One of the trade-offs that should be evaluated when determining where to place inventory in a multi-echelon supply chain network is the transportation cost and delivery time. A multi-echelon supply chain network is a system of interconnected stages or echelons that perform different functions, such as production, distribution, and retailing, to deliver products or services to the end customers1. Inventory placement is the decision of how much and where to hold inventory in the supply chain network to balance the costs and service levels2.
Transportation cost is the expense of moving products or materials from one echelon to another in the supply chain network. Transportation cost depends on factors such as distance, mode, volume, weight, fuel, and tariffs3. Delivery time is the duration of moving products or materials from one echelon to another in the supply chain network. Delivery time depends on factors such as speed, reliability, frequency, and congestion3.
There is a trade-off between transportation cost and delivery time when determining where to place inventory in a multi-echelon supply chain network. Generally, holding more inventory closer to the customers can reduce the delivery time and increase the service level, but it can also increase the transportation cost and the inventory holding cost4. On the other hand, holding less inventory farther from the customers can reduce the transportation cost and the inventory holding cost, but it can also increase the delivery time and decrease the service level4. Therefore, finding the optimal inventory placement requires balancing the transportation cost and delivery time trade-off.
Some of the methods or tools that can help evaluate the transportation cost and delivery time trade-off are:
Network optimization: a technique that uses mathematical models to optimize the design and configuration of a supply chain network by minimizing the total costs (including transportation and inventory costs) while satisfying the service level requirements.
Multi-echelon inventory optimization: a technique that uses mathematical models to optimize the allocation and sizing of safety stocks across multiple echelons of a supply chain network by minimizing the total costs (including transportation and inventory costs) while satisfying the service level requirements.
Simulation: a technique that uses computer software to mimic the behavior and performance of a supply chain network under different scenarios and assumptions. Simulation can help evaluate the impact of different inventory placement strategies on the transportation cost and delivery time.
Therefore, transportation cost and delivery time is one of the trade-offs that should be evaluated when determining where to place inventory in a multi-echelon supply chain network.
References: 1: Multi-Echelon Inventory Optimization 2 2: Inventory Placement Definition 3 3: Transportation Cost Definition 4 4: The Tradeoff Between Inventory Costs And Transportation Costs : Supply Chain Network Design: Applying Optimization and Analytics to … 1
