How a supply network is designed is important for serving the customer. Will we centralize inventory in a single location, or decentralize for a given reason? For the scope of this article, I will consider manufacturing environments and how the material is handled from the manufacturing point downstream to the customer.

Disclaimer: this article will cover the main types of supply networks commonly used in the supply of manufactured goods. In a future article, we will explore more on how to choose the appropriate type to best suit your customer requirements.

Direct Shipping

This design involves moving material directly from the point of manufacture to the customer and typically requires production processes which can respond quickly to customer demand or products which are small enough where the manufacturing and warehousing of material is all under one roof.

Advantages of direct shipping:

• Best way to tie all production processes to demand of the customer as closely as possible
• Very efficient use of working capital
• Problems can be identified and addressed very quickly

Disadvantages of direct shipping:

• Single point of failure if the organization has only one location
• Very difficult to sustain if production processes are not dialed-in

Centralized Inventory

This design is the simplest and often best starting point for scaling up new supply chains. Inventory can be centralized at the point of manufacture (think of small- to mid-sized enterprises, or SMEs) or shipped to a centralized warehouse or terminal (perhaps more suitable for larger organizations where a warehouse or terminal is or must be in a physically different location).

Advantages of centralized inventory:

• Easy setup, and often you are in control rather than a 3rd party logistics (3PL) provider
• Higher inventory turns can lead to better cash flow, assuming the demand exists for the material
• Better cost management for freight and administrative costs
• Forecasting demand is simpler (1 site to forecast vs many sites with decentralized inventory)

Disadvantages of centralized inventory:

• Introduces a risk of having a single point of failure
• Can create lead time delays to certain customers where the receiving point is furthest away from the shipping point

Decentralized Inventory or Terminal/Warehouse Network

This design can be beneficial to some organizations under the right conditions. Unless your business is very specialized, this approach can be too costly to justify unless the customer requirement is strong enough.

Advantages of decentralized inventory:

• The customer has a requirement for very short lead times
• There is no storage solution at the production site and no centralized warehouse/terminal available which makes sense to use

Disadvantages of decentralized inventory:

• Can be costly to maintain because of the different relationships with 3PLs or infrastructure requirements
• Distribution requirements planning is needed to ensure the right product gets to the right location in the right quantity, adding complexity

Basic Decision Framework 

Use the table below as a quick guide to determine which supply network design works for you. 

Other Thoughts & Conclusion

In many cases, a simple centralized inventory strategy is going to work well for most businesses. It has the potential to introduce somewhat longer lead times. When expectations are set ahead of time, customers may not mind (and may appreciate) this supply chain design as you can pass cost savings onward to customers by avoiding complexity.

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