Cost-based scheduling

When you enable cost-based scheduling, Sterling Order Management System Software uses optimization logic that you configure in the Landed Cost window to determine the least expensive node for fulfilling items.

Sterling Order Management System Software uses the following formula to determine the cost of fulfilling an item at a node: 

Cost to fulfill an item from a node = InventoryCost@NodeHavingInventory + 
NodeConsumptionCost@NodeHavingInventory + NodePriorityCost + 
 + FinalLegTransportationCost + 
OutboundHandlingCost + ProcurementCost +
HoursOfSupplyCost + ShipmentDelayCost

where, 

ProcurementCost = (for each hop) OutboundHandlingCost + 
TransferCost + InboundHandlingCost + NodePriorityCost

The variables in the formula represent different costs at the node, such as inventory cost and node priority cost.

Inventory Cost

Inventory cost is the average cost to fulfill an item at a node. Inventory cost includes the mark-down costs for the item and also the cost to store and replenish the item. For example, if the inventory cost is $39.00 at store 1 and $34.00 at store 2, Sterling Order Management System Software determines store 2 to be less expensive and thus fulfills items from store 2 until store 2's inventory is depleted.

The loadInventoryNodeCost API lets you load and update inventory costs for a node.

Handling Costs

Outbound Handling Cost

Outbound handling cost is the cost that is associated with shipping an item from a node. Outbound handling cost is defined by node type and includes the cost per shipment, per line, per quantity, and weight. Sterling Order Management System Software uses the following formula to calculate outbound handling cost:

Total handling cost = PerShipment + NumberOfLines*PerShipmentLine + Quantity*PerQuantity + Weight*PerWeight

Outbound Handling Cost: An Example

The example provides two scenarios where the outbound handling costs of a distribution center and a store are compared. The following formulas are used for scenario 1 and scenario 2:

Distribution center costs = $5.25 (PerShipment) + 0 (PerLine) + 0 (PerQuantity) + $.10 (PerPound)

Store costs = $10 (PerShipment) + $1 (PerLine) + 0 (PerQuantity) + 0 (PerPound)

Scenario 1

In the first scenario, the cost is calculated for shipping a quantity of two 10 lbs items from the distribution center and from the store:

The cost to ship the items from the distribution center is $7.25, as shown in the following equation:

$7.25 = $5.25 + $2

The cost to ship items from the store is $11, as shown in the following equation:

$11 = $10 + $1

In this scenario, Sterling Order Management System Software determines that the cost to ship from the distribution center is less than the cost to ship from the store.

Scenario 2

In the second scenario, the cost is calculated for shipping a quantity of ten 15 lbs items from the distribution center and from the store:

The cost to ship the items from the distribution center is $20.25, as shown in the following equation:

$20.25 = $5.25 + $15

The cost to ship items from the store is $20, as shown in the following equation:

$20 = $10 + $10

In this scenario, Sterling Order Management System Software determines that the cost to ship from the store is less than the cost to ship from the distribution center.

Inbound Handling Cost

Inbound handling cost is the cost that is associated with shipping an item to a node. Inbound handling cost is defined by node type and includes the cost per shipment, per line, per quantity, and weight. Sterling Order Management System Software uses the following formula to calculate inbound handling cost:

Total handling cost = PerShipment + NumberOfLines*PerShipmentLine + Quantity*PerQuantity + Weight*PerWeight

Inbound and Outbound Handling Cost: An Example

In the example, the inbound and outbound handling costs for a distribution center, DC1, are compared with the inbound and outbound handling costs for a store. DC1 and the store procure inventory from another distribution center, DC2.

The outbound and inbound handling costs use the following formulas:

Distribution center costs = $5.25 (PerShipment) + 0 (PerLine) + 0 (PerQuantity) + $.10 (PerPound)

Store costs = $10 (PerShipment) + $1 (PerLine) + 0 (PerQuantity) + 0 (PerPound)

In the example, inbound and outbound handling costs are calculated for shipping one 10 lbs item from DC1 and from the store. Inventory is procured from DC2.

The cost to ship items from DC1 is $18.75, as shown in the following equations:

Outbound DC2 is $6.25 = $5.25 + $1

Inbound DC1 is $6.25 = $5.25 + $1

Outbound DC1 is $6.25 = $5.25 +$1

Total Handling is $18.75 = $6.25 + $6.25 + $6.25

The cost to ship items from the store $28.25, as shown in the following equations:

Outbound DC2 is $6.25 = $5.25 + $1

Inbound Store is $11 = $10 + $1

Outbound Store is $11 = $10 +$1

Total Handling is $28.25 = $6.25 + $11 + $11

In the example, Sterling Order Management System Software determines that the cost to ship from the DC1 is less than the cost to ship from the store.

