Network Optimization in the Supply Chain: Strategies for Reducing Costs

Excerpted from the White Paper, Leveraging the Supply Chain for Increased Shareholder Value

Reducing costs and increasing productivity in the supply chain network is a critical strategy to gain shareholder value in the supply chain. However, new demands are creating obstacles to achieving these goals.

As companies continue to expand their global reach, supply chain complexity and risks significantly increase. Rising labor and fuel costs, political instability of offshore locations, erratic economic conditions, increasing regulations, the possibility of a merger or acquisition, and new competition (especially from offshore competitors) have put companies in a constant struggle of maintaining or improving customer service.

While the impact of supply chain performance on the bottom line and shareholder value is increasingly well understood, many companies have not changed their supply chain networks to keep up with new demands.

With such turmoil, companies realize that they must reinvent their supply chain networks in order to remain competitive. In fact, given the recent recession, some organizations have already made modifications to their supply chain networks. Others are scrambling to reinvent their supply chain networks in order to better use existing infrastructure, resources and working capital while allowing for growth and change.

However, 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, such as market forecasts or new channels of business.

Supply chain network planning is the process by which companies restructure their supply chain network in order to find the right balance between costs (manufacturing, warehousing / distribution centers, transportation and inventory) and customer service. See the chart below for an illustration of this balance:

Given the size of the challenge, most companies usually tackle network redesigns as “one time” events undertaken every three to seven years, often triggered when network costs get too great or by a major event, such as a merger or a change in supply chain strategy.

While there are a number of ways to approach the network planning processes, it is usually done with commercially available network modeling software. These tools provide the capability to examine dozens or hundreds of options that are difficult to do so otherwise. There are two main types of planning tools:

• Optimization Tools
• Network Planning and Optimization – used to design the “optimal” network of facilities by balancing the tradeoffs between costs and customer service
• Inventory Optimizers – used to identify optimal inventory deployment by facility and policies for a given network of facilities
• Simulation Tools – used to evaluate how real-time variability can impact supply chain performance and risk

The typical network planning exercise is done in two phases:

1. Optimize the structure of the network. What is the number of facilities, their locations and sizes, and what are the transportation modes and lanes to optimize the total network costs?
2. Optimize the inventory once the network structure is defined. What is the right inventory at each location in order to meet the desired service levels?

Typical questions answered by supply chain network planning include:

• How should the network expand or retract to optimally service present and future demand?
• How many plants and warehouses should exist? What are their sizes, locations and capacities?
• How many distribution centers should exist? What are their roles, sizes, locations and capacities?
• Where should inventory 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?
• How much capacity will be needed at each plant or distribution location?
• As a result of a recent or proposed merger, what would an optimal, combined supply chain network look like?
• What lead times should be offered and what is the impact on service level?
• What is the impact of sourcing from various suppliers?
• What are the best ports of entry to use?

Supply chain network realignment can result in substantially improved networks that save millions in total supply chain cost – often anywhere from 5% to 15%. But network realignment also results in customer service benefits of improved order fill rates, reduced order cycle times, and better customer relationships.

In the past, network planning has usually been focused on the strategic process of establishing the optimal network structure through closing and opening facilities. Once the network is established, most companies then stop the process until the next event causes the process to start all over again.

While most companies will not redesign their network structure on an ongoing basis, more are using the process to find better ways to support near-term planning decisions in order to leverage existing networks for more immediate gains.

Companies are beginning to look at their supply chains as a way to maximize profits and gain returns on capital or assets rather than just from a “cost minimization” perspective. This is a much different focus and requires significantly different thinking than solely minimizing supply chain costs.

It means that companies need to assess issues such as:

• Which suppliers should be used?
• What are the most effective go-to-market strategies?
• What SKUs are the most profitable?
• When does it make sense to drop a SKU?
• Which customers are the most profitable?
• When does it make sense to raise prices for a customer or to drop them altogether?
• What is the best flow for new product introduction?
• How should inventory policies be adjusted during product lifecycles?
• What are the best transportation strategies to deal with fuel fluctuations?
• How should inventory be redeployed if fuel costs continue to rise?
• When do product postponement strategies make sense?

Successful network design will always come down to the specific needs of the business, the needs of the customers, and the types of products moving through its veins. Reinventing the company’s supply chain network is beneficial, whether the company wants to minimize costs, improve customer service, maximize profits, minimize capital outlay, or make sure processes are efficient.

With some experiencing a 50% improvement level on return on investment, companies that have not recently assessed their network design should make doing so a top priority goal in order to achieve shareholder value in the supply chain.