“Who designed this supply chain, anyway?”
It’s a common question from senior executives when confronted with an end-to-end view of their supply chain.
Many of the world’s best known companies’ supply chains grew from a series of historical accidents rather than intentional design. Because of this, a simple activity like mapping and visualizing supply chain flows can often spark critical questions such as, “Why are materials sourced from Region A, produced in Region B, then air-shipped as finished product back to Region A?” By creating living models of the corporate supply chain, companies can examine how their supply chains will perform under a wide range of market conditions and assumptions and analyze the trade-offs of cost, service and risk.
Many companies spend many millions of dollars on the implementation of ERP and advanced planning systems, yet continue to ignore the root of the problem. Without a doubt, these applications can bring immense benefits: An ERP system can streamline financial operations, a transportation management system (TMS) can ensure on-time transportation and controlled costs, a warehouse management system (WMS) can enable optimal picking and placement of products, and an advanced planning and optimization (APO) application can balance demand and capacity for an efficient manufacturing process. But that doesn’t change the fact that a suboptimal end-to-end supply chain operation can mean millions of dollars wasted on inefficient processes.
It is the “design” of a supply chain that can bring the most benefit across key metrics like cost, service, sustainability and risk. Given the new global reality of volatility, complexity and rapid change, supply chain design has become a critical business function. Forward-thinking businesses are continuously redesigning and improving their supply chains by using modeling technology to examine how their supply chains will perform under a wide range of market conditions and assumptions and analyzing the trade-offs of cost, service and risk.
Why Is Supply Chain Design Important?
The modern supply chain is an increasingly complex network that often stretches across continents and supports numerous market segments. With this complexity, the impacts of change are harder to determine and the risks involved with being unprepared grow higher. Volatility is also near constant in the business world today. Changes in demand, shifts in commodity prices, supply disruptions, variability in transportation availability, natural disasters, geopolitical change, and regulatory issues all impact the flow of goods to market.
Companies with supply chains built with only blue sky scenarios in mind are massively impacted when that clear weather takes a turn for the worst. Supply chain design enables companies to create accurate models of their end-to-end operations to engineer a better plan and to explore how potential changes affect service, costs, sustainability and risk.
The following are real-world examples of supply chain decisions that are made throughout the course of doing business which often lead to sub-optimal operations.
A consumer goods company has traditionally sourced their key raw materials from South America, processed perishable finished goods in the U.S., then ground shipped to their customers in the U.S. As demand in new markets (Europe & Asia) grew, the company airshipped their products to each new region to ensure freshness.
A food processor determined the production location of new products by where there was available capacity instead of considering the full product mix and total end-to-end supply chain costs.
A retailer continued to procure product individually from each of its eight North American DCs when stock was low, even though a major cost break for volume purchase was available if they were to flow things through a single crossdock.
Taxes & Duties
A manufacturer produced new products in the same facility as older products, even though the new products were made of a different material that has a unique tax/duty when shipped outside the local market.
Merger & Acquisition
A construction materials company maintained parallel distribution facilities for different product lines in close geographic proximity after merging with a competitor.
An automotive parts supplier was stocking every item in every warehouse to ensure peak response to each customer, regardless of service requirements or product demand history.
A distribution company used a single one-size-fits-all supply chain strategy, even though their customers have vastly different buying behaviors and the many products they have introduced over the years have a wide range of sales and turn profiles.
A clothing manufacturer signed a new service-level agreement with a massive retail chain, which meant prioritizing nearly all their capacity and throughput for a single customer.
The Evolution of a Supply Chain
Most corporate supply chains evolve over time through a series of individual decisions made in the face of immediate business needs. These decisions often appear to make perfect sense at the time and for the specific issue being addressed, but what is the actual cumulative effect of such decisions? These decisions probably seemed right at the time they were made; they saved a capital expense, or made an individual part of the company more profitable, or maximized production capacity at a single facility. But over a longer period they created inefficiencies in the supply chain.
Most companies make dozens, if not hundreds, of decisions that impact their supply chains each year. If each one is made in a vacuum, the inefficiencies can multiply and over time cripple a company, leaving it with a supply chain that eats up precious resources and negatively impacts the bottom line.
If these decisions are made in a supply chain design environment, especially one where solutions can be optimized and the results simulated, these decisions can be vetted to understand their total effect on the supply chain. Inefficiencies can be corrected or prevented from ever being implemented.
Design vs. Planning
Planning systems are incredibly valuable for running the day-to-day aspects of a business. Planning and execution systems automate, streamline, and optimize the existing operations of an organization. They keep many of the important parts of a company running smoothly, but what if the existing operations are not designed properly or not correctly positioned in relationship to each other? How well can the supply chain perform if the foundation upon which it is built is flawed from the start?
