Executive Briefings

Designing Supply Chain Networks the Right Way

Analyst Insight: Network design, network planning, network analysis, network optimization, or network studies - these terms have been used over the past 25 years to represent the work to determine how to set up logistics networks, how to analyze them for cost reductions, and how to re-plan them when something important changes. - Gene Tyndall, Executive Vice President, Tompkins International

Designing Supply Chain Networks the Right Way

Today's leading computer models are accommodating multi-echelon networks, with thousands of SKUs, and with nodes and links totaling in the hundreds of thousands. Further, the traditional problem of data availability is also not as limiting of a factor, since most companies have "Big Data" files that exceed the basic requirements of network models - data on products, sales, customers, orders, costs, freight and facilities. What is missing in most network planning, is conducting these projects with the business objective of strategic action-oriented designs.

Following are innovative practices for effective network designs:

• Design networks for decision-making. The operations strategy, with its required operational capabilities, should drive the network design for the enterprise. A multifunctional team should direct the work so that it produces the right business solution.

• The business objectives should drive the analysis. Include the operational capabilities, and the missions and functions of the needed facilities, along with the preferred flows of goods. Set overall targets for inventories.

• Instead of incorporating only the normal costs of outbound freight, warehouse operations, and inventory carrying, also include all inbound freight, real estate, order processing, planning and management, and taxes.

• Apply advanced analytics to the data. “Big Data”, while often including all that is needed to model the current state, is often not organized for network designs, nor is it analyzed for reasonableness and relevance. Analytics can yield insights that help define realistic scenarios.

• Design scenarios that address the supply chains. The real value of network design is found in its ability to meet the business strategies of the enterprise. Whatever these are - in markets, products, and product value propositions - must be delivered (enabled) by the supply chain networks. This means that scenarios should include DCs, FCs, cross-docks, alternative storage locations, and creative product flows.

• Traditional network planning has been designed to meet specific service levels at total minimum logistics costs, given sales forecasts. But, the real question should be, “how to set up the network to impact customer satisfaction, while operating at expected cost levels?” This objective requires advanced analytics to help frame the scenarios around what is possible, not what is forecasted to be needed.

• At least 3 to 5 business scenarios should be examined before selecting the right one for a company. Once the preferred scenario is clear, the business case should include value-based metrics that incorporate the “balanced scorecard” - i.e., financial as well as operational measures. Total investments should be clear, as well as estimated paybacks, along with expected total costs and margin implications, and expected revenue gains. These should all tie to the company financials and link with the business strategy that drove the network design. The risks should also be defined and mitigated.

The Outlook

Network designs in 2016 and beyond should be planned and produced much differently than those three years ago. Today, the right way takes into account the primary gaps and addresses the advanced principles that resolve the gaps and mitigates the risks. This will produce action-oriented network improvements that will satisfy and grow the customer base and thus can differentiate a company. We can expect to see more network designs, and hopefully more strategic and action-driven ones.

Today's leading computer models are accommodating multi-echelon networks, with thousands of SKUs, and with nodes and links totaling in the hundreds of thousands. Further, the traditional problem of data availability is also not as limiting of a factor, since most companies have "Big Data" files that exceed the basic requirements of network models - data on products, sales, customers, orders, costs, freight and facilities. What is missing in most network planning, is conducting these projects with the business objective of strategic action-oriented designs.

Following are innovative practices for effective network designs:

• Design networks for decision-making. The operations strategy, with its required operational capabilities, should drive the network design for the enterprise. A multifunctional team should direct the work so that it produces the right business solution.

• The business objectives should drive the analysis. Include the operational capabilities, and the missions and functions of the needed facilities, along with the preferred flows of goods. Set overall targets for inventories.

• Instead of incorporating only the normal costs of outbound freight, warehouse operations, and inventory carrying, also include all inbound freight, real estate, order processing, planning and management, and taxes.

• Apply advanced analytics to the data. “Big Data”, while often including all that is needed to model the current state, is often not organized for network designs, nor is it analyzed for reasonableness and relevance. Analytics can yield insights that help define realistic scenarios.

• Design scenarios that address the supply chains. The real value of network design is found in its ability to meet the business strategies of the enterprise. Whatever these are - in markets, products, and product value propositions - must be delivered (enabled) by the supply chain networks. This means that scenarios should include DCs, FCs, cross-docks, alternative storage locations, and creative product flows.

• Traditional network planning has been designed to meet specific service levels at total minimum logistics costs, given sales forecasts. But, the real question should be, “how to set up the network to impact customer satisfaction, while operating at expected cost levels?” This objective requires advanced analytics to help frame the scenarios around what is possible, not what is forecasted to be needed.

• At least 3 to 5 business scenarios should be examined before selecting the right one for a company. Once the preferred scenario is clear, the business case should include value-based metrics that incorporate the “balanced scorecard” - i.e., financial as well as operational measures. Total investments should be clear, as well as estimated paybacks, along with expected total costs and margin implications, and expected revenue gains. These should all tie to the company financials and link with the business strategy that drove the network design. The risks should also be defined and mitigated.

The Outlook

Network designs in 2016 and beyond should be planned and produced much differently than those three years ago. Today, the right way takes into account the primary gaps and addresses the advanced principles that resolve the gaps and mitigates the risks. This will produce action-oriented network improvements that will satisfy and grow the customer base and thus can differentiate a company. We can expect to see more network designs, and hopefully more strategic and action-driven ones.

Designing Supply Chain Networks the Right Way