Archive for the ‘Network Design’ Category

In developing a supply chain network design there are many criteria to consider – including such factors as the impact of the facility choices on
• Cost of running the system,
• current and future customer service,
• ability to respond to changes in the market, and
• risk of costly intangible events in the future
to name a few.

Frequently we use models to estimate revenues / costs for a given facility footprint, looking at costs of production, transportation, raw materials and other relevant components. We also sometimes constrain the models to ensure that other criteria are addressed – a constraint requiring that DCs be placed so that 80% of demand be within a day’s drive of a facility, for instance, might be a proxy for “good customer service”.

Some intangibles, such as political risk associated with establishing / maintaining a facility in a particular location, are difficult to measure and include in a trade off with model cost estimates. Another intangible of great interest for many companies, and that has been difficult to make tangible, is water risk. Will water be available in the required quantities in the future, and if so, will the cost allow the company to remain competitive? For many industry groups water is the most basic of raw materials involved in production, and it is important to trade off water risk against other concerns.

As I wrote in a previous blog published in this forum,

There are several risks that all companies face, to varying degrees, as global water consumption increases, including
• Physical supply risk: will fresh water always be available in the required quantities for your operations?
• Corporate image risk: your corporate image will likely take a hit if you are called out as a “polluter” or “water waster”
• Governmental interference risk: governmental bodies are becoming increasingly interested in water consumption, and can impose regulations that can be difficult to deal with
• Profit risk: all of the above risks can translate to a deterioration of your bottom line.

The challenge has been: how to quantify such risks so that they can be used to compare network design options.

Recently a post entitled “How Much is Water Worth” on LinkedIn highlighted a website developed by Ecolab that offers users an approach to monetization of water risks. This website allows the user to enter information about their current or potential supply chain footprint – such as locations of facilities and current or planned water consumption – and the website combines this information with internal information about projected GDP growth for the country of interest, the political climate and other factors to calculate a projected risk-adjusted cost of water over the time horizon of interest.

This capability, in conjunction with traditional supply chain modeling methods, gives the planner a tool that can be used to develop a more robust set of information that can be used in decision-making.
For more details visit the website waterriskmonetizer.com

Many of our activities at Profit Point are focused on helping clients in identifying and implementing changes that improve the efficiency of existing supply chain networks, ranging from planning to operations and scheduling.  In the short term we are usually trying to find ways to use existing capabilities more effectively, but as you look out over longer time horizons supply chains evolve to develop new links, and these must be considered as you plan.

One instance of this evolution was described by my colleague, John Hughes, who recently wrote about the rise of a “New Silk Road”– a rail network stretching through Western China, Kazakhstan, Russia and Belarus to Europe – used for transporting manufactured goods from Asia to meet demand in Europe.

But Asia has a complementary demand that must be met for their manufacturing systems to function, the demand for energy to power their factories and cities.  The growing worldwide demand for energy, and for faster routes to market, is opening up another new link in the global trade routes – the Northern Sea Route, a maritime route connecting Pacific ports with Europe via the Arctic.

Lawson Brigham, professor of geography and Arctic policy at the University of Alaska Fairbanks, was recently quoted on the arcticgas.gov website as saying “What’s really driving the Northern Sea Route is global commodity prices and natural resource development, particularly in Russia.”

The northern reaches of the earth are currently hotbeds of energy development, and much of the activity is focused on adding Liquefied Natural Gas (LNG) production capacity.  Projects are on-line or in progress stretching from the North Slope in Alaska to the Yamal Peninsula in Siberia to Hammerfest in Norway.  The Northern Sea Route offers quicker shipments of many of these supplies to major Asian ports, shaving ten to twenty days off one-way transit times from Russia and Norway to ports in Korea and China, compared to routes through the Suez Canal.

Climate change has made these routes generally ice-free for several months of each year, and thus more cost effective, but ice-strengthened cargo ships, with icebreaker support, are still required to keep the route open in the colder months, thus driving up the costs.

Supply chain planning activities on a global scale will over time need to expand to consider the potential impact of these types of shipping options.  Keep an eye out for this and other new links in the global chain as they become available – change is inevitable.

 

For a more information on this route see articles like these:

http://www.arcticgas.gov/northern-sea-route-beckons-lng-shippers?utm_source=Arcticgas.gov+Distribution+List&utm_campaign=bed180a217-Northern+Sea+Route+beckons+LNG+shippers&utm_medium=email&utm_term=0_7eb428ef8a-bed180a217-407625618

http://arcticjournal.com/business/102/chinese-make-first-successful-north-sea-route-voyage

Recently I had the opportunity to speak to an operations management class for MBA students in the Goizueta Business School at Emory University.  The class is intended to give the students an introduction to a variety of problems that they might encounter during their careers, and to management science techniques that might be applied to them, using Excel as a solution platform.  The professor had asked me to address the course topic from the point of view of one who had used these methods in the real world, and I was glad to do so, recounting my work in supply chain network design, hydro power generation scheduling, routing of empty shipping containers, natural gas supply contract management and various other problems.

During Q&A one of the students asked how a company should determine the appropriate source of resources to use for solving these types of problems – should it be in-house expertise or an outside consultant?

As I told him, to me, this depends on a number of factors, and I gave an example, based on our experience: In our practice we perform supply chain network design studies, and we also license the network design software that we use to our clients, if they desire. A number of clients have engaged us to first do an analysis for them, and then they have licensed the software so that they can then perform future projects themselves, using our initial project as a base.  Many of these clients have used the software very effectively.

