The client had built up an extensive network of DCs and cross-dock shipping centers with high levels of inventory but was achieving disappointingly low levels of next-day delivery (around 70%) and suffering from high product return levels and intersite transfer costs.
Story
The client is a leading spare parts distributor with a network of nine distribution centers (DCs) serving US auto repair shops with next-day delivery. Pacellico was asked to model and recommend the optimum network for next-day delivery to the client’s customers.
We built an inventory and freight model for a variable number of DCs to quantify the increased transportation cost against decreased inventory for fewer DCs with consolidated stock. Variance analysis for 2 million sales records was used to model safety stocks. We experimented with a range of scenarios for DC count and location to determine the optimum network design. We investigated the client’s procurement and replenishment methodology to identify and address process weaknesses.
Conclusion
Our DC network analysis found that reducing the DC count from 9 to 4 would reduce inventory from $69M to $41M while achieving 95% next-day delivery. While freight costs would increase from $2.2M to $3.6M due to the longer delivery distances, this would be fully offset by a $4.9M reduction in transactional cost. We found the replenishment process was highly dependent on human judgment and proposed a methodology for forecasting and order generation which will further improve inventory performance.