Strategies for Designing Winning Retail Supply Chains

The majority of the global companies recognized as part of the gartner Supply Chain Top 25 for 2013 have designed with LLamasoft.
Source: Gartner, Inc., The Gartner Supply Chain Top 25 for 2013, Debra Hofman, Stan Aronow, Kimberly Nilles, May 22, 2013

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Strategies for Designing Winning Retail Supply Chains

LLamasoft is a recognized global leader in supply chain design, providing technology solutions that enable large companies to identify major financial and operational improvements in sourcing, distribution, transportation and inventory placement. LLamasoft enables companies to model, optimize and simulate their supply chain and transportation network operations, leading to major improvements in cost, service, sustainability and risk mitigation.

Using Supply Chain Design Technology to Tackle Retail Industry Challenges

Off-shoring vs. near-shoring—what’s the best choice? Many companies are reevaluating off-shoring decisions using LLamasoft Supply Chain Guru. Though analysis of the tradeoffs between cost and service levels (image 1) associated with alternative scenarios, companies can make intelligent decisions about sourcing and manufacturing products in the best location to handle market demand.

How do we right-size inventory to meet desired service levels at lowest possible cost? LLamasoft Inventory Guru gives companies a way to lower working capital while increasing service levels. This is achieved by applying better-fitting inventory curves on demand in order to “right-size” inventory levels across echelons. Because it’s an integrated module in Supply Chain Guru, users can move directly from inventory optimization to network redesign and simulation to test solutions under real-world conditions.

Should we merge our inbound channels or keep them separate? Many retailers employ multiple channels, such as a temperature-controlled network and a dry network, to move product in. By analyzing end-to-end cost balanced with service and other constraints, LLamasoft evaluates the utilization of cross-dock facilities or merge-in-transit consolidation points for both inbound and outbound movements. At the simplest, the merge operation comprises consolidating loads in a cross-docking operation. A key advantage of merge-in- transit networks over traditional distribution networks is that merge points can often be evaluated quickly, depending on the type of merge operation being performed. In general, customer service will be improved by having merge points that are closer than existing warehouses. Merge-in-transit is especially useful to companies expanding into new geographical regions that may not be well served by their existing distribution network.
Image: Service coverage map showing areas reachable within 1, 2, 3 and more days from each distribution center

How can I predict how my future supply chain will look? When setting business goals that may include growth or expansion or revenue increases, retailers wonder how their case cost, inventory levels and DC network will be affected. Using LLamasoft network optimization tools, retailers can view a forecasted projection of how their supply chain network will need to be configured, including supplier and transportation network and DC number and locations, in order to handle increased volumes and/or service in new markets.

Should we consider multi-channel distribution? And if so, how do we execute it? LLamasoft supply chain design solutions such as network optimization can help identify strategies for improving sourcing and transportation strategy based on required service constraints. Understand how to manage channels such as retail, wholesale distribution, e-commerce, OEM and third-party channels in order to minimize overall costs while meeting unique demands in each channel. In addition, supply chain inventory optimization can provide a full inventory plan that includes optimal safety stock, cycle stock and pre-build inventory.

What’s the best way to get products to market? Sometimes relocating manufacturing and distribution facilities through network design is not a realistic option. For these companies, finding the most efficient way to get products to market is the key. Air or ocean? Direct distribution or through hubs? Should I use cross-docking? LLamasoft enables companies to confidently answer these and myriad other questions using modeling and scenario analyses.

Retail Customer Case Examples

A LLamasoft supply chain network design initiative often identifies 10 to 20 percent cost savings in a corporate supply chain while maintaining or improving customer service levels. For most retailers, this equates to millions of dollars in supply chain cost reduction. Here are some examples of how retailers have leveraged LLamasoft technology for competitive advantage:

Network Optimization for Planned growth: A global retail giant plans to grow its perishable business (frozen, dairy/deli, meat, and produce) through increased sales of existing products in current and new stores, as well as through the addition of thousands of new SKUs over the next 10 years. The current network did not have enough throughput capacity to enable the growth in sales of the current products, nor did the existing DCs have the pallet positions to accommodate the SKU growth. A model was built offering ten perishable network designs that could enable the throughput and SKU growth over the next ten years while minimizing cost and maintaining a high level of service to the stores, while also providing three optimal network designs without the SKU growth for use in the business case. The output identified optimal locations for new DCs, year-by-year opening sequence, store-to-DC assignments, and all associated flows and costs.

Omni-Channel Fulfillment: A large department store chain wanted to design an effective one-day and second-day delivery fulfillment network for its growing e-commerce channel. This included determining the optimal number, location and size for fulfillment centers as well as best way to flow merchandise through the network to customers. Utilizing network optimization and greenfield analysis, the company built an eight-year plan to expand capacity by establishing new facilities and incrementally increasing existing capacity as needed.

The analysis (image 2) considered costs and service times of UPS and FedEx standard service, next day service and second day service as well as zone skipping strategies. The resulting plan leveraged retail stores to meet peak season demand and as a method of satisfying local market demands where fulfillment center delivery time and/or total network costs may exceed local fulfillment costs.

DC-to-Store assignment: A U.S. retailer served its network of stores from three primary distribution centers in Boston, Houston and Denver, with outsourced distribution capacity in Chicago, Los Angeles, San Francisco, and Seattle. They realized that some of their supply lines were unreasonably long. By optimizing their network, they discovered that adding a new DC in Atlanta and in-sourcing and growing the Chicago DC operation allowed them to save significantly on transportation costs by shortening and rationalizing supply lines and by balancing DC capacities (images 3 & 4). Determining the proper network configuration to serve the stores and to achieve the lowest total landed costs resulted in net savings of $6.2 million annually.

Cost-to-Serve Optimization: A North American retailer with over 900 stores and thousands of SKUs was profitable as a company, but had never been able to accurately calculate the total cost to serve each product to each customer (store) location (image 5). They hypothesized they had numerous store/product combinations that were highly unprofitable and wanted to optimize their overall cost-to-serve to eliminate unprofitable combinations. The model incorporated all key cost components throughout the supply chain and mapped the flow of each product to determine the stacked cost for each product at each location. The model also incorporated sale price to calculate profit margin and margin-to-serve, then used optimization technology to evaluate all the different flow options to determine the cost-optimal enterprise. The result was an overall cost reduction of over $22M million, with a two percent increase in profit margin.

LLamasoft Is Here to Help

LLamasoft is dedicated to helping businesses build optimized supply chains that help them thrive even in changing market conditions. Partnering with LLamasoft ensures you’ll have more than just software and technical support, but a growing community of supply chain design practitioners, workshops, training and coaching to guide you as you progress. To learn more, email or call 866-598-9831.

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