Those that have been most successful at using the software in-house, and at performing management science projects in-house in general, have several common characteristics-

  • They are committed to tactical and strategic planning as tools for meeting their business goals,
  • They have enough work in this area, and related areas, to keep an analyst or group of analysts busy full time, due to such factors as
    • The scale and scope of their operations
    • The speed of innovation in their industry
    • The level of complexity of their supply chain and variety of products made, and
    • Their desire for a “continuous improvement” approach as opposed to a “one-time reorganization” approach
  • They have a commitment to maintaining personnel who
    • have the proper skills and training to address these problems, and
    • are allowed the time to work on these problems, rather than being constantly pulled off for “firefighting” short term or operational problems.

Most companies can make good use of management science solution methods, but, as you think about how to do this, try to make a realistic determination of your internal priorities, so you can decide between insourcing and outsourcing, or a mixture of the two.

When we help our clients improve their supply chains the first step in the process is usually to identify what problem they need to solve, or what questions they are trying to answer. Examples of such questions might be

  • What will be the impact of several possible capital investments in our distribution system?
  • A major customer is considering changes in their manufacturing – how should we respond?
  • How can we improve the assignment of available production / inventory to customer orders?

After pinning down the objectives, the focus will then shift to the design of a planning model, or a software system, that will help them to address the identified needs. We find that a key design tenet for the model, or the scope of the supply chain to be covered, is to include enough detail to be able to answer the questions at hand, but no more.

A typical supply chain will stretch from procurement of raw materials to manufacturing to distribution to customers (and possibly beyond, on either or both ends.) Part of capturing the supply chain behavior will be to define the transformation of materials along the chain. This can be done by defining a bill of materials, or BOM, which defines the quantities of input ingredients that are required at a point in the supply chain to make an output material of interest. For instance, if you are a baker then your BOM is your recipe – e.g. the amounts of flour, buttermilk, leavening and various other ingredients required to make the batch of biscuits.

Deciding on the detail of the materials going into the BOM, and getting the right quantities for the BOM, is a key step in properly modeling the supply chain. If you are working at an operational supply chain level, the BOM will need to be detailed enough to actually make the product, but many times in a planning situation, it is reasonable to omit some of the detail, and only capture the main flows of product through the system. You will need to make these decisions based on your project objective.

For instance, if you are modeling a beverage company’s supply chain, water may be a key ingredient in the production process. If the question you are trying to answer for the beverage company is whether traditional warehouses vs. crossdocks is a better distribution solution for a part of the territory, then you may decide that the sources and cost of water for the production facilities will not have a big impact on the answer, so you can omit the water consumption from the analysis. On the other hand, if the objective of the analysis is to evaluate the impact of alternative future production locations on the company’s overall environmental impact and commitment to sustainable practices, then water for production (and waste water, and other intermediate or byproduct materials) would likely need to be included in the production BOMs.

Making good choices in defining your BOM is one of the important steps in getting a supply chain model to help you answer your questions effectively. Our extensive supply chain experience allows us to bring a large knowledge base to the assignment when we are helping our clients design in enough detail, but no more.

Profit Point, a leading supply chain optimization firm, adds total delivered cost and margin at the customer location-product level of detail to its supply chain network design software.

Supply Chain Network Design Software

Profit Network™ – Supply Chain Design Software

Profit Point, the leading supply chain optimization consultancy, today announced the release of an update to Profit Network™, a supply chain network design software that is used by supply chain managers all over the world to gain visibility in to the trade-offs they will face when designing or optimizing a global supply chain. In addition to several other new enhancements, Profit Network now allows users to analyze and report on the total delivered cost and the resulting gross profit margin for all products delivered to each customer location.

“With the ever-increasing availability of granular data across the supply chain, many of our clients have expressed a strong interest in analyzing and reporting on the total delivered cost of a single product or set of customer products,” said Alan Kosanksy, Profit Point’s President. “Previously, it was quite a challenge to understand how costs accumulate over time from raw material procurement through manufacturing, inventory, transportation and customer delivery.  Now our customers are able to see the true total cost for each unit of product delivered to each customer.  This will be a powerful tool in helping them evaluate their product and customer portfolios.”

In addition to total delivered cost, now Profit Network also enables more control over source-destination matching, as well as inventory levels by establishing minimum and maximum number of days of inventory demand.

“Profit Network software has been helping Fortune 500 companies around the world build more robust and profitable supply chains for more than 10 years,” said Jim Piermarini, Profit Point’s CEO and CTO. “Over that time, the dramatic increase in data availability across the supply chain has provided us tremendous opportunities to solve unique and critical problems in a variety of supply chain networks.”

In addition to Profit Network, Profit Point’s line of supply chain software also includes Distribution and Vehicle Planning, Sales and Operations Planning (S&OP), Production Planning, Scheduling and Order Fulfillment software.

To learn more about how Profit Network can help you analyze and improve your Supply Chain Network Design, call us at (866) 347-1130 or contact us here.

About Profit Point

Profit Point Inc. was founded in 1995 and is now the leading supply chain software and consulting company. The company’s team of supply chain consultants includes industry leaders in the fields infrastructure planning, green operations, supply chain planning, distribution, scheduling, transportation, warehouse improvement and business optimization. Profit Point has combined software and service solutions that have been successfully applied across a breadth of industries and by a diverse set of companies, including Dow Chemical, Coca-Cola, Lifetech, Logitech and Toyota.

Profit Point announced that it has successfully completed a distribution network optimization project with the hydrogen peroxide business team at Arkema Inc. Arkema is a global chemical company and France’s leading chemicals producer. Profit Point is a leading supply chain optimization company, delivering solutions to global manufacturers to optimize their supply chain networks, distribution plans and S&OP processes using a combination of targeted software and consulting services.