Node Operating Cost

Node Operating Cost is the cost that is associated with shipping an item to and from a specific node and, when applicable, overrides Node Handling Cost. Additionally, the Node Handling Cost factor is a numeric value that can be configured in the Applications Manager. By default, this numeric value is 1. The Node Cost is calculated by the outbound and inbound handling cost while taking the desired ship date into consideration. Sterling Order Management System Software uses the following formula to calculate Node Operating Cost:

Node Operating Cost = Node Handling Cost Factor * Node Cost

Node Operating Cost: An Example

The example provides a scenario where Sterling Order Management System Software calculates the handling costs of two nodes, and taking the ship date into account, determines the least-expensive node to ship from.

For this scenario, the Node Handling Cost Factor is set to 2.

Figure 1. Order line scenario: node cost determined by ship date
In this node picture, the nodes are parsed by cost, effective start dates, and effective end dates:
Node Node Cost Effective Start Date Effective End Date
N1 4 08/13/2015 00:00:00 08/13/2015 16:30:00
N2 5 08/13/2015 00:00:00 08/13/2015 24:00:00
N1 6 08/13/2015 16:30:00 08/13/2015 24:00:00
An order is received for 2 items with a desired Ship Date of 08/13/2015 16:30:00:
Order Line Number Quantity Ship Date
1 2 08/13/2015 16:30:00

Assuming the choices for sourcing are from node 1 and node 2, Sterling Order Management System Software makes the following calculations to determine which node is more cost effective.

Handling cost for Node 1 = Node Handling Cost Factor * Node1 Cost = 2 * 6 = $12

Handling cost for Node 2 = Node Handling Cost Factor * Node2 Cost = 2 * 5 =$10

These calculations show that the operating cost at node 2 is less than the operating cost at node 1. Thus, node 2 is chosen as the node the order ships from.

Transfer Cost

When a node procures inventory from another node, transfer costs represent the cost to transfer the inventory. Internal transfer costs are the costs to transfer inventory within the fulfillment network, such as transferring inventory between nodes in the enterprise; external transfer costs are the costs to transfer inventory outside of the fulfillment network, such as transferring inventory from an outside vendor.

Sterling Order Management System Software uses the following formula to calculate transfer cost:

Transfer cost = Distance*PerDistance + Weight*PerWeight

In most scenarios, external transfer costs are more expensive than internal transfer costs. For this reason, a higher value is used for the PerDistance variable and the PerWeight variable in the external transfer cost formula than in the internal transfer cost formula.

If you are using a transfer schedule, you can specify the transfer cost as PerUnitCost.

Transfer Cost: An Example

Store 1 can procure inventory internally from Distribution Center 1 (DC1) or Store 2, or externally from Vendor 1. In this example, the transfer costs are compared for Store 1 to procure a 10 lb item from DC1, Store 2, and Vendor 1. The following formulas are used to calculate the internal transfer costs and external transfer costs for each scenario:

Internal transfer cost = $.10 (PerDistance) + $.10 (PerWeight)

External transfer cost = $1 (PerDistance) + $1 (PerWeight)

If DC1 is 50 miles from Store 1, the cost to transfer items from DC1 to Store 1 is $6.00, as shown in the following equation:

Internal transfer cost from DC1 to Store 1 is $6 = $5 + $1

If Store 2 is 3,000 miles from Store 1, the cost to transfer items from Store 2 to Store 1 is $301, as shown in the following equation:

Internal transfer cost from Store 2 to Store 1 is $301 = $300 + $1

If Vendor 1 is 10 miles from Store 1, the cost to transfer items from Vendor 1 to Store 1 is $20, as shown in the following equation:

External transfer cost from Vendor 1 to Store 1 is $20 = $10 + $10

In the example, the least expensive transfer costs for Store 1 is to internally procure inventory from DC1.

Final Leg Transportation Cost

Final leg transportation cost is the cost to ship inventory from the ship node directly to the customer. This cost is not maintained by Sterling Order Management System Software and is provided by a user exit.

The cost returned by the user exit is included in the overall cost of the node. Thus, if Store 1 and Store 2 have the same internal cost and the user exit for Store 1 returns $5.25 and the user exit for Store 2 returns $6.25, Store 1 is the less expensive fulfillment option.

Node Priority Cost

Node priority cost is determined by the priority level that is specified for the node in the distribution group.

