In the prior article, we explored the 3 major types of supply network design when it comes to managing inventory to serve the customer. These types are direct shipping, centralized, and decentralized, and the conflict is whether we want to prioritize efficiency or responsiveness to best meet customer requirements. In this article, we will dive deeper into a framework to determine which model to select to serve your customer.
The 4 Key Decision Levers
There are four lenses we should view through differently to first determine how we should proceed with this decision: customer expectations, product characteristics, inventory carrying costs, and inbound vs outbound logistics.
Customer Expectations
What is most valuable to your customer: speed to deliver the product on short notice or cost of the product? Keep in mind this may change over time, and even the customer must consider this as a tradeoff. Seek this input from your customer and partner with them to help make the best decision for both of you.
Product Characteristics
Three big categories here are value-to-density ratio, shelf life, and demand volatility.
Value-to-Density Ratio
The value‑to‑density ratio tells you how much value an item carries relative to the space or weight it consumes.
This matters because it directly influences the most cost‑effective way to get products to customers.
- High value‑to‑density items (small, expensive, easy to ship) are ideal for centralized inventory or direct shipping. They don’t cost much to move, so you can store them in one place and still serve customers quickly and economically.
- Low value‑to‑density items (bulky, heavy, low‑value) are better suited for decentralized inventory. Shipping them long distances is expensive relative to their value, so keeping them closer to customers reduces freight cost and delivery time.
In short:
- High ratio → centralize or ship direct.
- Low ratio → decentralize and store closer to demand.
Shelf Life and Demand Volatility
Let’s talk about shelf life first. If shelf life is short, consider direct shipment or centralizing so we can move through inventory faster (or make-to-order when direct shipping) from a central location and improve inventory turnover. Otherwise, decentralization could make sense.
In situations where demand is highly volatile, centralization could also make sense. However, direct shipping and decentralized inventory would not make sense here because the high volatility could disrupt production operations too much and introduce the risk of stockout at many decentralized locations all at once. If demand is stable, any supply network design could make sense.
Inventory Carrying Costs
Decentralized inventory can place a lot of burden on working capital. Additionally, safety stock may be needed to act as a buffer against supply and demand variability, causing even more burden on cashflow. Can this be afforded by the business? Is the customer willing to share some of the cost burden?
Inbound vs Outbound Logistics
Direct shipment, centralized inventory, and decentralized inventory each balance inbound efficiency against outbound responsiveness in different ways. Shipping bulk into a single centralized facility minimizes inbound cost and complexity, but it often increases outbound distance and makes “eaches” fulfillment slower or more expensive. A decentralized network flips that tradeoff by pushing inventory closer to customers—raising inbound cost through more frequent replenishment but dramatically improving outbound speed, last‑mile cost, and service flexibility.
Thank you for reading! Next time, we will get into some scenarios and unpack how to use these decision levers.