In the very competitive hydrogen peroxide market, Arkema’s objective is to continuously improve product availability and customer service across North America, while simultaneously managing costs throughout the supply chain. Profit Point examined Arkema’s distribution options from manufacturing to the end customer to develop supply chain options to provide the right level of customer service at the best total delivered cost.

“The team at Profit Point developed an understanding of our business and they analyzed complicated data and made it easy to understand,” noted Ed Gertz, Arkema’s Director of Supply Chain for hydrogen peroxide. “They made it easier for us to see how different distribution infrastructure options impacted our cost and our service, which gave us the confidence we needed to make significant changes in our terminal network.”

The solution combined Profit Point’s supply chain design software, Profit NetworkTM, and the consulting team’s supply chain optimization expertise. By leveraging existing enterprise data, Arkema was able to develop an actionable infrastructure plan that meets the business’ strategic objectives.

“This is a classic example of the type of benefits large manufacturers can see when they bring together the right stakeholders and the right process, ” added Ted Schaefer, Director of Logistics and Supply Chain Services at Profit Point. “It reminds me a lot of what my Italian grandmother used to say about cooking, ‘If you choose the best ingredients, you will like the result.”

To learn more about Profit Point’s supply chain network design software and services, call us at (866) 347-1130 or contact us here.

About Profit Point
Profit Point Inc. was founded in 1995 and is now a global leader in supply chain optimization. The company’s team of supply chain consultants includes industry leaders in the fields infrastructure planning, green operations, supply chain planning, distribution, scheduling, transportation, warehouse improvement and business optimization. Profit Point has combined software and service solutions that have been successfully applied across a breadth of industries and by a diverse set of companies, including Dow Chemical, Coca-Cola, Lifetech, Logitech and Toyota.

About Arkema
A global chemical company and France’s leading chemicals producer, Arkema is building the future of the chemical industry every day. Deploying a responsible, innovation-based approach, we produce state-of-the-art specialty chemicals that provide customers with practical solutions to such challenges as climate change, access to drinking water, the future of energy, fossil fuel preservation and the need for lighter materials. With operations in more than 40 countries, some 14,000 employees and 10 research centers, Arkema generates annual revenue of $8.3 billion, and holds leadership positions in all its markets with a portfolio of internationally recognized brands.

What kind of risks are you prepared for?

As a supply chain manager, you have profound control over the operations of your business. However, it is not without limits, and mother nature can quickly and capriciously halt even the smoothest operation. Or other man-made events can seemingly conspire to prevent goods from crossing borders, or navigating traffic, or being produced and delivered on time. How can you predict where and when your supply chain may fall prey to unforeseen black swan events?

Prediction is very difficult, especially about the future. (Niels Bohr, Danish physicist)  But there are likely some future risks that your stockholders are thinking about that you might be expected to have prepare for. The post event second guessing phrase: “You should have known, or at least prepared for” has been heard in many corporate supply chain offices after recent supply chain breaking cataclysmic events: tsunami, hurricane, earthquake, you name it.

  • What will happen to your supply chain if oil reaches $300 / barrel? What lanes will no longer be affordable, or even available?
  • What will happen if sea level rises, causing ports to close, highways to flood, and rails lines to disappear?
  • What will happen if the cost of a ton of CO2 is set to $50?
  • What will happen if another conflict arises in the oil countries?
  • What will happen if China’s economy shrinks substantially?
  • What will happen if China’s economy really takes off?
  • What will happen if China’s economy really slows down?
  • What will happen if the US faces a serious drought in the mid-west?

What will happen if… you name it, it is lurking out there to have a potentially dramatic effect on your supply chain.

As a supply chain manager, your shareholders expect you to look at the effect on supply, transportation, manufacturing, and demand. The effect may be felt in scarcity, cost, availability, capacity, government controls, taxes, customer preference, and other factors.

Do you have a model of your supply chain that would allow you to run the what-if scenario to see how your supply chain and your business would fare in the face of these black swan events?

Driving toward a robust and fault tolerant supply chain  should be the goal of every supply chain manager. And a way to achieve that is to design it with disruption in mind.  Understanding the role (and the cost) of dual sourcing critical components, diversified manufacturing and warehousing, risk mitigating transportation contracting, on-shoring/off-shoring some manufacturing, environmental impacts, and customer preferences, just to begin the list, can be an overwhelming task. Yet, there are tools and processes that can help with this, and if you want to be able to face the difficulties of the future with confidence, do not ignore them.  The tools are about supply chain planning and modelling. The processes are about risk management, and robust supply chain design. Profit Point helps companies all over the world address these and other issues to make some of the of the best running supply chains anywhere.

The future is coming, are you ready for it?

Manufacture and delivery of a company’s products usually consume a wide array of materials, either directly or indirectly, ranging from rare commodities like titanium or zinc, to the most basic, such as water. Given the explosive growth of world population in recent history, and the resulting increases in consumption of food and other products, and the finite nature of raw materials, the sustainability of the supply chain over time is a growing planning concern for many companies.  Water is often a key focus in their planning, whether it is the main ingredient in their product, as it is in the beverage industry, or a major component, as it is for power generation, paper production, mining and many other industries.

One way to measure the water impact of companies (or countries, or production of industrial or agricultural products, such as textiles, rice or beef) is through the calculation of a “water footprint”, which can help identify what water is used (both directly and indirectly), where it comes from, and the relative efficiency of its use.  This concept is discussed in detail on the website www.waterfootprint.org  which has a wide array of statistics, as well as an interactive water footprint calculator and the option to download extensive research materials.  According to the website 92% of total water consumption in the world is associated with agricultural use.  However, since agricultural products are raw materials in many corporate supply chains, and are shipped from one location to another around the world, nations and companies effectively consume water from around the world.  The figure below shows major international water consumption flows, taking into account such factors as goods consuming water in production in one part of the world are shipped to a consumer in another area.

