Annual Cost Analysis: Impact of Delivery Intervals on Warehouse Operations

Assumption

The interval between deliveries – affects the cost of running a warehouse over a year.

Base Scenario Analysis

Under the initial operational strategy, our warehouse logistics were as follows:

• Deliveries every 30 days
• We have a system where our warehouse gets a shipment of 150 units every 30 days.
• Each delivery costs us $20.
• Our interest rate, which is like a fee we pay on the money tied up in our stored goods, is 10% a year.
• We sell goods at $20 each.
• On average, our customers buy 3 units every time they shop, which happens every 50 days.
• If we run out of stock and can’t sell to customers, we pay a penalty fee, which is 20% of the value of the goods we couldn’t sell.

Following this model for one year (365 tick) resulted in total operational costs of $352.57.

What if we get deliveries less often? This change means we have fewer delivery fees because the truck comes less often.

Revised Strategy Analysis

The revised logistics strategy proposed doubling the interval between deliveries:

• Delivery Frequency: Every 60 days

After one year, this strategic adjustment led to a notable decrease in operational costs, which stabilized at $227.20.

Cost-Benefit Analysis

It turns out that by getting our deliveries every 60 days, instead of every 30 days, we saved quite a bit of money! Our costs went down significantly, by 125.37$. Fewer deliveries can mean saving on those delivery fees, even though it also means we have to keep more goods in the warehouse at once. Since we don’t pay as many delivery fees, this seems to be working out cheaper overall. But it’s a delicate balance—keep too little stock, and those savings could be quickly erased by unhappy customers taking their money elsewhere.

Customer Impact Consideration

While cost reduction is a triumph, customer satisfaction hinges on the consistent availability of products. The analysis includes a 20% penalty fee for stockouts, reflecting the potential impact on sales and customer loyalty. Ensuring product availability without incurring excessive costs is the crux of effective inventory management.

Conclusion

Doubling the delivery interval from 30 days to 60 days effectively halved the annual costs in a year. It’s a clear and significant saving, making it a smart move for the business. In the analysis, a 20% deficit penalty reflects the cost of not meeting customer demand. Even with this penalty, halving the annual costs suggests that the warehouse is still able to satisfy customer needs while reducing expenses.

When we double the interval between deliveries, we’re taking a risk: if the warehouse runs out of products, customers face stockouts. This not only means immediate lost sales but can also affect customer trust and loyalty. They might start looking elsewhere if they can’t find what they need when they visit.

Ultimately, any inventory decision should consider the customer’s perspective. The goal is to find that sweet spot where you can minimize costs without compromising the availability of products for your customers.