5 Steps to Design a Supply Chain Network
You’re patting yourself on the back. You’ve sorted through the Marine Shipping chaos. In the face of volatile Marine Transportation rates, you just negotiated great prices to transport your North American produced bulk liquid via tank containers to ten Pacific region countries. The contracts are signed and locked in for the next year, holding costs to a known level. A month later you discover there may be a better way. Rather than transport your bulk liquid separately to each of your ten Pacific region customers, you can send all the product on a parcel tanker to a terminal in Singapore, drum it, and ship the drums from Singapore to each of your customers. And you can do this at considerable savings without a reduction in customer service. You looked at so many options, why didn’t you consider this one?
How do you make sure your business is aiming before it fires? The business process of supply chain network analysis and design will help you ensure that you are using the best modes of transportation, the best routes, and the right mix of intermediate assets (e.g. storage, inventory, etc.), to get your products where they need to be to meet your business goals. And the icing on the cake is that it is a relatively easy and cost effective process.
So how does it work? Here is a proven process to design a supply chain network that best meets your business objectives.
1) Clearly define your objectives. No logistics manager is likely to improve all aspects of their logistic and distribution network all at once. The most critical step of the network analysis and design process is to identify your primary objectives. A partial list of critical decisions you might consider is:
- What level of customer service does my market demand?
- What modes of transportation should be used to balance cost vs customer service objectives?
- Which warehouses should supply product to which customers?
- How many warehouses do I need and where should they be located?
- Where should inventory be stored and how much inventory should I be carrying of each product?
- Which manufacturing plants should be making product for which customers/warehouses?
- What routes should I be using to get product from source to destination?
- Are there opportunities for pooling resources that have been overlooked?
Identify your objectives as those decisions that are most important to the bottom line and those that you can do something about.
2) Gather supporting data. In order to make intelligent decisions, you need solid data to support those decisions. This step is usually the most time consuming part of the process. The good news is that the data is available and reusable. Most likely it exists in your new ERP or legacy system. Typical data elements include: demand by product and container type, transportation rates, transportation lead times, warehousing costs (both fixed and variable costs), and inventory costs. If your objectives include determining the manufacturing source of products, you will also need data like manufacturing and raw material costs.
3) Model your supply chain network. Today’s technology can help you make better decisions as there are many vendors offering supply chain network optimization tools. Alternatively, you can cost efficiently configure your own. Choose wisely, as all software is not created equal. Make sure the software you select fully addresses the decisions you need to make and can represent your unique business and logistics network. Typical model components include capacity limitations, customer service requirements, lead times by mode, operating capabilities and the cost of different options.
4) Analyze your supply chain network. There is no silver bullet. Using supply chain optimization tools to make better decisions for your business requires good old-fashioned analysis. Relying on people to leverage the benefits of technology is the path to success. A good supply chain analyst will be both an expert about your business and an expert with the supporting technology. They will need to review many “what if” scenarios with the business management to finalize the supply chain network design.
5) Implement and refine. The supply chain network analysis and design process is not a static process. Successful ideas are implemented and cost savings are realized. And then things change: a large new customer is added at a new location, more production capacity is added, demand takes a nosedive, or raw material prices swing dramatically. Thus, like all good planning processes, the supply chain network analysis and design process must be on going. This process should be revisited regularly (annually/quarterly,) and/or when big things happen within the business.
How do you measure the success of this business process? Firstly, it must generate bottom line savings in your supply chain operations. Secondly, the business process must embed itself firmly in the corporate culture. Treating supply chain analysis as a one-time effort limits your business from fully reaping the fruits of your labor.
“Although we have achieved cost savings between 4% and 11% of our total logistics costs in our network designs, the biggest value that we’ve seen from this type of analysis is a common understanding of the delivery chain among Manufacturing, Marketing, Sales, Logistics, and Planning. This common understanding of cost and customer service trade-offs results from the more complete “picture” of the network that emerges from this analysis and the ability to churn out “what-if” analysis to cover most credible business scenarios. It is this understanding and the ability to quickly understand and exploit changes in the market that is the enduring value of a continuing network analysis process”, says Ted Schaefer, Global Logistics Strategy & Design Manager at the Rohm and Haas Company.
Those businesses that integrate the supply chain network analysis and design process into their corporate culture will reap the benefits of efficient and focused logistics operations year after year. With a process like this in place you can be assured that you aim before you fire.
Dr. Alan Kosansky received his Doctorate in Applied Mathematics from The Johns Hopkins University in 1991. He is the co-founder and president of Profit Point Inc. He has taught at Villanova University and has shared his expertise at many national conferences. Dr. Kosansky has pioneered the application of advanced analytic techniques to transportation procurement, dynamic scheduling, supply chain management and financial optimization. His methods have repeatedly helped manufacturers to reduce their transportation, manufacturing, and inventory costs, and businesses to realize higher profits.
Ted Schaefer is the Global Logistics Strategy & Design Manager at the Rohm and Haas Company. He has been with Rohm and Haas for 18 years, spending the last 12 years in the operation or redesign of various segments of the Company’s Supply Chains. He has done network analysis and designs for the Rohm and Haas Monomers Business in North America, Europe, and Asia. He is a member of the Council of Logistics Management and APICS.