In a recent New York Times article, “New hubs arise to serve just-in-case distribution,” the author Matt Hudgins discusses the new approach many companies are taking of placing their Distribution Centers (DCs) closer to customers. This practice allows them to better serve their customers in a highly competitive and risky environment. The practice is called just-in-case. This is in contrast to the just-in-time practices, in which only small amounts of inventory are kept on hand.
The article goes on to say that “Since the 1990s, just-in-time has made sense for many companies looking to reduce the cost of keeping large inventories on hand. Technology enabled retailers and manufacturers to closely track and ship items to replace merchandise sold or components consumed in production.”
Our experience in the market shows that, in addition to improving response time, the major driver of these changes has been transportation costs. In the chapter “The Effects of Oil Price Volatility” in Operations Rules, David Simchi-Levi describes how the move to off shore facilities was driven by low oil prices in the mid-90s and how the increase in oil prices is now driving facilities closer to the customer.
He identifies three main trade-offs when transportation costs increase:
1) Regional DCs are more attractive – the increase in the cost of the “final leg” or the outbound costs from the DC make it important to shorten that distance.
2) Sourcing and production move closer to demand – As the cheaper manufacturing costs of “off-shoring” are offset with high transportation costs, companies are more inclined to “near-shore” their manufacturing activities. See David Simchi-Levi’s recent article for Spendmatters “Is Apple manufacturing in the US an important move?”.
3) Supply chain flexibility becomes the focus of the organization – Serving demand closer to the customer means that the manufacturing plants need to be less specialized and more capable of producing a variety of products.
For every company the actual decisions are unique and there are many other factors that affect the trade-offs such as:
- Customer channels, delivery commitment and level of customization
- Cost of building facilities and specialized production lines
- Inventory push/pull decisions
These trade-offs are complex. Therefore, we recommend utilizing end-to-end optimization with a combination of supply chain network design analysis to create scenarios that measure sensitivity and risk and follow this with a detailed analysis of plant processes and the inventory implications of various ideas.
To read a case study on end-to-end optimization in the medical devices supply chain or a white paper on managing supply chain risk, click on the icons below.
Written by Edith Simchi-Levi