Podcast 87: World-Class Transformational Supply Chain Network Planning (Part 1)

Hello, this is Jim Tompkins, CEO and President of Tompkins International. I want to share with you two topics that are really all over the press today and one that many executives are spending time on. Those two topics are inventory and network planning.

Obviously these two topics overlap. And when you’re working on network planning, you should be working on inventory, and when you’re working on inventory, you should be working on network planning.

But, it’s not always done like that. I see three levels of supply chain network planning out there.

The first is what I call supply chain network planning. That’s where we do the traditional thing of looking at the operational costs inside the warehouse, the transportation cost, and the inventory cost. We also look at meeting a level of customer satisfaction, as well as come up with an optimal supply chain network that will allow us to meet the customer needs, while minimizing the cost. This is typically done through some modeling, and lots of folks do that and have done that for many years. Unfortunately, I see that practice being somewhat obsolete.

So let me travel to the second level of what I call supply chain network planning, which I would call transformational supply chain network planning. It is a redesign, as opposed to a refinement, of the supply chain network, based upon a real understanding of the business objectives of the company.

For example, if you’re an online retailer, your supply chain design is not about the optimization of the transportation costs, operating costs and the inventory. It’s all about achieving great customer satisfaction.

I see a lot of online retail supply chain networks where they start with one distribution center somewhere in the center of the country. And that’s terrible, because it says you can only get to only 10% of your customers with same-day or next-day service.

As we look forward and really understand the business objectives, we find we must provide next-day or same-day service in all major markets. The answer isn’t one in LA, one in Memphis and one in New Jersey. The answer is also not one in Reno, Dallas, Chicago, and Atlanta. Instead, the traditional network plans we have came up with using network modeling do not meet the objectives of an online retailer.

So we need to look more in-depth at that and understand what is the hub and spoke for the hybrid inventory stocking policies, as well as what should be a combination of fulfillment center, forward picking locations and cross docks. How does this network support online retailers in doing a great job of customer satisfaction and meeting business objectives? However, that approach is somewhat limited, so I think there is a third level of supply chain network planning that we need to think about.

I call this level world-class transformational supply chain network planning. This is a strategic redesign of the supply chain network, leveraging the expertise across multiple disciplines to address the full range of business requirements. This goes beyond just looking at the business objectives and the operating costs and the inventory and transportation costs. This really looks at the total financial picture of the supply chain network and the impact it has on value creation of the firm.

So when I’m talking about multitude-discipline expertise, I’m talking about business, supply chain strategy, the supply chain itself (that’s the things we’ve always included -transportation, inventory, operating costs, distribution center design and so forth). I’m also looking at real estate, energy and sustainability, and taxes and incentives.

From a business strategy point of view, I want to do some competitive intelligence. What is the competition doing? I want to do some market analysis. What’s going on in the market place? This may not include people that I compete with but maybe people who are doing something innovative in a different sector. I need to know about the growth sector of the company. Taking last year’s data and increasing it by 10% is not going to get it. We really need to understand the business strategy going forward.

We also need to look at the supply chain strategy. Where is the sourcing being done? Is that going to continue to be there, or are we shifting locations around the world? What’s the impact of tax-effective supply chain management of customs and duty?

What about a demand-driven supply chain, where we pull the product through the supply chain as oppose to the old push? And if that occurs, what impact does that have on inventory levels with respect to the size and loads we are moving, with the amount of cross-docking that takes place, and so forth?

We also need to understand the organizational strategy. I mentioned an online retailer earlier. Is an online retailer going to be organized separately from the in-store retailer that is its sister? Or are we going to work with an omnichannel and the retailer and its sister? So the organizational structure around the online and inline retailer chains must work together.

We also must understand the impact of outsourcing. Are we going to use 3PLs, or 4PLs or logistics service providers? What does strategy have to do with the overall network plan?

For real estate, we have to have a global reach and an in-depth understanding of the market knowledge. We really have to have transactional knowledge and expertise. Don’t just tell me I should go St. Louis for my new distribution center. Tell me the existing, specific facility I should be renting or the land I should be buying to build on. Let’s get specific and stop using generalities.

On the whole topic of sustainability and energy, we need to understand something about the strategic plan for sustainability. We have to have supply chain reporting. What are the impacts of our network decisions on carbon fuel emissions? How does this deal with the public disclosure of our sustainability and energy outreaches?

We really need to understand taxes and incentives. We need to have a regional and corporate tax advisor and government affairs specialist. There are tremendous amounts of money available if we are willing to locate in different locations. What will the state of New Jersey give us versus the state of Pennsylvania, versus the state of New York? How do we properly work with these people to maximize the incentive in our supply chain network as we move forward?

So as we deal with this multidiscipline expertise, what we need to do is take a holistic approach to network optimization. This holistic approach has four elements: financial factors, organizational factors, operational factors and business expansion factors.

With financial factors, we have to look at balance sheet. What are the assets and the capital efficiencies — both for fixed and working capital? On the income statement, we have to understand the impact on revenue from expenses, the net of the incentives and what happens in respect to cash flow. The supply chain network will have a tremendous impact on the financial factors of our business.

Operationally, we need to understand something about sustainability goals, energy, emissions, what’s going on with reporting and local regional incentives, and what type of knowledge transfers are occurring. For the operational factor – looking at supply chain elements of inventory and distribution centers, freight, custom and trades, labor and technology administration – we have to also look at things like energy, real estate, taxes. And then also see to customer service –  not just having the product available and not just meeting the existing customer requirements – but in fact, really taking this to a higher level and making it a corporate strategy for winning revenue going forward

We need to understand – back to the example earlier – if we are an online retailer and what you have is all distribution in the center of the country. You’re not going to meet the customer requirements. You simply can’t get there quick enough.

I believe by holiday 2013 that we are going to need to provide same-day service in every major metropolitan area. This is going to require a forward picking location. How do we integrate that in our network with the endless aisle? So there is a lot of activity and planning we need to do from an operational point of view.

And then lastly we need to understand the business expansion factors. What’s the scalability of the network we plan, what is the market coverage, and the potential going forward? How about value-added services? As our customers are becoming more demanding, we have to find ways to delight them and to give them something extra special. Value-added services are a great idea, but we need to have it planned into our network going forward.

So I see a way to put all the pieces of the puzzle together. At Tompkins International, we certainly handle the business, the supply chain strategy and the operations of the supply chain. We really are not real estate, sustainability, energy or tax and incentive experts. That’s where we have turned to partners.

From a real estate point of view, we partner with Cassidy Turley. From a sustainability and energy perspective, we partner with American Energy. And for taxes and incentives, we partner with MR Press consultants. It starts with the leadership of Cassidy Turley, American Energy, and MR Press that we’re able to deliver a holistic approach to network optimization through world-class transformational supply chain network planning.

This ends the first part of world-class transformational supply chain network planning. In the next part, which we’ll have in a couple of weeks, we’ll talk about a point of view on network planning.

Until then, I hope you’re doing well and I look forward to speaking with you real soon.