The Future of Supply Chain Network Design
Most leading companies perform supply chain network design (SCND) analysis to define the structure of their supply chain as well as the key operations that will be performed at each location in the resulting network. The analysis includes suppliers, manufacturing, warehousing, and distribution. In fact, a number of Fortune 100 companies require such analysis before approving capital to add manufacturing or warehousing infrastructure. Those on the cutting edge are also using SCND analysis on a continual basis to understand the true delivered cost to supply each customer as well as the price required from the customer to achieve profitability goals. Advances in network design modelling and optimization have also opened the door to a broader analysis that focuses on the collective supply chains of all competitors in a marketplace and how best to supply the market at the lowest cost and maximum profit.
Twenty-five years ago, the optimization tools to analyze and strategically set one’s supply chain infrastructure were new and untested. Those companies on the cutting edge had the vision to employ this technology to gain competitive advantage. They analyzed the trade-offs among raw material, production, transportation, distribution and inventory costs to understand the most cost effective way to meet their customer demand at higher customer service levels. In today’s world, what was once the domain of a few has become a “best practice” in supply chain management. Most supply chain managers are on the band wagon and perform some sort of optimization based supply chain analysis when considering major capital investment, key strategic initiatives or when their network has grown too large and unwieldy through acquisition and growth. That does not mean that the world has caught up to the thought leaders….rather the thought leaders continue to push the envelope and are using SCND to do more for their organization than they did in the past.
In particular, there are two areas where the best supply chain managers are focusing their attention with regard to SCND: First, they are making SCND an evergreen business process that is fully integrated into all strategic and tactical decisions related to network infrastructure and product sourcing. Second, they are expanding the scope of their supply chain analysis to not only include their own supply chain network, but also to analyze the supply chain dynamics of their major competitors and how the entire market is being served.
Sustained Supply Chain Network Design
In too many cases, SCND analysis is a one-and-done process. The reality is that it’s often difficult to assemble the data required to perform the analysis, but this prevents companies from assessing ongoing risks and opportunities. Through a carefully designed data management process integrated to the right set of tools, leading businesses are putting into place sustainable business processes to continually revisit their supply chain network structure and operations.
Good data is the driver of good supply chain analysis. Many companies struggle with understanding the true activity costs associated with one or more of the following: raw material supply, production, packaging, warehousing, distribution and inventory. When running a significant supply chain analysis and design project it is often the case that the bulk of time and effort is spent on gathering, organizing and validating the input data that drives the analysis. Unfortunately, too often that effort is wasted, as that data is used once and then forgotten. However this need not be the case.
Those implementing best practices have extended data warehouses to include key activity based operations and cost data that is used in their strategic and tactical network optimization. The data is kept evergreen through continual data management processes and is always available for the next what-if scenario. These what-if scenarios might include:
• Short term: How best to tactically respond to unexpected events like strikes, weather disruptions, major capacity losses, etc…?
• Mid-term: How do I evaluate new sales opportunities for large additional volumes and how will these impact my ability to deliver across the supply chain?
• Long Term: How do I evaluate new merger and acquisition opportunities? How do I plan for capacity expansions?
Companies who maintain the proper data and do not have to start from scratch on each new what-if analysiscan use a tried and true process to respond more quickly and more accurately to the opportunities that constantly and continually present themselves.
Extending Supply Chain Network Design to Competitive Markets
If you have used optimization SCND to analyze a portion of your business in the past couple of years, then you are running with the herd. If you have implemented sustainable business process to refresh and maintain the critical data and are able to run supply chain network what-if analysis at a moment’s notice, then you are running at the front of the herd. Those running way out in front are also using SCND analysis to understand the true delivered cost of supplying product to each customer and managing their business profitability accordingly.
Advances in network design modelling, optimization, and game theory have recently opened the door to a broader analysis that focuses on the collective supply chains of all competitors in a marketplace. These tools can be used to which customer/product combinations should be targeted and at what price to maximize profit. There are three key steps to being able to accomplish this.
1. Understand your own Total Delivered Cost to each customer.
Understanding your true total deliver cost to each of your customers enables you to analyze and determine the profit you are earning from each customer. It also partially informs your pricing decisions, especially in competitive situations or when the demand is greater than your ability to supply. Not only does this analysis determine the profitability by customer, it also determines the impact of adding or dropping a customer, thus answering the question, “Even though it’s low margin business, can we afford to lose the volume?”
2. Estimate competitor costs for supplying to a shared set of customers
While pricing information is largely influenced by your own internal costs for producing, delivering and selling to your customers, it is also heavily influenced by the market conditions and at what price your competitors are able and willing to sell their competitive products to the same customers. In order to understand the market dynamics, you need to be able to reasonably estimate your competitor’s costs. For example, if you are in an industry where transportation delivery costs are significant, then regionally located manufacturing will have an impact on price and profitability. Understanding which customers are more profitable for you and which are more costly for your competitors to serve enables you to develop a winning strategy.
3. Use cutting edge optimization technology to model the competitive market
While most businesses are good at determining pricing and identifying profitable customers intuitively and on and ad hoc basis, few have put into place the rigorous business processes and analytics to be able to do it accurately on a routine basis. This requires a deep understanding of your total delivered cost, your supply chain sourcing options, and the flexibility you have on both the cost and revenue side of the equation. It also requires a better understanding of your competitors supply chain, and what they may or may not be able to do, based on their own costs.
Supply chain network design optimization tools have become well integrated into modern business decision making processes at leading edge companies. They are used to rigorously analyze and make the best decision in response to both short-term events such as weather disruptions, spot sales opportunities, capacity outages) and long-term strategy, such as capacity expansion or mergers and acquisitions. These analytical approaches and technologies have recently been extended to enable businesses to analyze not just their own operations, but the sum of multiple supply chains in the competitive market place. It is exciting work and adding additional millions of dollars to bottom line profit each year.