We want to know what happens to the service level as more distribution centers are added to the system. To make valid comparisons, we must freeze the sales volume. We can then compare the costs as we add distribution centers to the system.

** Transportation costs**Generally, as more distribution centers are added to a system, we expect the following:

- The cost of TL shipments increases,

- The cost of LTL shipments decreases,

- The total cost of transportation decrease.

The major savings are made with the addition of the first distribution centers. Eventually, as more distribution centers are added, the marginal savings decrease.

** Warehousing costs**The space needed depends on the amount of inventory carried. As we have seen, as more distribution centers are added to the system, more inventory has to be carried, which requires more space. In addition, there will be some duplication of non-storage space such as washrooms and offices. So as the number of distribution increases, there will be a gradual increase in distribution center space costs.

Operating costs depend largely on the number of distribution center increases. Operating costs depend largely on the number of units handled. Since there is no increase in sales, the total number of units handled remains the same, as does the cost of handling. However, the non-direct supervision and clerical costs increase.

** Inventory-carrying cost**The average inventory carried depends on the order quantity and the safety stock. The total SS will be affected by the number of warehouses in the system. For the same SKU, the standard deviation varies approximately as the square root of the ratio of the different annual demands. Suppose that the average demand is 1000 units and, for a service level of 90%, the safety stock is 100 units. If the 1000 units is divided between 2 distribution centers each having a demand of 500 units, the safety stock in each is:

Thus, with a constant sales volume, as the number of distribution centers increases, the demand on each decreases. This causes an increase in the total safety stock in all distribution centers.

** Material handling costs**There will be a little change in materials handling costs as long as the firm can ship units loads to the distribution center. However, if the number of distribution centers increases to the point that some non-unitized loads are shipped, materials handling costs increase.

** Packaging costs**Per-unit packaging costs will remain the same, but since there will be more inventory, total packaging costs will rise with inventory.

** Total system cost**Figure shows graphically how the cost of transportation, warehousing, materials handling inventory and packaging behave as distribution centers are added to the system. Up to a point, total cost decrease and then start to increase. It is the objective of logistics to determine this least-cost point.

** System service capability**The service capability of the system must also be evaluated. One way of assessing this is by estimating the percentage of the market served within a given period.

As expected, the service level increases as the number of distribution centers increases. The first distribution center is built to serve the best market, the next to serve the second best market and so on. Let us assume that a study has been made of a system of 1 to 10 distribution centers and the costs are as shown in figure:

A three-distribution center system would provide the least total cost. Figures show that by moving from 3 to 10 distribution centers, the one-day service level increases by 8%. Management must decide which system to select. The decision must be based on adequate analysis of the choices available and a comparison of the increase in costs and service level.

__ Forecasting by Aggregation__Forecast can be conducted by estimating the demand at each final distribution center or store based on

historical demand, when possible using techniques such as exponential smoothing, correlation, regression or market surveys. Once the forecast at each final distribution point is determined the sum of all the final distribution points served by an area distribution center constitutes the forecast for the area stocking point.

**Forecasting by Allocation**

In this the forecast at the final distribution centers is done by forecasting the total nationwide or worldwide

sales of the product in terms of the number of units. Forecasting total sales tends to yield a more accurate

prediction because larger volumes spread over many customers. A 2nd forecast is then necessary which

involves the historical % of the total sales consumed by each regional center. Regional sales are then

distributed again by historical % to area centers & so fourth.