Question

A global manufacturing company has hired a supply chain management consulting company to review its supply chain. The consulting company has recommened the manufacturer to conduct periodic review of its logistics network design and optimize its network of warehouses.

(i) Discuss why the manufacturer should periodically review its logistics network design.

(ii) Discuss the advantages of having a small number of centrally located warehouses and having a large number of warehouses closer to the customers.

Answer 1

1) It is considered as a prudent practise to establish a periodical review system, to evaluate and realign the firm's supply chain policy. This is due to the fact that periodical review helps the firm counter the ever changing market and industry dynamics. It will prevent any kind of dissonance between the perfect supply chain policy and the established supply chain policy. Review activties thus help the firm establish a lean process in the firm, thus translating it into greater fiscal efficiency and greater competitive advantage. In addition to this, the review activity shall also provide insights related to the right combination of investments/disinvestment required with respect to the supply chain network. This should be done in order to reduce the supply chain risk and optimize the inventory and the cost incurred through it. Nevertheless, Periodic review also helps in proactive approach towards market trend estimation and thus making the firm ready for any change.

2) Centrally located warehouses have following advantages -

• Maintaining locally placed warehouses increase the supply chain cost by increasing the cost of Warehouse setup cost and the inventory cost. The firm would be also be required to undertake regular maintenance activities at these warehouses, this regular overhead costs greatly reduces the fiscal efficiency of the supply chain. In addition to reduced fiscal efficiency, the firm would be required to establish a certain amount of inventory at the client location irrespective of the demand from a particular customer, this needlessly increase the inventory cost for the firm.
• Central warehouses helps in improving the supply chain response time. Through proactive demand estimation, we shall be able to ensure product availability for the client when they need it. Maintaining local warehouses at client location creates an uncertainity over inventory utilization and it may also lead to to a situation where there is a surplus at one client location and there is a deficit in another. Therefore, we can also say central warehouses provides greater control over inventory and client servicing.
• Over and above, maintaining single central warehouse improves upon the inbound cost for the firm. It is always efficient to transport goods to a single warehouse rather than transporting them to multiple warehouses. We can greatly optimize the network using the right combination of goods carriers depending upon the demand from each client and thus improving the efficiency to the supply chain network.

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