I have already written here in this same space about the dilemma of companies in producing to order (make to order) or producing to stock (make to stock). But, once the company understands that the latter is the best alternative for its business, where should this stock be located? Is it better to keep stock geographically dispersed and closer to potential customers or to keep it centralized, reducing the need for stock?
Normally, when companies decide on the centralization or decentralization of inventories, the following paradigm permeates the decision-making process: by centralizing, safety stocks are reduced because the company gains from compensation for fluctuations in demand in different regions of Marketplace. When demand heats up in one region and slows down in another, a central location allows the company to “win on average”. If inventories are decentralized, the company runs the risk of imbalanced inventories and additional expenses with transferring products.
On the other hand, in addition to decentralization reducing response time and lead-time variability for the customer, transport costs are also reduced, since the company reduces the distance traveled in the last mile, which is the most expensive stage carriage.
So how do you make the best decision? To define where to locate the stock, it is important for the company to pay attention to some characteristics of the demand and the product, in addition to the customer's service requirements.
Demand Characteristics
Demand characteristics include sales turnover and variability. The greater the product turnover, i.e., the smaller the stock coverage of an average purchase/production lot, the greater the tendency to decentralize stocks, as the risks associated with obsolescence, loss or stranding of products are minimized . Products with a high degree of variability in demand tend to be centralized, as the greater the variability, the greater the need for safety stocks, and decentralization would further increase this need. Typically, products with longer life cycles and a small number of substitutes have a more predictable demand profile, tending to have their inventories decentralized, as their risk of product stranding is reduced.
Product characteristics
Product characteristics cover the added value and degree of obsolescence of the products. The greater the added value, the greater the propensity to centralize inventories in a single facility, in order to reduce the duplication of costs associated with maintaining safety stocks in different locations. The same goes for the obsolescence factor: the greater the degree of obsolescence, the greater the propensity for centralizing inventories, in order to reduce the risk of stranding arising from wrong decisions, such as, for example, sending a specific product to the warehouse in a region that does not demand that item. For reasons like this, it is common for retail companies to centralize the storage of cell phones in a few Distribution Centers, since these are products with a high added value and a certain degree of obsolescence.
service requirement
The level of market demand also affects the location of inventories, characterized by two basic dimensions: delivery time and product availability. Shorter and more consistent delivery times are more easily achieved through physical decentralization, that is, the location of inventories closer to the end customer. Decentralization, however, can affect availability, as it increases the difficulty of managing inventories at different points. When inventories are decentralized, local variations affect the inventory directly, while centralized inventories absorb variations better, as they offset each other. Thus, to guarantee the same level of product availability through a decentralized network, a higher inventory level is required, which demands a greater financial outlay from the company.
The following image summarizes how each attribute impacts the decision on where to stock a product:
Image: Attributes to be considered when positioning stock
Source: ILOS
In short, there is no right answer. Each company has a reality and within the same company each product has its characteristics, which will lead to different decisions. Even the same product will have characteristics that will suggest centralization and others will direct to decentralization. In this case, the company must weigh each one and understand which are the most important.
References:
Fernanda Monteiro
More than 11 years of experience in training and consultancy projects, focusing on Logistics and Supply Chain. In consultancy, he carried out projects such as Transformational Logistics Plan, Diagnosis of logistics operations, Strategy and Calendarization of Transport Operations, Measuring the Cost of Serving, Market Study, Mapping of Inventory Reduction Opportunities, Review of the S&OP Process, Management Plan Training and Implementation of Commercial Processes in companies such as Nestlé, Raia Drogasil, Ipiranga, Lojas Americanas, B2W, Coca-Cola, Andina, Embraco, Martins Atacado, Loja do Mecânico, Santo Antônio Energia, Ecoporto and Silimed. She is currently one of the teachers of the Inventory Management Course taught every six months by ILOS. She worked on the development and management of Online Courses in Logistics and Supply Chain, Supply Processes, Demand Planning, Inventory Management and Industrial Management. Still in the training area, she was responsible for applying ILOS business games in companies such as Raia Drogasil, Fibria, NEC, Novartis and Moove.
