Given the choice of staging a California customer's multi-part order in California or Mississippi, one would always pick the former, right?
Not necessarily. It's entirely possible that the Mississippi distribution center can do the job cheaper, without jeopardizing customer service. Yet such an option is rarely visible without the help of a sophisticated tool for supply-chain optimization.
It's even less evident when the manufacturer in question turns out a product with a huge number of variations, sourced from multiple sites. Case in point: Muscatine, Iowa-based HON Industries, Inc. The third-largest maker of office furniture in North America, and largest in the middle market, HON has a total SKU count of more than 10 million, according to Malcolm Fields, vice president and chief information officer.
Of course, the company doesn't have that many models sitting around in a warehouse somewhere. Like most office-furniture makers, HON operates on a build-to-order basis. As such, it operates a highly service-intensive supply chain. Yet service levels for this $2bn company were far from satisfactory.
HON's production and distribution scheduling was run by various legacy systems with big gaps in their capabilities, Fields says. They couldn't account for constraints in the DCs, which could be overwhelmed by product. A single order might consist of up to 600 line items, all coming from different places. Yet the system routinely dictated that staging and shipping take place at the DC closest to the customer, regardless of how much volume was already at that location.
Customers want their orders delivered whole, so if one piece is held up, the whole thing sits. That helps to explain why HON was experiencing 99-percent on-time delivery from its plants to DCs, but only 62 percent from the DCs to customers. In addition, overall costs were unacceptably high.
HON saw the need to schedule manufacturing and distribution based on its total cost of supplying product. Running 25,000 line items a day, it wanted to optimize transportation between 13 facilities, six of which are fully operating DCs, able to handle shipments both inbound and outbound.
It started casting about for a commercial solution around 1997, when software vendor SynQuest Inc. had no such product to offer. But by 1999, when HON began its search in earnest, SynQuest had developed an applicable tool. Uncharacteristically, HON chose it over the larger vendors with whom it generally prefers to work. The other finalist proposed to do the job in stages: optimize production, then implement a distribution plan. HON, says Fields, wanted the whole package at once.
SynQuest provided HON with the ability to work network constraints into its planning. It allowed the customer to view both production and logistics capacities simultaneously, to come up with a rational delivery plan. At the same time, it calculated the lowest-cost carrier and route for transportation.
SynQuest's Dynamic Sourcing Engine figures when and how much to build, which DC to use, and how best to consolidate orders to the customer, says Chris Jones, vice president of marketing and corporate development. When sourcing options are available, it produces the lowest delivered cost. Hence the possibility that a California-based order might be sourced out of Mississippi. Instead of allowing multiple trucks to move pieces of an order over the long haul, SynQuest will instruct HON to consolidate items into a single vehicle, thus taking advantage of lower rates for truckload transit. "If there are four ways of making a customer delivery date," says Jones, "we find the cheapest way every time."
With better planning ability, HON was able to push on-time delivery to customers into the mid-90s, Fields says. At the same time, costs went down. In the third quarter of 2000, freight was 6.5 percent of sales. By the same period of 2001, it had dropped to 5.8 percent. And while SynQuest wasn't the entire reason behind the change, it was a strong contributing factor. Says Fields: "We have saved thousands of dollars every day we have run this tool."
HON might next look to SynQuest for better routing and control over its inbound freight. Although its needs on that end are less complex, the company still stands to save money by deploying dynamic sourcing further up the supply chain, to secondary plants and suppliers, Jones says. In addition, HON hopes to acquire a tool for optimizing the placement of manufacturing and distribution facilities.
Fields predicts big changes as a result. "If it doesn't change the way the network works," he says, "it's a failed project."
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