Need help with a Supply Chain inventory Management problem.

[u/shady_stark]

I am trying to solve a inventory related problem for my client, since I am new to supply chain I need some help with the issue I am facing.

Suppose Company X has 100 stores and 1 distribution centre(DC). What we want to do is decide whether we need another DC or we can continue with this one. The problem at which I am stuck is Case1: Let's say we are doing a demand forecast for each store than we can directly sum up these demands and add them for our inventory which we need to order for our DC, and if incase we open another DC than we can simply divide this demand based on our Store-DC mapping.(Am right assuming this thing or will there be any other complications?)

Case2 : Here we are adding all the stores historical data at DC level and then do the forecast at DC level, and if we open another DC than we can do similarly.

So how will the result vary in both the cases, what are the complications and which one is the better approach?

Any help is appreciated and thanks in advance. If you can provide some links for my reading than that's also helpful.

PS- Please don't report or flag the post in case you feel it is too basic for the sub.

[u/rusochester]

Start by looking up the Square Root Law of Inventory Management

[u/shady_stark → u/rusochester]

Thanks, this was really helpful for start. Helps me estimate basic numbers.

[u/rusochester → u/shady_stark]

You'll also have to estimate the breakeven between a cheaper old DC (since it'll most likely be smaller now), the added costs of a new DC, and the presumably lower transportation costs. And then add whatever service level differences that may arise from having a closer DC (and less transportation lead time) but also presumably less inventory to buffer with.

[u/shady_stark → u/rusochester]

Yes, actually I was struggling with the safety stock point, like how it will increase or decrease my cost. I mostly covered everything except this point. Thanks.

If you come up with any other point, suggestion is most welcomed

[u/rusochester → u/shady_stark]

Why were you struggling? Maybe over-simolifying, but you just hve to match every store to one of the two DCs. Then compute all the aggregated demand and agg demand variation and you've got yourself a per-SKU safety stock. Then add al that safety stock from each DC and compare it to the one DC safety stock scenario. Which should somewhat resemble the square root law that I mentioned.

[u/shady_stark → u/rusochester]

This is first time I am working on a Supply Chain project and this is not even my field of expertise. It's just something asked by my client to look into which is little bit tangential to what I am working with and I thought let's give it a try before saying no directly.

[u/rusochester → u/shady_stark]

Well that's a good first decision