Design. Analyze. Optimize.

Storage Outsourcing

Current storage trend includes more and more outsourcing the expensive spare parts with slow turnover rates into supplier storages. In these cases the supplier commits to storing the spare parts in its stock and delivering them to the customer in a certain time.

As an example will be used the previously optimized item "Bearing 23456" and the goal is to find out how much its outsourcing is allowed to cost so that it would be profitable.

The estimation of the problem can be started by examining the item optimization made with the StockOptim software. The overall costs coming from the storing of item "Bearing 23456" were 306.95 €/year. Also it is necessary to take notice that with the optimized storage strategy (reorder point = 5, order size = 4)there were no shortage situations in the storage with the current spare part consumption. With these results in mind it can be said that if the supplier guarantees to store the item cheaper than the previously mentioned 306.95 €/year and can provide same service rate for the item, it is on average profitable to store the item at the supplier.

In practice storing the item "Bearing 23456" at the supplier would mean a supplier managed storage close to the usage location, because the costs coming from delayed distribution would be extremely high compared to the storing costs.

If it would be evident that storing the item at the supplier storage would cause more delay compared to the current storing method, that would be caused by the transportation of the item from the supplier storage to the usage location, it would be possible to calculate the costs coming from the delay with StockOptim software. As an example the storing of the previously optimized item "Bearing 23456" is moved to a supplier storage, that causes a delay of one hour with a standard deviation of half an hour to get the spare part to the need location compared to the scenario where it would be stored in the own storage of the location. What would be the extra costs coming from this delay if the shortage cost is 10000€/hour?

The calculation is performed with StockOptim software by changing the item delivery time to 1 hour with a standard deviation of half an hour. This will give us the results concerning the shortage costs coming from increased delivery delay:

Cost (EUR) Supplier storing
Extra delay in average 1h with deviation of 0.5h
Shortages (a) 30024.00
Shortages (s.d.) 17168.00
Shortages (95%) 60138.00
(a = average value, s.d. = standard deviation ja 95% = 95% quantile)

As previously noted the storing of this item should be kept as close to the usage location as possible due to the high shortage costs.

The result of the example could have been easily predicted without StockOptim software, but the case at hand is often much more complex than this. If for example the consumption would be divided between many usage locations which all would have different shortage costs (some of the locations would suffer e.g. slower production or reduced quality) and item need times, then the calculation would be extremely challenging without StockOptim software.