We often get asked what kind of return on investment (ROI) you should expect to see when using our supply chain network design software. Like others in our peer group, we often find ourselves sharing a range based on results typically seen in the market.
Given that we are a data-driven (math-loving) company, we wanted to test this range by running some scenarios to see what kind of results companies can expect across a variety of verticals.
To do this, we built two representative models of a business. One in the pharmaceuticals industry and another in consumer hi-tech products. Both are significant in size (at around $7.5Bn in revenue each) and complex enough to justify between 20-30 distribution centers. Among all verticals, the pharmaceutical sector is poised to witness the most significant growth rate, according to Research and Markets 2023 report. While businesses differ in complexity and size, for this exercise we extrapolated based on these $7.5Bn baselines.
When the models are built, running scenarios with these large businesses can be a lot of fun. We were typically flexing volumes and adding or relaxing constraints and then only had to wait 15-20 seconds for the model to run on the cloud and tame these complex networks into a comprehensive solution.
Justifying the investment: Supply Chain Network Design ROI
The first hurdle to overcome is to justify the time investment and the cost of the software subscription. To do this, we assume that these sample new customers will initially optimize based only on their current distribution assets and constraints (such as lead times), and simply allow the technology to make the best of what they already have by optimizing customer/DC associations.
A $ 7.5B business will justify the investment easily with full payback within the first quarter of starting. Extrapolating to smaller, simpler businesses, it’s likely that an entity needs to be scaled at around $500M annual revenue and above to meet this first ROI hurdle.
Looking into opportunities
Having justified the project investment, it’s now time to get into the more substantial opportunities that present themselves in these sample $7.5B businesses, particularly at this time of great change.
We flexed demand by decreasing volume by 40% in 5% increments, and also by growing volume by 40% in 5% increments. These are numbers that aren’t unusual anymore – both high-tech consumer products and pharma are seeing major changes in different product categories.
We relaxed constraints to allow the model to add (and fund) more distribution centers and also close distribution centers, where they didn’t support an optimized solution.
The benefits modeled become considerable and reach the high tens of millions in logistics-intensive industries, such as pharma and high-tech. In these cases, we seem to have a potential positive impact of the equivalent of 1% of annual revenue when the network is re-optimized after changes of 30% to the volumes of the original network.
What we tend to see is businesses reducing relative transport costs as volumes shrink. This saving is then overwhelmed by oversized fixed costs. As volumes increase, assets tend to be better leveraged, but capacity shortages require the business to service customers from distribution centers that are further away. Eventually, the company overheats its assets and can’t service all customers.
Optimization ‘right sizes’ your network for each scenario. That’s why it’s key to be able to run a multitude of scenarios to get not “one right answer,” but to create a solution that is resilient to a wide range of volume changes and situations. Optimization is here to help you but keep in mind that it’s only a tool. The largest value comes from you posing great questions and exploring new, innovative scenarios.
The largest value of optimization comes from you posing great questions and exploring new, innovative scenarios.” – Tweet this
We hope the examples discussed above help you evaluate estimates of value that companies experience from leveraging network optimization software. Watch our short demo to see how AIMMS SC Navigator is used in practice.
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