Accounting Best Practices, Fifth Edition

16–42. Use Overnight Delivery from a Single Location for Selected Items

It makes a great deal of sense to store most types of inventory in distribution warehouses strategically located in a company’s primary markets or near major customers. By doing so, one can more easily ship products to customers on short notice. However, this approach does not work well for the minority of products having uncertain demand levels. It is impossible for material planners to estimate how much of these items to stock in each distribution warehouse, so they face the alternatives of frequent stockouts or the expense of an excessive inventory investment (especially for those items having a high unit cost).

An inexpensive best practice that resolves this issue is to retain high-value items with uncertain demand levels in a central warehouse, and use overnight delivery services to ship them to customers when needed. By doing so, material planners can store a large quantity of the items in one location, rather than in several. The cost of overnight delivery services is usually minor in comparison to the saved inventory investment. However, this best practice works less well for bulkier items, since express delivery expenses rise dramatically with the size of the shipment. Consequently, one should conduct a cost-benefit analysis to determine the maximum item size beyond which it is impractical to ship items from a central location.

It may also be necessary to alter the customer order system, so that orders ...