Source:Mekonnen and Hoekstra (2011)

 

Why should a company be concerned about their water consumption?  There are several risks that all companies face, to varying degrees, as global water consumption increases, including

  • Physical supply risk: will fresh water always be available in the required quantities for your operations?
  • Corporate image risk: your corporate image will likely take a hit if you are called out as a “polluter” or “water waster”
  • Governmental interference risk: governmental bodies are becoming increasingly interested in water consumption, and can impose regulations that can be difficult to deal with
  • Profit risk: all of the above risks can translate to a deterioration of your bottom line.

But with risk comes opportunity – planning for your water consumption, and footprint, as part of your supply chain analysis, and acting in response, can keep you ahead of the curve!

 

A Network Design is Never Done

September 18th, 2012 5:17 pm Category: Network Design, Profit Network, by: Editor

DC Velocity featured an article entitled A Network Design is Never Done. The article, which included an interview with Profit Point’s Alan Kosansky, touches upon on the trend of large manufacturers to move from designing their supply chain networks once to continuously improving the design to meet customer demand and supplier mix, among other things.

You can read the complete article here.

There is nothing like a bit of vacation to help with perspective.

Recently, I read about the San Diego Big Boom fireworks fiasco — when an elaborate Fourth of July fireworks display was spectacularly ruined after all 7,000 fireworks went off at the same time. If you haven’t seen the video, here is a link.

And I was reading an article in the local newspaper on the recent news on the Higgs: Getting from Cape Cod to Higgs boson read it here:

And I was thinking about how hard it is to know something, really know it. The data collected at CERN when they smash those particle streams together must look a lot like the first video. A ton of activity, all in a short time, and a bunch of noise in that Big Data. Imagine having to look at the fireworks video and then determine the list of all the individual type of fireworks that went up… I guess that is similar to what the folks at CERN have to do to find the single firecracker that is the Higgs boson.

Sometimes we are faced with seemingly overwhelming tasks of finding that needle in the haystack.

In our business, we help companies look among potentially many millions of choices to find the best way of operating their supply chains. Yeah, I know it is not the Higgs boson. But it could be a way to recover from a devastating earthquake and tsunami that disrupted operations literally overnight. It could be the way to restore profitability to an ailing business in a contracting economy. It could be a way to reduce the greenhouse footprint by eliminating unneeded transportation, or decrease water consumption in dry areas. It could be a way to expand in the best way to use assets and capital in the long term. It could be to reduce waste by stocking what the customers want.

These ways of running the business, of running the supply chain, that make a real difference, are made possible by the vast amounts of data being collected by ERP systems all over the world, every day. Big Data like the ‘point-of’sale’ info on each unit that is sold from a retailer. Big Data like actual transportation costs to move a unit from LA to Boston, or from Shanghai to LA. Big Data like the price elasticity of a product, or the number of products that can be in a certain warehouse. These data and many many other data points are being collected every day and can be utilized to improve the operation of the business in nearly real time. In our experience, much of the potential of this vast collection of data is going to waste. The vastness of the Big Data can itself appear to be overwhelming. Too many fireworks at once.

Having the data is only part of the solution. Businesses are adopting systems to organize that data and make it available to their business users in data warehouses and other data cubes. Business users are learning to devour that data with great visualization tools like Tableau and pivot tables. They are looking for the trends or anomalies that will allow them to learn something about their operations. And some businesses adopting more specialized tools to leverage that data into an automated way of looking deeper into the data. Optimization tools like our Profit Network, Profit Planner, or Profit Scheduler can process vast quantities of data to find the best way of configuring or operating the supply chain.
So, while it is not the Higgs boson that we help people find, businesses do rely on us to make sense of a big bang of data and hopefully see some fireworks along the way.

Uncovering the Value Hiding Behind Environmental Improvement Investments

Supply Chain optimization is a topic of increasing interest today, whether the main intention is to maximize the efficiency of one’s global supply chain system or to pro-actively make it greener. There are many changes that can be made to improve the performance of a supply chain, ranging from where materials are purchased, the types of materials purchased, how those materials get to you, how your products are distributed, and many more. An additional question on the mind of some decision makers is: Can I minimize my environmental footprint and improve my profits at the same time?

Many changes you make to your supply chain could either intentionally – or unintentionally – make it greener, so effectively reducing the carbon footprint of the product or material at the point that it arrives at your receiving bay. Under the right circumstances, if the reduced carbon footprint results from a conscious decision you make and involves a change from ‘the way things were’, then there might be an opportunity to capture some financial value from that decision in the form of Greenhouse Gas (GHG) emission credits, even when these emission reductions occur at a facility other than yours (Scope 3 emissions under the Greenhouse Gas Protocol).

As an example, let’s consider the possible implications of changes in the transportation component of the footprint and decisions that might allow for the creation of additional value in the form of GHG emission credits. In simple terms, credits might be earned if overall fuel usage is reduced by making changes to the trucks or their operation, such as the type of lubricant, wheel width, idling elimination (where it is not mandated), minimizing empty trips, switching from trucks to rail or water transport, using only trucks with pre-defined retrofit packages, using only hybrid trucks for local transportation and insisting on ocean going vessels having certain fuel economy improvement strategies installed. These are just some of the ways fuel can be saved. If, as a result of your decisions or choices made, the total amount of fuel and emissions is reduced, then valuable emission credits could be earned. It is worth noting that capturing those credits is dependent on following mandated requirements and gaining approval for the project.)

