Hello this is Jim Tompkins, the President and CEO of Tompkins Associates and Tompkins International. Today we continue our discussion with John Spain on Network Planning.John and I began two weeks ago talking about Network Planning and we just got so into it that we ran out of time. So today, I am happy to welcome back John Spain. John, good to have you with us again.
John last time we finished up talking about the tools of network planning, I would like to continue from there.
Jim
What are some of the types of questions that the network modeling process can answer?
John
The most common questions that companies address are network infrastructure questions – typically outbound logistics distribution:
How many plants and warehouses should exist? What are their sizes, locations and capacities?
How should inventory be deployed? Where should it be stocked, in what quantities and at what costs?
What transportation modes and lanes are best to move products through the network and, ultimately, to customers?
Which customers and products should be served from each facility?
However, the tools and process can address many more questions such as:
What is the impact of sourcing from various suppliers?
What are the optimal customer service policies?
What lead times should be offered and what is the impact on service level?
What products should be produced at which plants?
What is the impact of an off-shore consolidation center/DC (in China or elsewhere)?
W hat are the most effective go-to-market strategies?
How can we minimize the customs impact and costs?
How do we minimize our overall taxes?
Jim
John, you are right. Most companies do not use the full power of the modeling tools and overall network planning process. Partly this may be true because the process is fairly complex. How do you begin and what is the process?
John
Jim, you are correct. The process is not always simple. It requires understanding the whole supply chain and it involves many disciplines such as marketing and sales, manufacturing, procurement, distribution, transportation, inventory planning, customer service, finance, legal. So it is a complex process that requires a structured process.
Obviously the first step is to assembly your team with stakeholders from all of the disciplines that will have an impact or will be impacted by the network planning process.
Once the team has been set up, it is imperative that we address Business Strategy before we address network planning. We see companies pursuing network design and optimization without being able to articulate the business strategy of the firm going forward or how the supply chain needs to enable that strategy. The strategy is the starting place, and it is from this strategy that the network will evolve. If there is no strategy, then a valid network planning process cannot be pursued. Unfortunately many clients do not understand this. We often get requests for network optimization “to minimize the cost of my network”; however, the business strategy may be to maximize profitability instead of minimize costs or it might be to increase market share through improved customer service. Network Planning is totally different for each of these strategies.
So the first step is to fully understand your business strategy. The primary focus at this point should be to develop a list of critical issues and identify how each will change over next 3-5 years.
A good starting point for discussion starts with a review of the current market trends, competitive and financial pressures and operating environment. Then develop a vision of future market needs and the operating environment necessary to meet those needs. The network strategy to be developed must close the “gap” between current and future operating environments.
Once the business strategy is fully understood, then the detailed network planning process can begin.
Step 1 is to develop the overall project and modeling plan. You need to fully define the questions and issues that are to be addressed by the project. Is the objective to minimize total costs, maximize customer service, or minimize assets? It is important to understand the questions you are trying to answer because this drives the modeling and analysis efforts.
Step 2 is to define all of the limitations and constraints that must be taken into consideration. For example, if you know you will not close certain facilities, this needs to be understood up front. There is no reason to look at options that will never be implemented.
Step 3 is to gather appropriate data – usually customer demand, supply, facilities, inventory, costs (fixed variable, material handling, transportation) customer requirements, volumes, operations, transactions, costs, future forecasts, etc.
Step 4 is to build a model of the current network including facilities, transportation, inventory level, and then you will want to validate it against historical performance.
Step 5 is to identify various network scenarios, execute the model against them and evaluate the results in terms of assets (facilities, inventory), operational costs and customer service.
Step 6 is to perform sensitivity analysis on the top 2 or 3 solutions in order to determine the robustness of the solution.
Step 7 is to select the best solution, develop a transition action plan.
Jim
Ok, we understand the process but many companies are not as successful with their network planning projects as they would like to be. What are the challenges and what do the most successful companies do?
John
You are right, Jim. It is a big undertaking and it requires significant commitment on the part of a company because it affects so many parts of a company other than just logistics and distribution. There are several keys to successful network planning.
First is to have the correct level of executive sponsorship. Network planning cuts across almost all aspects of a company. The level of executive sponsorship needs to be high enough to ensure you have the support need to effectively conduct the analysis and more importantly to implement the solutions.
Secondly is involvement of all the key stakeholders across all the parts of the company that affect the supply chain or are affected by it. Network planning often involves business process changes. The right people have to be involved in order to develop processes that are best for the overall supply chain and not just a specific area.
Thirdly is to realize that data collection will be a challenge and put in place the necessary resources to get it done. Difficulty of collecting all of the needed data is one of the key reasons that companies give for not using the tools and doing network planning. A few years ago, finding the data may have been a real nightmare, but now most companies are swimming in information. The tools are increasingly easier to use, and IT systems such as data warehouses, ERP, WMS, TMS, visibility, SC Intelligence, and finance make it possible to collect the needed data. So, this excuse is beginning to fade away.
Fourth companies must have the commitment and resources to follow through with the change required to implement the new strategies. Opening or closing a facility is not a trivial task. Neither is implementing new business process or new policies. The move to more integrated supply chain organizations helps eliminate some of the barriers but strong executive commitment and leadership are still key.
Jim
What do you think is the biggest misconception about network planning solutions today?
John
I think there are two big misconceptions. First is the lack of understanding and appreciation for both the breadth and depth of business problems that network planning and analysis tools can address. Historically network planning solutions have focused on network infrastructure – in other words where to put distribution centers. However, as we mentioned earlier, the tools and techniques can also be used to evaluate many other issues such as sourcing strategies, market entry approaches, and tax effectiveness.
The second misconception is that companies often view network planning as a “one time event” that is done every 3 – 7 years and then put on the shelf until the next time.
Companies that use network planning tools to continuously tweak their supply chain network strategy and support tactical decisions are realizing a significant competitive advantage. When you combine the constant changes in business strategy with all the uncertainties in the supply chain right now, very few networks are good for very long – typically not more than about 12 months. The flexibility, speed of response to opportunities and cost reduction that these companies can achieve will provide a substantial competitive advantage – impacting both revenue and costs.
Jim
No doubt reinventing a supply chain network is a time consuming and daunting challenge. It requires a deep understanding of all aspects of the current supply chain and a comprehensive analysis of detailed operating data along with many external factors. Successful network design will always come down to the specific needs of your business, the needs of your customers, and the types of products moving through its veins. Thank you John for being with us today, I look forward to our next installment where Gene Tyndall will be joining us again to wrap up this podcast series, I look forward to speaking with you all real soon.
