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Supply Chain Network Design: How it Can Lower Your Logistics Costs

odwlogistics / 2:00 PM on September 26, 2016

Network_Analysis.pngAnalysts claim that 80% of supply chain cost is predetermined in the design of the product and supply chain network. This overwhelming statistic illustrates the strong desire of executives across the world to seek consulting analysis on their supply chain network.

Supply chain network design is one of the most important competencies companies can leverage to continually improve their operations. At a textbook level, supply chain network design is:

  • The practice of effectively locating and rationalizing the facilities within the supply chain
  • Determining the capacity of these facilities
  • Sourcing demand through the network
  • Selecting the best modes of transportation to provide the required level of customer service at the lowest cost

     

A good supply chain network design study should yield a few key outputs for your company:

  • Baseline Measurement: A robust measurement of how your current network is operating and being measured in the current state – based on YOUR priorities
  • Snapshot of Nirvana: A future state view of the “Optimal Network” that meets your organizational goals and objectives
  • Gap Analysis: Detailed analysis on the gaps you face in meeting your “Optimal Network” and detailed understanding of measurable impact of those gaps
  • Continuous Improvement Infrastructure: A measured implementation plan which gives a realistic approach to continued network improvements – each aiming to achieve YOUR measurable priorities.

While these points are really just the "tip of the iceberg" for what supply chain network design can encompass, it ultimately boils down to understanding if your company is best positioned to serve your customer.

As consumers, we want things better, faster, and cheaper. Network design helps us to do just that—deliver products and services to customers at the highest quality, with the lowest cost, and in the shortest lead time. 

The typical network design investment will return:

  • Lower total cost of supply chain
  • Improved customer satisfaction
  • Improved profitability
  • Better visibility

 

A SUPPLY CHAIN NETWORK DESIGN EXAMPLE

supply_chain_network_design.jpgConsider a produce distributor that is looking to buy grapes from a company in Northern California and another in Southern California. These companies give two different price points for grapes based on how much is ordered.

The distributor may look at this situation and their U.S. demand and wonder how to handle the two potential grape producers. On one hand, aligning with a single producer and purchasing larger quantities result in overall lower prices. On the other hand, having two grape suppliers could provide more stability in the event that one has crop issues or a supplier goes out of business.

While the scope of this example may seem very basic at first glance, there are many secondary factors that are in play when weighing these options. A network design analysis could factor in not only the costs of transportation, distribution and inventory, but also supply analytics around demand forecasting.

Many companies know they need to make changes to their supply chain, but simply do not have the expertise or resources needed to do it properly. Additionally, they do not know where to start or how to analyze the impact of such changes. Many companies turn to a 3PL partner to help them complete this analysis, and better understand their supply chain. Before a company selects a 3PL it is important to evaluate potential partners and consider a few key criteria:

  1. Evaluate the “Fit” of the 3PL Partner

While “fit” can be many things, it is critical you select a 3PL partner who has the capabilities you are looking for, understands your goals, and will provide a solution most effective for your organization. If you have a simple supply chain, you don’t need a complex answer – and vice versa. Finding a 3PL with a similar culture and business philosophy as your organization will help ensure you are working in alignment with a true partner.

  1. Tools and Capabilities of the 3PL partner

You want to ensure the 3PL has the tools and abilities to complete a study for you at the level of detail you need. For example, if you have a large complex network, with hundreds of suppliers, multiple distribution points, and want your study to include SKU rationalization from supply through customer demand, you need to make sure your 3PL has the tools and capabilities to provide that study – Microsoft Solver will not work for this effectively.

  1. References

You ask for these from potential employees, right? You should ask for references from a potential 3PL partner. Getting feedback from existing customers will help you understand how the potential 3PL works with current customers.

  1. Cost

Supply chain studies can be very costly, and time intensive. Understand the scope of the study you want, and make sure your budget expectations are being met by your provider. Additionally, ensure the output you are expecting will give you the analysis to achieve an ROI.

  1. Process behind the study

Prior to selecting a partner, understand their process for completing your study. Below are a few questions you may want to answer to yourself:

  1. Is the approach giving us a holistic approach to our analysis? Are all facets of our supply chain being considered?
  2. Are we being asked to provide enough information to get the results we are looking for?
  3. Do we have a list of the assumptions made by the 3PL – are we comfortable with them?
  4. Does the study have our company’s best interest in mind or does it feel like it benefiting the 3PL? Watch out!

 

WHAT NETWORK DESIGN ANALYSIS WON'T DO FOR YOU

 

Network design analysis can be a very valuable tool, but it’s just as important to understand what it will not deliver for your supply chain.

  • Fix your inventory management: What a network design cannot do is fix the existing internal problems such as lack of inventory management that leads to a snowball of inefficiencies. 
  • Implement: The design engineering will help you develop a plan. You will need the right strategy, team and partner to help you implement that plan.
  • Optimize: A network design helps provide the infrastructure to allow for daily and weekly optimization, but it does not provide the systems, processes, and people to manage the plan.
  • Execute: While you may be building an improved model for execution, you still need the right people, processes and continuous improvement to properly execute and adjust.

 

THE BOTTOM LINE

Use a network design study as a guideline for your strategy, but do your due diligence to understand how this may change and shape over time. With a network design analysis, there are a variety of systems, methodologies, and mathematics that companies use. Understand the variables and focus on the two keys for a successful supply chain network design:

  1. Having key performance indicators you are measuring to deliver a service to your customers
  2. Continuing to improve those metrics with a reasonable return on your investment

Doing the study is just the start, to get your ROI, you must then execute the plan. Have a clear understanding of which action items each party needs to own and hold everyone accountable for executing those actions.

Lower costs will only get you so far, you need to also focus on better utilization of those costs. Network design can be critical if your company wants to maximize efficiency and ultimately deliver better results for your customers. Many companies turn to 3PLs and other experts to help them in the analysis process and for good reason—they live and breathe this each and every day.

It is crucial that you find the right 3PL before making any decisions. Good results start with a good partner who has your end goal in mind at all times.

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