Global Market for GHG Credits

If your corporate environmental strategy requires that you retain ownership of these reductions, then you keep the credits created and the value of those credits should be placed on the balance sheet as a Capital Asset. Alternatively, if you are able, the credits can be sold on the open market and the cash realized and placed on the balance sheet. Either way, shareholders will not only get the ‘feel good’ benefit of the environmental improvement, but also the financial benefit from improvement to the balance sheet. If preferred, the credits can be sold to directly offset the purchase price of the material involved, effectively reducing that price and so increasing the margin on the sales price of the end-product and again improving the bottom line. If capital investment is required as part of the supply chain optimization, the credit value can also be a way to shorten the payback period and improve the ROI, or to allow an optimization to occur

So, when you consider improving your environmental impact or optimizing your supply chain, consider the possibility that there might be additional value to unlock if you include both environmental and traditional business variables in your supply chain improvement efforts.

Written by: Peter Chant, President, The FReMCo Corporation Inc.

IDK (“I Don’t Know”)

After listening to a Freakonomics Radio podcast on NPR, the following question and blog comments emerged:

Why do people feel compelled to answer questions that they do not know the answer to?

What I’ve found in business is that we are all prone to hiding our ignorance when asked a question that we cannot answer. So even if someone absolutely has no idea what the answer is, if it’s within his or her realm of expertise, “faking” seems to be an essential part of the response.

My professor friend told me that she has learned the following from teaching MBA students: “One of the most  important things you learn as an MBA student is how to pretend you know the answer to any question even though you have absolutely no idea what you’re talking about. It’s really one of the most destructive factors in business. Everyone masquerades like they know the answer and no one will ever admit they don’t know the answer, which makes it almost impossible to discover the correct answer”.

I ask: Does every question need to be answered?

Everyone expects answers to every question, especially if the question comes from someone higher up in an organization. However, not every unknown question is worth the time and resources to research. If it comes down to the choice of making-up an answer or being saddled with a research project, many people will prefer to make-up an answer. Perhaps in some situations, combined with the ego/self-image issues, every question will be answered, regardless of the person’s knowledge.

I ask: Should IDK be a legitimate response?

Perhaps, if the question has minimal economic impact on the business, and you know something related to the question, then maybe a guesstimate (an estimate made without using adequate or complete information) is fine.

But then, for significant economic impact questions …maybe it’s better to say “IDK the answer to that question, but we are studying it”, and then do the study!

As an example, management asks: Will our delivered cost per SKU increase or decrease if we add more distribution centers to meet expected growth rates and satisfy customer service levels?

The first reaction guesstimate might be “yes they will increase”, although, this might not be true.

The smart analyst will say: “Hmmm, IDK! Give me a few hours (days) to do a quick analysis, and see what the true impact will be.”

A small spreadsheet study looking at the increase in production and distribution levels combined with the increase fixed and variable costs associated with adding a few new distribution centers may be surprising. It may indicate that the increase volume and revenues and lower transportation costs will offset the increased DC costs.

This small study may also be the first in a stage gate approach to perform a forward looking comprehensive supply chain infrastructure study. A detailed strategic infrastructure study can capture the manufacturing and distribution details, including costs and constraints, generating results that will allow management to make a reliable strategic economic decision.

No field is exempt from their know-it-alls, even when the correct answer really is IDK.

I submit, if you are in an uncertain position, try the IDK approach and then offer the following response “I can check into that and find an answer for you”. You may be surprised to learn that your credibility with management will improve.

“Every act of conscious learning requires the willingness to suffer an injury to one’s self-esteem. That is why young children, before they are aware of their own self-importance, learn so easily.”
–Thomas Szasz

Change is hard.

Collapsed Souffle

Collapsed Souffle

So why do it? Why change when you can be the same?  If you have a well-worn recipe to make a great soufflé, you know that the risk of tampering with that recipe can result in the collapse of the soufflé. So why change what is already working?

In the businesses that I help, change comes for several reasons. It may be thrust upon the business from the outside, a change in the competitive landscape for instance, or a new regulation.   It may come from some innovative source within the company, looking for cost savings to increase profitability of productivity, or a new process or product with increased productivity. Change can come from the top down, or from the bottom up. Change can come in a directed way, as part of a larger program, or organically as part of a larger cultural shift.  Change can come that makes your work easier, or harder, and may even eliminate a portion (or all) of the job that you were doing. Change can come to increase the bottom line or the top line. But primarily change comes to continue the adaptation of the company to the business environment.  Change is the response to the Darwinian selector for businesses.  Adapt or decline. Change is necessary.  It is clear to me from my experience that businesses need to change to stay relevant.

This may seem trite or trivial, but accepting that change is not only inevitable, but that it is good, is the shift in attitude that separates the best companies (and best employees) from the others.

So, you say, I see the need to change, it is not the change itself that is so difficult, but rather the way that it is inflicted upon us that makes it hard.  So, why does it have to be so hard?  Good question.

Effective managers know that change is necessary but hard. They are wary of making changes, and rightly so.  Most change projects fail. People generally just don’t like it.  Netflix is a great example.  Recently, Netflix separated their streaming movie service from their DVD rental business. After what I am sure must have been careful planning, they announced the change, and formed Quikster, the DVD rental site, and the response from the customer base was awful. As you likely know, Netflix, faced with the terrible reception from their customer base and stockholders, reversed their decision to separate streaming from DVDs. What was likely planned as a very important change, failed dead. Dead, dead, dead. Change can be risky too.

If change is necessary, but hard and risky… how can you tame this unruly beast?

The secret of change is that it relies on three things: People, Process, and Technology. I name them in the order in which they are important.