Sterling Order Management System Software uses the following formula to calculate node priority cost:

Node Priority Cost = NodePriorityCostFactor*NodePriorityLevel

The Node Priority Cost Factor converts the node priority level to a currency value, such as dollars, and determines the importance of the node priority cost in the overall cost calculation for sourcing at the node.

Additionally, you can calculate node priority cost based on geography by enabling Consider distance between ship-to and ship-from locations for prioritization in the Scheduling Rules screen. When you enable this option, Sterling Order Management System Software gives weight to distance in the calculation and uses the following formula to calculate the node priority cost:

Node Priority Cost = NodePriorityCostFactor*NodePriorityLevel

where,

NodePriorityLevel = (NodePriorityLevelInDistributionGroup*WeightGivenToNode)+ (Distance*WeightageGivenToDistance)

If Calculate Node Attribute Costs on Per Unit Basis option is selected, the node priority cost is calculated on a per-unit basis.

Node Priority Cost: An Example

In the example, two types of node priority costs (node priority cost without geography and node priority cost with geography) are compared for Store 1 and DC1.

The following conditions exist:
  • Node Priority Cost Factor is $10
  • Node Priority Level in the distribution group for Store 1 is 30
  • Node Priority Level in the distribution group for DC1 is 10

When the node priority costs are calculated without using geography, the node priority cost for Store 1 is $300 and the node priority cost for DC1 is $100. In this case, DC1 is less expensive than Store 1.

However, if node priority costs are calculated using geography, the node priority costs change for Store 1 and DC1. In the example, a weight of 10 is given to nodes and weight of 1 is given to distance:

If Store 1 is 50 miles away, the node priority level for Store 1 is 350 (Node Priority Level) = 30(Node Priority Level in Distribution Group)*10(WeightageGivenToNodes) + 50(Distance)*1(WeightageGivenToDistance)

If DC1 is 500 miles away, the node priority level for DC1 is 600 (Node Priority Level) = 10(Node Priority Level in Distribution Group)*10(WeightageGivenToNode) + 500(Distance)*1(WeightageGivenToDistance)

In this case, the cost to source from Store 1 is $3,500 and the cost to source from DC1 is $6,000. Based on distance, Store 1 is the less expensive choice for sourcing.

Node Consumption Cost

Consumption is the percent of inventory that is consumed at a node. Consumption cost is the conversion of this percentage to currency, such as dollars.

As inventory is consumed at a node, the node's consumption cost increases and the node becomes less likely to be selected by cost optimization. Thus, consumption cost enables you to employ a "round robin" approach to sourcing as different nodes are selected for sourcing when the consumption percent changes for the node.

Sterling Order Management System Software uses the following formula to calculate the consumption cost at a node:

Node Consumption Cost = ConsumedCapacityPercentage*NodeConsumptionPercentageCostFactor

The Node Consumption Percentage Cost Factor converts consumed capacity percentage to a currency value, such as dollars, and determines the importance of the node consumption cost in the overall cost calculation for sourcing at the node.

If Calculate Node Attribute Costs on Per Unit Basis option is selected, the node consumption cost is calculated on a per-unit basis.

Consumption Cost: An Example

If the Node Consumption Percentage Cost Factor is $1 for each percent consumed, the node consumption cost for Store 1 is less expensive than Store 2, as shown in the following example:

If 29% inventory is consumed at Store 1, the consumption cost at Store 1 is $29 = 29 (ConsumedCapacityPercentage)* $1 (NodeConsumptionPercentageCostFactor).

If 30% inventory is consumed at Store 2, the consumption cost at Store 2 is $30 = 30 (ConsumedCapacityPercentage)* $1 (NodeConsumptionPercentageCostFactor).

In the example, inventory is consumed at Store 1 initially because Store 1 has a lower consumption cost than Store 2; however, after inventory is sourced from Store 1, Store 1's percent of inventory consumption changes to 30%. The next time an order is placed, a random node is selected for sourcing because Store 1 and Store 2 have the same consumption cost of $30. In this case, if Store 1 is selected again, Store 1's percent of inventory consumed changes to 31% and Store 1's consumption cost changes to $31. When another order is placed, the order is sourced by Store 2, which has a lower consumption cost of $30.

Hours of Supply Cost

The hours of supply cost is based on the hours of supply remaining at the node, which is calculated by using the node's available supply and item velocity. For example, if available supply is high at a node and item velocity is slow, the hours of supply remaining at the node is high. Thus, the cost to source items from the node is low. Similarly, if the available supply is low and item velocity is fast, the hours of supply remaining at the node is low. In this case, the cost to source items from the node is high.

