnold et al. 2011, pp. 296).

When taking into account the previously presented total logistics concept of supply chains, inventories can also be seen as strategic leverages to gain both effectiveness and efficiency in a distribution network. Hence, beyond this general reason for the existence of inventories, a slew of other incentives for holding inventories in a distribution network can also be found.

These are summarized in the following Figure 5.

(Rushton et al. 2010, pp. 118-119; Watson et al. 2013, pp. 118-119) Figure 5. Strategic incentives for holding inventories in a distribution network

•To help buffer lead times.

•To be able to exploit the economies of scale during production and sourcing (by enabling lot sizes and economic order quantites).

Supply

•To be able to exploit the economies of scale during transportation by allowing full vehicle loads to be used.

•To enable trade-offs within the transportation system by allowing different modes to be used.

Transit

•To be able to consolidate products coming from various sources and in this way facilitate order assembly.

•To help provide excellent customer service by positioning goods close to markets so that customers can be served both more effectively and efficiently.

•To enable managing seasonal spikes of demand more economically.

Demand

To be able to match up the list of reasons with proper types of facilities, it is also important to be aware of the alternative types of inventories. (Watson et al. 2013, pp. 8) Generally there may be many kinds of inventories in a global distribution network, but the most common ones are:

• Distribution centers – Distribution centers (DC) are widely used in distribution systems and they have a dynamic purpose of centrally storing, mixing and moving products. In these goods are received in large volumes, stored briefly and then broken down into small individual orders required by the lower-tier general warehouses closer to the market. Sometimes DCs can also serve customers directly. In a global multi-echelon distribution system, it is common to have multiple DCs at different levels, which are conventionally referred as central, regional, national and local DCs depending on the location and role of the site relative to the network. (Arnold et al. 2011, pp. 296; Rushton et al. 2010, pp. 119)

• General warehouses – General warehouses are sites where goods are stored for longer periods and where the primary purpose is to have goods readily available to be able to fulfill customer orders. In a multi-echelon distribution system general warehouses respond directly to customer demand and they are the closest depots to the market.

General warehouses get their products from DCs, but apart from this there is minimal handling, movement and relationship to transportation. (Arnold et al. 2011, pp. 296)

• Cross-docks – Cross-docks act as stockless intermediate points in the distribution network for the transfer of goods. Thus, they are simply meeting places for products to move from an inbound vehicle to an outbound vehicle. In the best-run cross-docking systems, all the required vehicles are arriving at approximately the same time so that products stay at the cross-dock for only a short period of time. This, though, requires a great amount of planning and coordination to succeed in the desired manner. (Watson et al. 2013, pp. 8-9)

Once the high-level inventory structure is derived, the final step is to decide how much inventory will be needed to fulfill customer demand. To be able to properly answer this, it is crucial to understand how inventories work in the ground level. When taking the inventory management point of view, an inventory on hand can be broken down into two main sections, as illustrated in Figure 6, both of which having its own specific function considering the entity.

Figure 6. Generic formation of inventories from an inventory management perspective

These sections, their purposes and the related dimensioning bases are:

i. Cycle inventory – The cycle inventory, also referred as cycle stock (CS) is the average amount of inventory used to satisfy demand between the receipts of replenishments. The size of the cycle inventory is a result of the production, transportation and purchase of material in large lots, what companies tend to do to capture the economies of scale. With the increase in lot sizes, however, comes the increase in amount of inventory to be carried and hence inventory holding costs. Therefore, the trade-off companies face when deciding on the size of cycle inventory is the cost of holding larger lots of inventory (when the cycle inventory is high) versus the cost of ordering products frequently (when the cycle inventory is low). (Chopra & Meindl 2013, pp. 60)

ii. Safety inventory – The safety inventory, also referred as safety stock (SS) is the inventory to be held to counter uncertainty. If the world be perfectly predictable, only cycle inventories would be needed. Because demand is, though, uncertain and may exceed expectations, companies need to hold safety inventories to satisfy possible demand peeks. When determining the needed size of safety inventory, this turns to making a trade-off between the costs of losing sales due to not having enough inventory and the costs of having too much inventory. (Chopra & Meindl 2013, pp. 60)

As can be summarized, holding inventories impact directly on assets held, both availability and responsiveness provided, and costs incurred in the distribution network. Because of this supply chain practitioners completing network design studies should strive to find the right number, type and location of inventories that can provide the right level of responsiveness at the lowest possible cost and capital employed. (Chopra & Meindl 2013, pp. 59)

Inventory on hand

ii) Safety inventory i) Cycle inventory