People are the most important agents relative to change, since they are the one who decide on the success or failure of the change. People decided that the Netflix change was dead. People decide all the time about whether to adopt change. And people can be capricious and fickle. People are sensitive to the delivery of the change.  They peer into the future to try to understand the affect it will have on them, and if they do not like what they see…  It is the real people in the organization who have to live with the change, who have to make it work, and learn the new, and unlearn the old. It is likely the very same people who have proudly constructed the current situation that will have to let go of their ‘old’ way of doing things to adopt to the new. Barriers to change exist in many directions in the minds of people.  I know this to be true… in making change happen, if you are not sensitive to the people who you are asking to change, and address their fears and concerns, the change will never be accepted.  If you do not give them a clear sense of the future state and where they will be in it, and why it is a better place, they will resist the change and have a very high likely hood of stopping the change, either openly, or more likely passively and quietly, and you may never know why the fabulously planned for change project failed.

Process is the next aspect of a change project that matters.  A better business process is what drives costs down. Avoiding duplication of efforts, and removing extra steps. Looking at alternatives in a ‘what-if’ manner, in order to make better decisions, these are what make businesses smarter, faster, better.  A better business process is like getting a better recipe for the kitchen. Yet, no matter how good a recipe; it still relies on the chef to execute it and the ovens to perform properly. Every business is looking for better business processes, just as every Chef is looking for new recipes.   But putting an expert soufflé recipe, where the soufflé riser higher, in the hands of an inexperienced Chef does not always yield a better soufflé.  People really do matter more than the process.

Technology is the last aspect of the three that effect change. Better technology enables better processes. A better oven does not make a Chef better.  The Chef gets better when they learn to use the new oven in better ways, when they change the way they make the soufflé, since the oven can do it.  A better oven does not do it by itself.  An oven is just an oven. In the same way, better technology is still just technology.  It by itself changes nothing.  New processes can be built that use it, and people can be encouraged to use it in the new process.  Technology changes are the least difficult to implement, and it is likely due to this fact that they are often fixed upon as the simple answer to what are complex business problems requiring a comprehensive approach to changing the business via it people, process, and technology.

Nice Souffle

Nice Souffle

Change is necessary, but hard and risky. Without change businesses will miss opportunities to adapt to the unforgiving business world, and decline. However, change can be tamed if the attitude towards it is changed to be considered a good thing, and is addressed with a focus on people, process and technology, in that order.  Done right, you can implement the change that will increase the bottom line and avoid a collapse of your soufflé.

Rich Guy

The rise of zombies in pop culture has given credence to the idea that a zombie apocalypse could happen. In a CFO zombie scenario, CFO’s would take over entire companies, roaming the halls eating anything living that got in their way. They would target the brains of supply chain managers and operations people. The proliferation of this idea has led many business people to wonder “How do I avoid a CFO zombie apocalypse?”

Supply chain managers are seeking and developing new and improved ways to exploit the volumes of data available from their ERP systems. They are choosing advanced analytics technologies to understand and design efficient sustainable supply chains. These advanced analytics technologies rely on the use of optimization technology. I am using the mathematical concept of “optimization” as opposed to non-mathematical process of making something better.

Mathematical optimization technology is at the heart of more than a few supply chain software applications. These applications “optimize” some process or decision. Optimization-base programs, for example, those frequently found in strategic supply chain network planning, factory scheduling, sales and operations planning and transportation logistics use well-known mathematical techniques such as linear programming to scientifically determine the “best” result. That “best solution” is usually defined as minimizing or maximizing a single, specific variable, such as cost or profit. However, in many cases the best solution must account for a number of variables or constraints. Advanced analytics technologies can improve a company’s bottom line – and it can improve revenue, too! CFO’s like this.

Advanced analytics technologies provide easy-to-use, optimization-based decision support solutions to solve complex supply chain and production problems.  And, these solutions can help companies quickly determine how to most effectively use limited resources and exploit opportunities.

So, from my perspective, there are seven practical reasons to embrace advanced analytics technologies:

  1. Your company saves money, increases profits.
  2. You get to use all your ERP system’s data.
  3. It’s straightforward and uncomplicated.
  4. You have the tools to discover great ideas and make better decisions.
  5. At the end of the day, you know the total cost of those decisions.
  6. You have a roadmap to make changes.
  7. You avoid the CFO zombie apocalypse

This article written by Alan Kosansky and Ted Schaefer originally appeared in Industry Week.

“Network structure, which determines 75%-80% of total supply chain costs, offers the biggest opportunity to reduce those expenditures.”

A recent study of supply chain activities indicated that as much as 80% of total supply chain costs are determined by the network in place and not by the decisions the supply chain team makes on a daily basis within that network. The cause can be attributed to infrastructure, which significantly determines the types of decisions and degrees of freedom that are available to supply chain decision makers. As a result, many companies have literally stumbled into pitfalls associated with warehouses, distribution centers and sources of supply (manufacturing, supplier locations, etc.) because they lacked thoughtful design.

There is help available for vigilant executives in the form of 10 guidelines to implement necessary cost saving measures. All are applicable whether the company is pursuing a growth strategy or struggling with underutilized assets in a challenging economy. Keeping these guidelines at the forefront of consideration can create opportunities to ease pressures on margin and the bottom line.

1.  Network structure, which determines 75%- 80% of total supply chain costs, offers the biggest opportunity to reduce those expenditures.

That’s because when manufacturing and distribution assets are in place, and major transportation contracts are negotiated, actions to improve operations and efficiencies in the supply chain are limited. The time to discover the biggest supply chain improvement opportunities is during assessment or reassessment of the infrastructure in place; e.g. manufacturing capability, raw material sourcing, major transportation lanes, distribution facilities and delivery to customers.

2. Optimize supply chain infrastructure to realize maximal cost savings.

A company’s existing supply chain infrastructure is a primary cause of daily disruptions and short-term challenges. Those companies that experience the smoothest and most profitable operations are the ones who routinely re-evaluate both operations and infrastructure. Those who reevaluate as a matter of procedure tend to become supply chain and profitability leaders. A recurring evaluation of infrastructure should be considered a necessity.

