SC Strategy and Network Design PAO 13 0910

Practice Area Overview

Supply Chain Strategy & Network Design

Introduction Recent years have seen an explosion of interest in Supply Chain Management (SCM). Movements such as Re-Engineering and Six Sigma have led managers to question and redesign the processes through which they operate their supply chains.

But the biggest savings from SCM are typically not achieved by changing how the supply chain is operated; they are obtained by changing its structure.

Indeed, we find that typically 70% of the cost of a supply chain is built right into its structure – placing a severe limitation on what even world-class operating practices can achieve. It is of little help to have a world-class JIT production system if you remain uncompetitive because your plant is simply too big and in the wrong place.

Our Supply Chain Strategy and Network Design practice helps clients attack the strategic decisions that drive 70% or more of supply chain cost.

What is Supply Chain Strategy & Network Design? Supply Chain Strategy, and the closely-related concept of Network Design, refer to how the firm chooses to structure its supply chain in support of its business strategy. This typically involves the following strategic decisions:

Number, location, and size of factories and • distribution centersChoice, number and locations of suppliers• Modes of transportation used• Location and size of inventory buffers •

Location of the push/pull boundary • Routings: Assignment of products to plants, • plants to DCs, DCs to customers, etc.

A further complication is that the “right” supply chain structure can differ markedly by product and/or customer segment, or can change over the course of the product lifecycle. And the right supply chain structure for an individual product may itself be a portfolio of multiple supply chains. (Think of fashion retailers who sometimes combine a low-cost, long lead-time source in the Far East with a higher-cost but more responsive domestic source.)

Can my Supply Chain Network be Improved? We find that it usually can, because one or more of the following three situations apply:

Optimizing one cost at the expense of others.1. A common problem with companies’ existing networks is that they minimize one particular type of cost, while inflating other costs – and hurting overall profits. For example, many companies have minimized manufacturing costs by moving production to the Far East, only to find that the “hidden” cost associated with long lead times hurt their overall business performance.

Accidents of history.2. Many supply chains were never “designed” in the first place. Rather, they are “accidents of history” - the accumulated results of legacy facilities augmented by piecemeal additions from mergers and acquisitions. If the current network design is an accident, it can almost certainly be improved.

Case Study

A Fortune 500 medical device

manufacturer had grown throughout

Europe by acquisition of national

players, thereby creating a

distribution network with one

warehouse in each country.

This network design was an “accident

of history”. It had made sense for

individual national players to have

their own local distribution facilities.

But it didn’t necessarily make sense

for the combined company. And with

the advent of the Single European

Market in the 1990s, all remaining

barriers to cross-country shipments

were removed.

Our analysis began by mapping the

existing supply chain network – and

removing the country borders from

the map. Instead of irrelevant

country borders, we focused on

customer service requirements,

lead times, and shipping costs. We

showed that demand could be met

with just three strategically-located

regional warehouses, plus a single

European hub for items with a high

value-to-volume ratio. The resulting

increase in freight costs was far

outweighed by a reduction in fixed

costs exceeding $10M/yr.

1 The location at which actual orders (as opposed to forecasts) drive the activities such as assembly and materials movement).

For example, see the Case Study in the sidebar of a European medical devices manufacturer.

Different businesses need different supply 3. chains. A company’s supply chain needs to support its business strategy. But different business strategies have different performance requirements (cost, lead times, reliability). If the supply chain was not explicitly designed to support the business strategy, the chances are that it doesn’t. For example, companies may need their stable products to flow through a low-cost supply chain while utilizing a shorter and more responsive chain for their seasonal and volatile products. They may even need the ability to switch supply chains during the product lifecycle.

Beware of Off-the-Shelf Solutions How should a firm identify and evaluate possible improvements in its supply chain network design? One approach is to use one of the various “off-the-shelf” software tools for supply chain modeling that have become available in recent years. Some of these software solutions stemmed from simulation tools that were used to optimize production processes. Others started from academic research in inventory management. Still others started their lives as business process mapping and design tools.

Unfortunately, generic software solutions cannot offer enough detail where it is needed without requiring too much information where it is not. Tools may require too much detail before any meaningful insights can be gained. Runtimes may be prohibitive. The key assumptions about

the nature of uncertainty may not be valid for all products and networks. Data may not be available in the desired format, or significant pre-processing may be required.

Proven Methodology Over the course of multiple projects across many industries we have developed and refined the three-step methodology shown in Figure 2. Note that we believe that the insight on why the proposed solution is optimal is often more important than the solution. Given how fast conditions change supply chains cannot be static, and these insights give our customers the ability to monitor their business and adjust and re-visit their decisions accordingly. We also help identify the right level of resilience/responsiveness to changing supply and demand conditions by incorporating uncertainty and its associated costs correctly.

Getting Started To learn more please visit our website at www.e2eAnalytics.com, or contact us by email at info@e2eAnalytics.com.

Why End-to-End Analytics?

The End-to-end Analytics team

has comprehensive experience in

designing supply chains for a variety

of products and industries: personal

and portable computers, mobile

phones, media, medical equipment,

machining supplies, baked goods,

home appliances, and more.

This experience allows us to put

together the right project team,

understand the key dynamics of

the problem, use the right mix of

tools and models (ranging from

simulation to network optimization,

to spreadsheets), and provide insights

into why the recommendation is the

right one.

The cumulative profit impact of our

network design work is estimated by

clients at well over $500 million.

AnalyzeNetwork Economics

segmentation »» »

Build “right” model

Gather and validate inputdataUse model to analyzealternative designs

Validate outputPerform sensitivity analysis

Distill model output formanagerial consumption:

Solicit feedback and iterateas necessaryDevelop strategyCreate implementation plan

Establish total cost ofcurrent network(s)

Understand cost drivers

Identify constraintsDevelop high-levelnetwork design alternatives

Intended use?Total costs of alternativedesigns

» Intuition behind results» Risks and sensitivities» Recommendation

Optimization, or just“what-if”?

» Granularity?»»

ModelAlternative

Network Designs

Use Model toDrive Strategy

Figure 2: End-to-End Proven 3-Step Methodology for Network Design

SHORTAGE COSTSINVENTORY COSTSFREIGHT COSTSFIXED MFNG COSTSVARIABLE MFNG COSTS

CURRENT OPTION OPTION OPTIONA B C

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