Companies want to maximize service levels, but they also want to cut costs. These goals often contradict each other. How do you find the optimum balance? That’s what Supply Chain Network Design is all about. Until recently, supply chain network design was done once or on a project basis. Rising volatility and uncertainty have changed that. Companies are now running models on a quarterly basis and sometimes more frequently, as an ongoing activity, to adjust to changes in their business landscape. Let’s unpack the concept of network design and explore how it can help your organization.
Defining supply chain network design
Supply chain network design is about two things:
- Determining your supply chain’s footprint: where to place facilities and how big they should be.
- Determining how products should flow through the supply chain.
The supply chain network’s design will determine the capacity of the business’ facilities, and the movement of raw materials, intermediates, and finished goods – from the source to the point of consumption. All of this is typically supported by advanced mathematical modeling. Network design tools often have a solver in the back-end that can take the business’ complex constraints into account to deliver an optimal answer. What does this look like in practice?
Common use cases for supply chain network design
Network design is a strategic planning activity in most cases. But there are exceptions where network design software can fulfill tactical or even operational needs.
- Strategic network design: model in annual or monthly time buckets, and make sure your cost functions are good enough to validate strategic decisions. For instance, you can use network design to:
- Reduce “hard-coded” costs
- Optimize service levels
- Make DC Open / close decisions
- Optimize customer to DC allocations
- Optimize transport flows
- Optimize supplier, production and DC volumes
- Manage capacity constraints
- Understand cost to serve
- Perform M&A due diligence and post M&A rationalization
- Mitigate risks for disruptions
- Prepare business cases for investment
- Optimize carbon emissions
- Tactical planning: network design can be used to perform rough cut-capacity planning on a monthly basis or to support an S&OP process with a monthly supply/demand balancing solve. Still, the process and collaboration aspects of S&OP may be better handled in a tool specifically designed to manage that process.
- Operational planning: one example where a network design tool can be successfully used for operational planning is the placement of spare parts at forward stock locations in an MRO (maintain, repair, and operate) environment. This can be done at the SKU location level and run weekly, for example.
How can supply chain network design help your business?
As the use cases above show, designing a supply chain involves many complex, multi-million-dollar decisions. That’s why analysts like Gartner advise organizations to make network design a pillar of analytics initiatives within the supply chain. In a nutshell, supply chain network design can help you in four crucial ways.
1. Have informed conversations with business sponsors; make decisions based on data
Today’s supply chains are too complex to risk making decisions based on gut feel and Excel. Having a digital representation of your supply chain where you can model different scenarios and test assumptions can be incredibly helpful to make these complex decisions. As BT’s Transformation Director, David Mackenzie, explains:
“[Network Design] materially enhances conversations and dialogues. Where we previously would have a well-reasoned opinion to solve certain problems, we now have the data to support a better answer.”
2. Expose risks and build an agile and resilient supply chain
Forward-thinking supply chain leaders are also using network design to build resilience. We don’t know where the next pandemic, trade war or hurricane will hit. When it happens, you need to be able to react quickly. You should be able to model unforeseen disruptions, understand their impact, and put a plan in place that mitigates the negative impact on your bottom line. A supply chain network design technology that incorporates optimization and scenario modeling makes it easier to evaluate the impact of these disruptions and mitigate risks.
3. Minimize costs
Evaluating scenarios can be very helpful to pinpoint inefficiencies and cost-saving opportunities, as well as manage the complex trade-off between increased resilience and costs. Network design activities typically result in 2 to 5% savings in logistics costs. Check out our benefits calculator to calculate potential savings for your industry.
4. Optimize service levels
Whether you want to offer the best service to tier 1 customers, or the best service in the market, network design can help you optimize customer service opportunities. Scenario modeling helps you better determine the impact of choosing between dedicated or multi-DC fulfillment. In addition, it helps you better orchestrate fulfillment and lower lead times.
What are your options when it comes to supply chain network design software?
Have you identified that your business can benefit from supply chain network design after reading this blog? Then you will probably research the different tools in the market as well. Good news – we did this daunting job for you! Watch our 30 minute webinar to evaluate the options. These include spreadsheets, outsourcing to consultants, or using a tool like AIMMS Network Design.