Sterling Order Management System Software uses the following formula to calculate hours of supply cost:

Hours of Supply Cost = Hours of Supply Cost Factor / Hours of Supply Remaining

Where,

Hours of Supply Remaining = Available Supply / Item Velocity

The Hours of Supply Cost Factor converts hours of supply remaining to a currency value, such as dollars.

When you set the Hours of Supply Cost Factor, consider the following:
  • If Calculate Node Attribute Costs on Per Unit Basis option is selected, the hours of supply cost is calculated on a per-unit basis.

  • If available supply is 0 at a node or only future supply is available at the node, such as a purchase order (PO), the cost to source inventory from the node is high. To calculate a high hours of supply cost that is not infinite, the hours of supply remaining is set to 0.01. The hours of supply cost calculation is CF/0.01 or CF*100. For example, if you set the Hours of Supply Cost Factor in the Landed Cost window to $1.00, the hours of supply cost at a node with 0 available supply is $100, as shown in the following equation:

    $1.00*100=$100

    Thus, Sterling Order Management System Software uses the following formula to calculate hours of supply cost for nodes with 0 available supply:

    Hours of Supply Cost = Hours of Supply Cost Factor * 100

  • In cases where a ship node procures inventory from procurement nodes, the total hours of supply cost is the sum of the hours of supply cost for each node that sources inventory.

    Sterling Order Management System Software uses the following formula to calculate the total hours of supply cost:

    Total Hours of Supply Cost = Hours of Supply Cost at Ship Node + (Hours of Supply Cost at Procurement Node P1 + Hours of Supply Cost at Procurement Node P2...)

    Note: If the available supply at the ship node is 0, Sterling Order Management System Software assumes that all items are procured from the procurement nodes and uses the following formula to calculate the total hours of supply cost:

    Total Hours of Supply Cost = Hours of Supply Cost at Procurement Node P1 + Hours of Supply Cost at Procurement Node P2...

    In this case, the total hours of supply cost is based on the hours of supply cost from only the procurement nodes.

  • To convert the hours of supply cost to days of supply cost, divide the cost factor by 24. For example, if the Hours of Supply Cost Factor at a node is $.96, the Days of Supply Cost Factor is $.96/24=$.04.

  • If item velocity at a node is 0 and available supply is not 0, Sterling Order Management System Software assumes that the node was not used for sourcing in the past but is now ready for sourcing. For this reason, the node's hours of supply cost is set to $0.

Hours of Supply Cost: An Example

The example compares the hours of supply cost for node 1 and node 2, where the Hours of Supply Cost Factor is $1.00. The hours of supply cost at Node 1 ($.25) is less expensive than the hours of supply cost at Node 2 ($.50).

Table 1. Hours of Supply Cost for 2 nodes
Node Available Supply Item Velocity
(items/hour)		 Hours of Supply Remaining Hours of Supply Cost =Cost Factor/Hours of Supply Remaining
Node 1 20 5 4 $.25=
$1.00/4
Node 2 10 5 2 $.50=
$1.00/2

Shipment Delay Cost

Shipment delay cost is based on the number of days that are required to deliver a shipment to the customer.

Sterling Order Management System Software uses the following formula to calculate the shipment delay cost:

Shipment Delay Cost = Shipment Delay Cost Factor * Shipment Delay

Where,

Shipment Delay = Delivery Date - Requested Delivery Date

The Shipment Delay Cost Factor converts the shipment delay into a currency value, such as dollars.

When you set the Shipment Delay Cost Factor, consider the following:
  • If Calculate Node Attribute Costs on Per Unit Basis option is selected, the shipment delay cost is calculated on a per-unit basis.
  • Sterling Order Management System Software fulfills an order by using the least expensive shipment first, then the next least expensive shipment, until the order is fulfilled. Thus, multiple shipments from multiple nodes can be used to source an order.
  • If the shipment is delivered today, the shipment delay cost is 0.

Shipment Delay Cost: An Example

In the example, multiple shipments are needed to fulfill an order of 10 items. The Shipment Delay Cost Factor is $1.00, and the requested delivery date is January 20.

