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Transport cost and inventory trade-off

In this step, we consider another important trade-off involving transport and inventory.
11.8
Inventory management is a balancing act, mainly between transport assets and inventory and where your storage is located in a geographical sense. The cost of transport is variable and flexible but the cost of storage is not. Your initial choice of where you locate your inventory is extremely important. Once you have purchased a warehouse in a particular geographical location it’s not easy to change it but remember you can use transport to offset the disadvantages that you might have by locating your storage location in a particular geographical site. So you can add to your transport or use different modes of transport or go further to your customers.
64.4
If you wish to store a lot of goods that is going to increase your costs but if you want to keep your inventory down you need to move more goods quicker through the system. It’s a trade-off between where your goods are and how you get them to your customer. So, that’s what it’s all about you’re trying to balance the two.
Another important trade-off in global distribution network design is the one between transport and inventory.
In the video, Nick Wright provides an overview of the trade-offs between the two.
If we look into this a little deeper, trade-offs can be decided by using total cost analysis, which involves examining the total cost of either scenario and choosing the cheapest.
In some countries, transport is generally cheaper than the cost of operating and holding stock. This is because road infrastructure is of high quality, but property is expensive due to the shortage of available land to develop warehouses and other distribution assets. The transport variable of driver, vehicle and road costs can be contrasted with the cost of holding inventory in warehouses, the price and availability of land and labour.
Transport cost - Inventory location graph. This shows that there are lower costs for transport and higher costs for inventory on a local basis, compared to higher costs for transport but lower costs for inventory on a global basis
Bowersox et al. (2019) suggest a way to calculate whether transport or moving geographical location is the best trade-off. This uses the assumption of trunk transportation from the original inventory location to a regional location and then utilising local delivery to transport to the customer. This cost of trunk transport to storage to local delivery is compared with the direct delivery from the original geographical inventory location to the customer.
\[Wx = \sum (Px + Tx) – Lx – \frac{\sum(Pv +Tv)}{Nx}\]
Where:
\(Wx\) = Local warehousing cost of average shipment
\(Px\) = Processing cost of average volume shipment
\(Tx\) = Direct freight cost of average shipment
\(Lx\) = Local delivery of average shipment
\(Pv\) = Processing cost of volume shipment to area
\(Tv\) = Transportation cost of volume shipment to area
\(Nx\) = Number of average shipments per volume shipment
This can be further simplified to:
\[Wx = Tx – Lx – Tv\]
Where:
\(Wx\) = Local warehousing cost of average shipment
\(Tx\) = Direct freight cost of average shipment
\(Lx\) = Local delivery of average shipment
\(Tv\) = Transportation cost of volume shipment to area
This method is not completely scientific because there are other factors that might have to be considered, such as service levels that customers expect and other influences that cannot be reliably costed, but it can help in making reasoned and calculated management decisions in network design.
The key issue that can be drawn from this is the recognition that, due to transport’s inherent nature of moving, it can be used to flexibly adjust the distribution network to help meet customer expectations and control the total cost of the global network.

References

Bowersox D., Closs D. and Bixby-Cooper M (2019) Supply Chain Logistics Management. 5th edn. New York: McGraw-Hill
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Principles of Global Logistics Management

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