3. Understand the changes that can be impacted.

Change is inevitable, and the response to it will determine a company’s profitability. First assure that the processes and tools are in place to recognize the changes occurring in the supply chain. Then identify and analyze potential courses of actions and communicate the execution plan.

4. Consider technological analysis to make the supply chain decisions.

Spreadsheet analysis can evaluate a potential change in a business plan or supply/demand balance and perhaps project the impact of a given course of action. However when decisions involve multiple products made across multiple manufacturing sites, shipping and distribution point issues while serving thousands of customers, companies need sophisticated tools to effectively consider all the options to assure maximization of every supply chain infrastructure.

5. Modern infrastructure planning requires a collaborative effort.

Good supply chain operations happen because the people in charge of different aspects (sales, manufacturing, logistics, procurement and finance) are effectively communicating by:

  • Providing the critical data necessary to make the best overall decisions.
  • Understanding how each critical decision \impacts them.
  • Informing each department of every decision and the steps they need to implement.

6. The planning process needs to include many different scenarios to ensure a robust solution.

Even with collaboration across all of the stakeholders, the supply chain infrastructure design process depends on forecasts of the future that will not all prove to be accurate; e.g. customer demand, competitors’ actions, cost of raw materials and transportation. Those who recognize the uncertainty of the data that drives their business planning can use supply chain tools to explore different possible futures and evaluate a course of action. That way they can confidently make decisions that will perform well across a wide range of possible futures and position themselves for a positive return.

7. Consider hybrid solutions to ensure low-cost, high level customer service.

Simplified assumptions are quite common during evaluation and analysis of complex supply chain operations. These may cause managers to overlook opportunities that are combinations or hybrids. For example, instead of sourcing 100% of a raw material from a low-cost country, perhaps optimal customer service at lower costs can be achieved by sourcing 80% to the low-cost provider and 20% to a higher cost and more reliable alternate supplier. Another example is demand variation by day of the week, which may warrant different operations on different days. Hybrid solutions are frequently solutions for optimal mix of customer service and cost, however they are often difficult to identify and evaluate.

8. Models and analysis mean nothing without implementation.

A good supply chain infrastructure planning process begins with solid analysis and evaluation of various scenarios to identify an optimal course of action. However, it is not complete without implementation planning, which must address the cultural and organizational issues that too often prevent companies from achieving the gains that have been projected. If there is resistance within the organization to change, it may be necessary to stage the implementation in increments to gain credibility before tackling the more strategic approach.

9. Optimized supply chains minimize inefficiencies.

A good supply chain infrastructure planning process goes beyond elimination of waste to analysis of benefits and tradeoffs among the different drivers of sustainability in the supply chain. This by definition means that you are creating a greener and more sustainable operation. One example is analysis of tradeoffs between profit and other sustainability measures (for example CO2emissions). Using tools to analyze the total impact of different courses of action can optimize decision making to meet the overall objectives.

10. The answer is in the data.

Assure the accuracy of the data, and then present it to the right people (See #5).

Roadmap for the Future

Supply and logistic executives recognize the importance of developing new and improved ways to understand and use the volumes of data to help them find and utilize the best approach. It is incumbent upon them to ensure that each aspect of the operation is fully aligned to business strategy and goals, which is the purpose of these guidelines. They should be considered a roadmap combining sound business management practices with the newest technologies and tools as a path to success.

Alan Kosansky, Ph.D., is president and Ted Schaefer is director of logistics and supply chain services of Profit Point Inc.. Profit Point, based in North Brookfield, Mass., is a provider of supply chain optimization systems providing such services as infrastructure and supply chain planning, scheduling, distribution and warehouse utilization improvement.

We recently attended a discovery meeting that was focused on how to conduct a strategic optimization planning study of an existing distribution network. The company wanted to know what changes needed to be made to lower the distribution costs. Several members of the management team were present and there were many questions regarding the ideal business process, study approach and modeling tools to be used to insure a successful project.

What was interesting to me was the overwhelming focus on the modeling tool. Questions about who would be on the project, the timeline, the types of scenarios, data gathering and validation were secondary. It may be important to have the right tool to model your infrastructure, but the real focus should be on the experience and modeling capabilities of the users of the tool.

These are the Critical Success Factors

  1. Full participation in data gathering and results review by the project team and management.
  2. Clear definition of the key questions to be addressed and the related scenarios required by the Project Sponsor early in the project timeline.
  3. Availability of leadership resources within the company throughout the project to review assumptions and to ensure integrity and quality of the input.
  4. On time delivery of a complete set of all required data by Project Team members.
  5. Acceptance and agreement on the variable, fixed and capital cost assumptions of existing and potential new facilities.
  6. Availability, communication, and collaboration of the Project Team members, support staff, and consultant for all working sessions, conference calls, and follow-up between meetings.

It’s important that the optimization modeling tool can incorporate the variables and constraints associated with your supply chain, but the real focus should not be on the tool, but rather on the experience of the users of the tool and their ability to deliver the results of a project. If I were to set out on a network optimization planning project to model my entire supply chain, then my primary focus would be on developing an experienced team of individuals that had the skills to minimize the above risks.

Including Capital Costs in Network Design Analysis

September 22nd, 2010 11:42 am Category: Network Design, Profit Network, by: Gene Ramsay

When making infrastructure planning decisions regarding adding new facilities, or adding capacity to existing facilities, you will want to take into account a variety of facility costs to ensure you make the right decisions.  These costs include…

  • variable cost, dependent on the volume through the facility
  • operating fixed cost, to cover costs such as taxes, security, leases, etc.
  • depreciation,  based on the life of the equipment, and
  • cost of the capital used to construct / purchase the facility

In an optimization model you can capture all of these costs separately, or perhaps you will want to consider the fixed costs as a “lump sum”.

