Author: Jennifer Hall

July 9th | 2 min read

Following our recent discussions on why and when you need network studies and the importance of service levels, this post zooms in on a practical framework for allocating costs in distribution networks. In this article, Jennifer Hall walks us through the “50/50, 50/50 Rule” in network dynamics—a concept that LIDD refined to simplify how companies can optimize their supply chain costs effectively.

Mastering Distribution Network Optimization with the 50/50, 50/50 Rule

Many companies find network studies daunting due to the complexity they perceive. The intricate mathematics involved, and the criticality of the end result can often lead to overcomplication and unnecessary stress. However, these studies have basic elements that, when understood from the start, can simplify the process and make it more accessible. One such fundamental principle is the 50/50, 50/50 rule, which we coined here at LIDD to provide a straightforward framework for allocating costs in distribution networks.

At the highest level, we can split a network’s cost between transportation and warehousing costs. This split typically hovers near a 50/50 split. If you notice you are leaning more one way or the other, this can be a sign that you are spending too much on one and it’s worth taking a look at the overall network.

Times when you will steer away from this 50/50:

• High-value or specialized inventory may lean towards higher transportation costs.
• Proximity to customers when competing on lead time may increase warehousing costs.

Furthermore, if you dive deeper into the 50/50 rule, we find that each half – transportation and warehousing – can also be further divided into a 50/50 split between direct labor vs. other costs. In transportation, drivers account for approximately 50% of the network cost, while in warehousing, warehouse workers make up the other half of the overall warehouse costs. Meaning, a productive workforce, whether it be skilled drivers or efficient warehouse workers, is key to maintaining a well-functioning and cost-effective supply chain network.

LIDD Distribution Network Strategy

As technology advances and automation becomes more prevalent, we expect the distribution of costs to shift away from direct labor. Instead, indirect labor associated with maintenance, facilities personnel, and technology will account for a greater proportion of the warehousing costs.

For more information on the topic and distribution network strategy, reach out to Jennifer Hall directly [email protected] or click the link below.

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