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Supply Chain Strategy for network Design
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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 [email protected].
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
Identify key trade-o�s955 Alma St., Suite BPalo Alto, CA 94301
(650) 331-9659 [email protected]
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