Consider the following examples:
Planning & Execution Systems
- An ERP system helps record financial transaction history with suppliers and customers, documents the costs of facility operations, captures orders, and rolls up revenues, costs, and profits.
- A TMS manages load building, tendering, route planning and tracking, driver scheduling and settlement issues, providing metrics and historical records of the corporate transport processes.
- A WMS manages the movement and storage of materials inside the warehouse, dictating the receiving, stocking location and picking order for products. It can provide detailed records of warehouse performance.
- An APO system helps minimize costs and keep products running down the line by planning what to make, on which equipment and in what order given the existing production capabilities.
- A design system can determine if a company is using the right suppliers or if they should even be selling to certain customers. It can help decide which facilities should be producing products to maximize profits.
- A design system can determine which products should travel along which routes and select what modes should be used to optimize service and costs. It can simulate alternative strategies to predict overall performance.
- A design system defines the best locations and capacities for warehouses and which products should be stocked in which facilities and at what levels to meet service levels, while minimizing end-to-end supply chain costs.
- A design system can determine the best facility to use in the production of specific products. It can also help identify the type and quantity of production equipment that will minimize cost and maximize capacity.
Supply chain design helps companies compete and win by giving them the tools to connect all the parts and capacities of their supply in a rational, measured and efficient manner so that the other tools—the ERP, WMS, TMS and APO—can do their jobs in an environment that maximizes their effectiveness. These planning tools, as valuable as they are, are only as good as the network they function in and that network should be designed, not just happen.
When to Use Supply Chain Design
Any time there is the potential for a significant change to the business operations of a company, there is an opportunity to leverage supply chain design. Some opportunities are a matter of course (a revised demand forecast, changes in the customer base) while others are more periodic (expansion into a new market or reaction to an acquisition) and some are rare (the company’s suppliers in Thailand are all under water) but in all of these cases design decisions need to be made. Making decisions with the aid of sophisticated models and tangible analysis on the impact of those decisions increases the likelihood of a desired outcome.
Planning and execution systems are critical to running a business. Supply chain design tools are critical to determining how a business should run.
Supply chain design is used to answer questions. Some of these questions are focused on near-term challenges while others look out over a longer-term time horizon. Questions also typically fall into the category of structure (the physical makeup of the supply chain) or policy (the decisions on flow and operations).
If any of these questions are being asked in the executive boardroom, supply chain design can likely provide insight:
- Should I use one of my existing DCs as an inbound consolidation center?
- Should I start delivering certain customers factory-direct? At what fuel cost do I need to add additional local DCs?
- When and where do I need to create additional production capacity?
- Do I insource or outsource manufacturing of these parts?
- What is the best way to decrease the company’s carbon footprint?
- To meet holiday demand, what products do we pre-build?
- What is the best frequency and design of multi-stop deliveries?
- Where should I position inventory to achieve my desired service levels?
- Can I profitably introduce this new product into the Asian market?
- Do I source components from local or low-cost countries?
- Should I rely on a third party logistics (3PL) supplier to manage my freight?
Creating a Supply Chain Design Competence
In order to use supply chain design as a competitive weapon, a company must first develop a competence in the process of continuously engineering their supply chain. Because supply chain design is very much a “human process” it is not enough to simply purchase and implement
a software tool. The companies that do this best focus on three core elements:
The Technology – The Individual – The Organization
When selecting the right supply chain design technology, a company should first determine the types of questions and challenges that their business will need to address. It would be best to find a single application or software platform that addresses each of these needs to avoid additional maintenance, training and IT infrastructure issues. The system should be able to scale to address the size and scope of models that the company will be building. As important as the technology itself, the software supplier should be able to support the organization through continued innovation and system maintenance.
Supply chain design is a very human activity, so it important to invest in the designers as much as the technology. Even with the most user-friendly software, the key analysts and modelers will require training, mentoring, and support to become proficient as designers. Since accurate operational costs and enterprise data are essential to supply chain design, creating a cross-functional team to provide access and validation of this data is also critical.
Finally, to achieve excellence in supply chain design, it is important to implement a methodology and systems that will facilitate the retention of project knowledge. IT systems can enable knowledge management, but the practice of knowledge management has to be fostered throughout all levels of the organization. To keep the supply chain design team focused on key business initiatives, corporate executives must know what questions the team can answer and be kept updated through consistent delivery of key metrics so they can understand the progress that is being made and the importance of the results.
By establishing these three key pillars, a supply chain team can be successful, not just for a single project but as an integral, repeatable process within the organization. Not only will the design team be able to execute supply chain design reviews at regular, scheduled intervals but they will also be able to add value whenever decisions are being made that will impact the supply chain. In addition, they will represent an important resource for the company when the inevitable unforeseen circumstance occurs that shocks the supply chain. While a fully trained, competent supply chain design team can’t prevent a natural disaster, they can make reacting to one easier and less costly.