Executive Briefings

Ten Steps to Transforming the Supply Chain

Analyst Insight: For the better part of 40 years truly leading-edge firms have made supply chain design/redesign using network optimization models an integral part of their overall corporate strategy. The focus has gradually evolved from a myopic consideration of the number and location of warehouses to a comprehensive examination of the entire supply chain, from sources of raw materials to the customer. The principal impediments to success are myopic scope and failure to institutionalize the process. - Jeffrey J. Karrenbauer, President, Insight Inc.

A typical supply chain redesign study proceeds as follows:

Step 1: Establish Project Scope.  Consider a representative list of issues which may be addressed by a contemporary supply chain design tool, such as: System Structure Issue, Facility Ownership Issues, Facility Mission Issues, "What If" Issues (i.e., Sourcing, S&OP, Sustainability, Flexibility, Capacity Planning, etc.). It is clear that the breadth of issues noted here is a far cry from the old "warehouse locations models."

Step 2: Describe the Network. Network description consists of developing lists for the commodities, locations, channels and time periods "¦ the building blocks of the model.

Step 3:  Obtain Customer Demand Data.  Customer demands, measured in units of weight, cube or units must be obtained for each customer region/channel/finished product/time period.

Step 4:  Obtain Freight Costs. Possible sources include the firm's own rates, distance-based equations, and sophisticated simulations of proposed traffic management policies. Commercially available databases are available for less-than-truckload (LTL), truckload (TL), and parcel rates for most North American locations "¦ but not elsewhere.

Step 5:  Obtain Facility Data.  Facility data consist of procurement, manufacturing, distribution center, cross-dock, port, etc., costs and capacities, as well as bills of material at manufacturing locations.

Step 6:  Validate the Model.
  At this point, the model structure and database are essentially complete. But before succumbing to the temptation to turn the optimization engine loose, it is essential that the database be validated by means of an historical cost/flow baseline.  The model is "locked down" to reflect historical facilities and flows and the results are compared with accounting data.

Step 7:  Prepare Scenario Generation Data.  Key to the success of a strategic supply chain design study is the rapid generation and solution of a wide range of scenarios. Real learning takes place as the team works its way through a well-structured series of "what if" questions.

Step 8:  Run Optimization Exercises.
  Each scenario defined in step 7 is done in conjunction with running a solver engine, a computer-based algorithm that takes a given set of data and finds the best (optimal) network configuration.

Step 9:  Analyze Solver Results.
  Contemporary supply chain design packages come with an extensive repertoire of results interpretation/presentation aids, including maps, business graphics, canned reports, and links to powerful graphics packages.

Step 10: Develop the Plan of Action.
  The desired result of a supply chain design study should be a plan of action, not simply a recommendation for more study.

Outlook

There is an unfortunate belief among some that supply chain strategy in general, and network design in particular, should be revisited only periodically, say once every five years or so.  Nothing could be further from the truth "¦ or potentially more damaging to the firm.  Contemporary supply chains exist in an environment so dynamic that leading-edge firms use supply chain design tools on a continuous basis and revisit major strategic questions at least annually.

Keywords: supply chain management, supply chain management IT, supply chain systems, supply chain design tools

A typical supply chain redesign study proceeds as follows:

Step 1: Establish Project Scope.  Consider a representative list of issues which may be addressed by a contemporary supply chain design tool, such as: System Structure Issue, Facility Ownership Issues, Facility Mission Issues, "What If" Issues (i.e., Sourcing, S&OP, Sustainability, Flexibility, Capacity Planning, etc.). It is clear that the breadth of issues noted here is a far cry from the old "warehouse locations models."

Step 2: Describe the Network. Network description consists of developing lists for the commodities, locations, channels and time periods "¦ the building blocks of the model.

Step 3:  Obtain Customer Demand Data.  Customer demands, measured in units of weight, cube or units must be obtained for each customer region/channel/finished product/time period.

Step 4:  Obtain Freight Costs. Possible sources include the firm's own rates, distance-based equations, and sophisticated simulations of proposed traffic management policies. Commercially available databases are available for less-than-truckload (LTL), truckload (TL), and parcel rates for most North American locations "¦ but not elsewhere.

Step 5:  Obtain Facility Data.  Facility data consist of procurement, manufacturing, distribution center, cross-dock, port, etc., costs and capacities, as well as bills of material at manufacturing locations.

Step 6:  Validate the Model.
  At this point, the model structure and database are essentially complete. But before succumbing to the temptation to turn the optimization engine loose, it is essential that the database be validated by means of an historical cost/flow baseline.  The model is "locked down" to reflect historical facilities and flows and the results are compared with accounting data.

Step 7:  Prepare Scenario Generation Data.  Key to the success of a strategic supply chain design study is the rapid generation and solution of a wide range of scenarios. Real learning takes place as the team works its way through a well-structured series of "what if" questions.

Step 8:  Run Optimization Exercises.
  Each scenario defined in step 7 is done in conjunction with running a solver engine, a computer-based algorithm that takes a given set of data and finds the best (optimal) network configuration.

Step 9:  Analyze Solver Results.
  Contemporary supply chain design packages come with an extensive repertoire of results interpretation/presentation aids, including maps, business graphics, canned reports, and links to powerful graphics packages.

Step 10: Develop the Plan of Action.
  The desired result of a supply chain design study should be a plan of action, not simply a recommendation for more study.

Outlook

There is an unfortunate belief among some that supply chain strategy in general, and network design in particular, should be revisited only periodically, say once every five years or so.  Nothing could be further from the truth "¦ or potentially more damaging to the firm.  Contemporary supply chains exist in an environment so dynamic that leading-edge firms use supply chain design tools on a continuous basis and revisit major strategic questions at least annually.

Keywords: supply chain management, supply chain management IT, supply chain systems, supply chain design tools