Here are two ways that you could build the cost of capital into the decision-making process:

  • Add a Capital Recovery Cost to the objective function, to reflect the cost of the capital required to build or expand a facility.  One way to do this is the approach used in the Microsoft Excel PMT function, which asks for four inputs to the calculation of recovery cost for a time period:
    • capital cost of the asset to be added, e.g. a plant, production line, distribution facility, waste water treatment facility, etc.
    • useful life of the asset  - the entry here for the number of time periods should be consistent with the frequency of time in your model
    • salvage value at the end of the asset’s used useful life, if any
    • capital cost charge (interest) rate to be charged in each time period – again, the entry here should be consistent with the frequency of time in your model.  (This number could be annual, monthly, or based on another frequency, depending on how you have defined your model.)

The Capital Recovery Charge can be thought of as a loan repayment for the amount of capital required in purchase and install the facility.  Excel has help files describing the details of the PMT function, so we will go into more detail here.

  • Use Economic Profit as the objective of the model, or as a measure that you use to compare alternative solutions.  Economic Profit is your standard accounting profit, less the opportunity cost of capital invested in the business.  The opportunity cost is the return that the company would have been able earn if it had invested in the next best alternative project.  For instance, if you consider a future alternative where
    • the accounting profit for the time period (say, year) is 100, with the additional asset, but
    • the asset has a capital cost of 1000, and
    • the opportunity cost for capital is 15% per year (the company could have received a 15% return by investing the capital elsewhere) , then
    • the Economic Profit for the year is 100 – .15*1000 = -50.

If you are minimizing cost rather than maximizing profit in your model, then you can calculate Impact on Economic Profit for a given alternative, adjusting the operating costs from the model for the effective tax rate, and subtracting the capital charge.

Including the cost of capital appropriately will allow you to present a more complete analysis.


Profit Network 4.5 enhances visibility for decision makers and extends modeling capabilities to handle the world’s largest supply chains.

North Brookfield, MA (PRWEB) February 4, 2010 — Profit Point, a leading Supply Chain Optimization company, today announced the introduction of Profit Network 4.5, a major upgrade to their award-winning supply chain network design and modeling software. The software update includes a combination of new features and technical enhancements which combine to support richer scenario testing for larger supply chains over a longer time periods.

“With almost 10 years in the field, Profit Network has been put to the test against some of the world’s largest supply chains,” noted Jim Piermarini, Profit Point’s Chief Technology Officer. “But best practices have expanded over time, so decision makers are looking for more integrated and comprehensive modeling solutions.”

Profit Network 4.5, which is used by many Global 2000 companies to model supply chain plans, has been enhanced to integrate better capital planning, greater control over facilities decisions and improve tracking and modeling of sustainability initiatives. The modeling software now includes improved options for integrated capital spending, facilities decisions, natural resource planning and emissions mitigation.

“Ultimately, the number one priority for our customers remains capital planning and return on investments” said Piermarini. “A company’s infrastructure plan will dictate 80% or more of future costs. So, we added several features that help analysts understand the capital impact of decisions to control costs and maximize the long-term logistics benefits.”

The software update also includes several technical enhancements to improve planning for the largest supply chains, over longer periods of time. “We’ve added a new core optimization process into Profit Network 4.5,” stated Piermarini. “Customers will now have 50% more addressable memory capacity, which will yield deeper visibility in to larger networks and the long term tradeoffs that are being modeled.

To learn more about Profit Network and Profit Point’s supply chain software, visit www.profitpt.com.

About Profit Point:
Profit Point Inc. was founded in 1995 and is now a global leader in supply chain optimization. The company’s team of supply chain consultants includes industry leaders in the fields infrastructure planning, green operations, supply chain planning, distribution, scheduling, transportation, warehouse improvement and business optimization. Profit Point’s has combined software and service solutions that have been successfully applied across a breadth of industries and by a diverse set of companies, including Dow, The Coca-Cola Company, General Electric, Logitech, Sealed Air, Bridgestone and Toyota.

Below is a video interview with Ted Schaefer, Profit Point’s Director of Supply Chain Services, discussing supply chain optimization including cost reduction and supply chain sustainability issues for greener decisions with Xpress Optimization Suite.

To learn more about our supply chain network design services, contact us here.

Companies are increasing their local supply capabilities while reducing the costs and risks of highly centralized, offshore production and procurement strategies.

This month’s issue of Supply & Demand Chain Executive features an informative article entitled The Future of Network Planning. The article, which was co-authored by Profit Point’s President, Dr. Alan Kosansky, and the firm’s Director of Supply Chain Services, Ted Schaefer, looks at the emerging trend towards a more “local” supply chains.

You can read the complete article here.

To learn more about Profit Point’s Global Supply Chain Design services, please contact us.

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Published articles

  • A Fresh Approach to Improving Total Delivered Cost
  • Filling the Gap: Tying ERP to the Business Strategy
  • 10 Guidelines for Supply Chain Network Infrastructure Planning
  • Making Sound Business Decisions in the Face of Complexity
  • Leveraging Value in the Executive Suite
  • Should you swap commodities with your competitors?
  • Supply Chain: Time to Experiment
  • Optimization Technology Review
  • The Future of Network Planning: On the Verge of a New Cottage Industry?
  • Greening Your Supply Chain… and Your Bottom Line
  • Profit Point’s CEO and CTO Named a "Pro to Know" by Supply & Demand Chain Executive Magazine