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How can supply chain design optimize inventory allocation in an E-commerce network and reduce last mile logistics cost?

Published December 2023

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Brick and Mortar vs. E-commerce

E-commerce is one of the fastest-growing and most dynamic industries in the world today, with no signs of slowing down. According to Forbes, E-commerce accounted for 21% of total sales in the US in 2023[1]. This number is expected to grow to 24% by 2026. This implies that E-commerce will continue to grow for the next several decades. In today’s world, supply chains are increasingly becoming omni-channel, and a consumer can be served from any node in the supply chain, as shown in the graphic below:

Logistics cost for E-commerce

The logistics cost of a distribution network depends on where the products are manufactured, stocked, and distributed from. However, for E-commerce networks (B2C), last-mile costs can contribute up to 80% of the total logistics cost, depending on product types, service methods used, and where inventory is fulfilled from. The graphic below shows how logistics costs vary as a percentage of revenue for different channels:

Impact of inventory allocation in an E-commerce network

Having inventory closer to the customer not only reduces last-mile costs (mostly parcel) but also enables higher customer service through faster and more reliable delivery times. An illustration below highlights how inventory regionalization, in other words, moving inventory closer to the customer, can reduce last-mile logistics costs.

How can supply chain design be used to assess optimal inventory allocation decisions?

The supply chain design process can not only inform strategic decisions about optimal distribution center locations but can also be used to assess optimal SKU-DC assignments that drive the supply planning process. SKU-level supply chain models (Digital twins) can be set up using OPTIFLOW, and cost optimization algorithms can run to generate ‘constrained’ supply settings that account for fulfillment center storage and throughput capacities while reducing the total logistics cost, of which the last mile is a major component for parcel networks. At a high level, supply chain models (Digital twins) can be set up on Optiflow with the following inputs and outputs.

Adopting continuous supply chain design to support S&OP and S&OE processes can reap significant cost benefits by optimizing logistics costs and increasing supply chain efficiency.

References:

1. https://www.forbes.com/advisor/business/ecommerce-statistics/

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