Forward Positioning and Consolidation of Strategic Inventories

Abstract

INTRODUCTION The forward placement of inventory in the supply chain in order to save time and cost in "anticipation" of future demand is a strategic decision, which can save delivery time, and also cut transportation costs. *, ** Similarly, the consolidation of inventory creates pooling effects, improves standardization, and can increase control and visibility of key stocks. But how should this type of consolidation be made in an existing logistics network and what sort of metric should be used to measure the efficiency of such a consolidation of strategic inventory? These are questions which managers must understand as they consider forward positioning strategic inventory in the supply chain, especially in the face of uncertain demand with extremely high stockout costs, as exist in wartime, humanitarian aid operations, and other emergency response environments. This decision to forward position inventory in the supply chain may also help support critical maintenance activities necessary to sustain geographically isolated operations or to protect valuable personnel and resources when the unavailability of such inventory poses significant risk and costs. The U.S. military faces the problem of deciding how and where to pre-position such anticipation inventory in the face of uncertain demand and is also highly sensitive to shipping time and stockout costs. In one particular problem, the U.S. Air Force at Randolph Air Force Base Texas is responsible for the management of a variety of Security Force's' War Readiness Material (WRM) equipment packages that are shipped overseas for conflicts. This equipment is divided into several different Unit Tasking Codes (UTCs) and the packages are positioned at twelve Air Force bases in the U.S. As a result of this decentralized storage, inconsistencies in management of the assets often exist and the timeliness of their deployment to overseas locations is often lacking. How and where to best manage this inventory prior to shipment overseas is a question whose answer may provide efficiencies and increased savings for the military. Additionally, the methods used in this study and the similar forward positioning of strategic inventories in the supply chain may hold similar advantages and savings in other logistics operations where delivery time is critical. LITERATURE REVIEW Although the elimination of inventory has the potential to achieve significant cost savings, the need for strategic inventory buffers is still an accepted practice to account for variability in demand, even in "lean" supply chains (Womack and Jones, 1996; Christopher and Towill, 2000). The concept of advanced placement of inventory in the supply chain has been considered in a handful of previous studies (Sampson et al., 1985; Teulings and van der Vlist, 2001). More recently, the advanced or forward placement or prepositioning of such inventories referred to as "floating stock" has been studied by Dekker et al. (2009). They showed that using intermodal rail terminals as pre-positioning points in the supply chain can result in lower inventory costs as well as shorter customer lead times. These results are similarly consistent with expected results of the forward placement or "logistics speculation" of inventory in the supply chain, as discussed by Pagh and Cooper (1998). Related research has also shown that inventory consolidation may create efficiencies and pooling effects (Zinn, Levy and Bowersox, 1989; Evers and Beier, 1998) leading to decreased logistics costs for transshipments (Evers, 1999, and Minner 2003) and as achieved by the square-root rule (Croxton and Zinn, 2005 and Shapiro& Wagner, 2009). These studies all examine the efficiencies and inventory cost savings associated with pooling and consolidation. This study, however, contains more of a supply chain focus that looks at the impact of transportation, inventory and other relevant costs when making decisions about where to preposition inventory in the supply chain (Vanteddu et al, 2007, and Dekker et al, 2009). …