Sterling Order Management System Software calculates the shipment delay cost for each shipment and determines the following shipments are the most cost-effective choices for fulfilling the order:
  • Shipment 2 is the least expensive shipment with a shipment delay cost of $0.00. Three units are shipped from node 2 in shipment 2.
  • Shipment 4 is the second least expensive shipment with a shipment delay cost of $1.00. Three units are shipped from node 3 in shipment 4.
  • Shipment 1 is the third least expensive shipment with a shipment delay cost of $2.00. The remaining four units of the order are shipped from node 1 in shipment 1.
Table 2. Shipment Delay Cost for 5 shipments
Node Shipment Delivery Date Shipment Delay
(in days) 		Shipment Delay Cost
=Cost Factor*Shipment Delay
Node 1 Shipment 1 All units on January 22 2 = 22 - 20
(January 22 - January 20)		 $2.00
=$1*2
Node 2 Shipment 2 3 units today 0 = 20 - 20
(January 20 - January 20) 		$0.00
=$1*0
Shipment 3 7 units on January 24 4 = 24 - 20
(January 24 - January 20)		 $4.00
=$1*4
Node 3 Shipment 4 3 units on January 21 1 = 21 - 20
(January 21 - January 20) +		 $1.00
=$1*1
Shipment 5 7 units on January 24 4 = 24 - 20
(January 24 - January 20) 		$4.00
=$1*4

Cost Per Unit

When the Calculate Node Attribute Costs on Per Unit Basis option is selected in the Landed Cost window, all node attribute-related costs are calculated on a per-unit basis. Node attribute-related costs include node priority cost, node consumption cost, hours of supply cost, and shipment delay cost.

Sterling Order Management System Software uses the following formula to calculate node attribute costs by unit:

Per unit cost = Existing cost calculation / Number of items

Note: When Calculate Node Attribute costs on Per Unit Basis is enabled, ensure that all cost factors for node attribute-related costs are based on a per-unit calculation and not a per-quantity calculation. For example, if you want the shipment delay cost to be calculated by quantity, you might use $1.00 as the Shipment Delay Cost Factor; however, if you want the shipment delay cost to be calculated by unit, you might use $.10 as the Shipment Delay Cost Factor.

Per-unit Shipment Delay Cost: An Example

In the example, Sterling Order Management System Software is fulfilling an order for 10 items and determines the best shipments to use for sourcing based on per-unit shipment delay costs. The Shipment Delay Cost Factor is $1.00 and the requested delivery date is January 20.

Based on per-unit shipment delay cost, Sterling Order Management System Software determines the following shipments are the most cost-effective choices for fulfilling the order:
  • Shipment 2 is the least expensive shipment with a per-unit shipment delay cost of $0.00. Three units are shipped from node 2 in shipment 2.
  • Shipment 1 is the second least expensive shipment with a per-unit shipment delay cost of $.20. The remaining seven units of the order are shipped from node 1 in shipment 1.
Note: In the example, if Sterling Order Management System Software uses only the shipment delay cost to determine the cost of each shipment, the best shipment choices are shipment 2, shipment 4, and shipment 1.

Table 3. Per-unit Shipment Delay Cost for 5 shipments
Node Shipment Delivery Date Shipment Delay
(in days) 		Shipment Delay Cost
=Cost Factor*Shipment Delay		 Per-unit Shipment Delay Cost=Shipment Delay Cost/Number of Units
Node 1 Shipment 1 All units on January 22 3 = 22 - 20
(January 22 - January 20)		 $2.00
=$1*2		 $.20 =$2/10
Node 2 Shipment 2 3 units today 0 = 20 - 20
(January 20 - January 20) 		$0.00
=$1*0		 $0.0 = $0.0/3
Shipment 3 7 units on January 24 4 = 24 - 20
(January 24 - January 20)		 $4.00
=$1*4		 $.57 =$4/7
Node 3 Shipment 4 3 units on January 21 1 = 21 - 20
(January 21 - January 20) +		 $1.00
=$1*1		 $.33 =$1/3
Shipment 5 7 units on January 24 4 = 24 - 20
(January 24 - January 20) 		$4.00
=$1*4		 $.57 =$4/7

Understanding cost factors in cost-based scheduling

You can apply cost factors to some landed costs to increase or decrease the importance of the cost in the overall cost calculation of the node.

For example, for an Hours of Supply Cost Factor of $1.00, the hours of supply cost at Node 1 is $.15 and $.10 at Node 2. Thus, the fulfillment cost at Node 1 is less expensive than at Node 2:

  • Node 1: $10 (iventory cost) + $5 (transfer cost) + $.15 (hours of supply cost)= $15.15
  • Node 2: $11 (inventory cost) + $6 (transfer cost) + $.10 (hours of supply cost) = $17.10
However, if the Hours of Supply Cost Factor is set to $100, the hours of supply cost is $15 at Node 1 and $10 at Node 2. In this case, Node 2 has the less expensive fulfillment cost:
  • Node 1: $10 (inventory cost) + $5 (transfer cost) + $15 (hours of supply cost) = $30
  • Node 2: $11 (inventory cost) + $6 (transfer cost) + $10 (hours of supply cost) = $27