Logistic Network

The Square Root Law

It is nice rule of thumb for estimating the changes in overall inventory as a result of changing the
number of warehouses. These calculations are assuming that nothing else changes.

X2 = (X1) * √ (n2/n1)

n1 = number of existing warehouses n2 = number of future warehouses X1 = existing inventory X2 =

future inventory

Examples:
Example 1:

 Current inventory is 10,000 units

 2 facilities become to 3

Estimated future inventory = (10,000) * √ (3/2) = 10,000 * 1.225 = 12,500 units.

Example 2:

 Current inventory = 20,000 units

 1 facility becomes to 4 facilities

Estimated future inventory = (20,000) * √ (4/1) = 20,000 * 2 = 40,000 units.

#1 Use the fewest number of warehouses

that are close to the largest number of
customers
Since each warehouse adds cost you should be careful about the number of warehouses you have.
Depending on how the network is set up, there are no good or bad numbers, but as the number of
warehouses changes, other factors must adapt as well, such as which warehouse certain customers
are serviced by changes, so does the amount of inventory held in each warehouse, and of course
the transportation part of your network.
#2 Keep your miles-per-delivery (MPD) as
low as possible
A good starting point is to look at each warehouse and calculate the MPD for all customers. Here are
some good rules of thumb:

 The farthest customer should not be more than 1,000 miles from the warehouse (if we assume
that we seek a 2 day ground delivery).
 The average MPD should be between 300 and 400 miles.

#3 Find a balance
It is most important that you pick the network that make sense for you. That means you will not
overspend in any one area or make a critical mistake. Conservative approaches with careful
considerations of the specific requirements will usually lead to the best results.