Inventory Management Review: Choosing Your Location

 

Inventory Management Review: Choosing Your Location

Deciding where to put your warehouse, factory, and offices can become complex but is a crucial step in managing your operations and in helping you cut down your inventory costs. First I will discuss its importance and then the steps involved.

The most important reason for choosing a good location is to cut down on shipping costs. It is essential to minimize both inbound and outbound shipping costs throughout the entire supply chain when determining your ideal location. 

This reason should be fairly straightforward. Setting up a factory in the same state where the warehouse, distributor, and bulk of the sales come from would save a company an incredible amount of money. It is also important to try to obtain parts from suppliers that are located close to your in-house operations.

As far as inventory management is concerned, inbound and outbound logistics can be greatly affected by having a prime location. The reason for this is because of lead times. In a recent article, I discussed the Re-Order Point. 

A large reason inventory is kept is because of uncertainty in demand. If demand rises above sales forecasts expectations, inventory is in place to help fulfill orders until more parts can arrive. With today’s overnight shipping, this may not seem like a big deal, but a location close to suppliers can help facilitate shorter lead times.

A less objective advantage to consider is whether or not you want to travel so far every time you have to go to one of the locations involved in your supply chain. Objectively speaking, travel costs can begin to add up.

To figure out your location, it is essential to determine where all of your inbound parts are coming from, and also where all of your outbound goods will be shipped to. You will also need to determine how many of each good you will be shipping or receiving and how much each weighs. 

Ultimately, you need to take a weighted average of shipping costs per mile and then use the following formula to determine your optimal selection. More specifically you need to treat each mile traveled as a cost per mile and then take the global latitude in which they are traveling from and use it to find an average, and then do the same for the longitude.

For example, if you have a supplier that charges $.0010 per mile, per good and is located at a latitude of 40 degrees and a longitude of 100 degrees. Assume you also have a distributor and the cost to ship to him is $.0015 per mile per good and the longitude is 10 degrees and the latitude is 80 degrees. 

Both locations are in the northwest hemispheres. Annually you need to ship out 100,000 units and need to ship in 200,000 units.

Ideally, the center of gravity formula results in an ideal longitude of 20.5 degrees N, and ideal latitude of 75.3 degrees W. Because the formulas are a bit more complex than previous ones discussed on the site, I have made an excel spreadsheet covering these formulas with the example solved.

These ideal values are only suggestions. State taxes, state wages, available land, labor, and other resources should also be taken into consideration. The center of gravity should be used specifically as a way to find a location close to where you should be.

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