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SCDigest Expert Insight: Supply Chain by Design

About the Author

Dr. Michael Watson, one of the industry’s foremost experts on supply chain network design and advanced analytics, is a columnist and subject matter expert (SME) for Supply Chain Digest.

Dr. Watson, of Northwestern University, was the lead author of the just released book Supply Chain Network Design, co-authored with Sara Lewis, Peter Cacioppi, and Jay Jayaraman, all of IBM. (See Supply Chain Network Design – the Book.)

Prior to his current role at Northwestern, Watson was a key manager in IBM's network optimization group. In addition to his roles at IBM and now at Northwestern, Watson is director of The Optimization and Analytics Group.

By Dr. Michael Watson

February 27, 2013

Supply- and Demand-Centered Modeling: A Follow Up to 2013 Priorities

In Dan Gilmore's 2-Part Series on Mapping and Modeling the Supply Chain, He Mentioned that Most Companies Start with Supply- or Demand-Centered Modeling. Here is Why and What That Means.

Dr. Watson Says:

A good practice at companies with sophisticated modeling capabilities is to iterate between the demand-centered and supply centered models.
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In many cases, I’ve had to suggest to companies that they need to split up their supply chain model.  And, As Dan pointed out, companies tend to split their models into supply-centered or demand-centered.   This is a great way to think about it.  However, the question I get from nervous managers is:  "By splitting it, won’t we be leaving something important out?"  This is a variation of the question:  "Won’t we be sub-optimizing?"

This is fair question. 

Here is the first answer:  Probably Not.

Although supply chains are complex and inter-related, some costs will still dominate others.  Take an extreme case.   If you are locating retail stores, this decision is 100% driven by proximity to your customers.  Even though the location of the store will have some impact on the cost to replenish that store from the warehouse, this cost difference will be absolutely swamped by the value of locating the store where you will get the best foot traffic.

Of course, the trade-offs are more subtle when locating warehouses or plants.  But, it is just as likely that one or two costs (or strategic interests) will swamp the others.  You should take advantage of this fact to build simple, yet valuable models.

Here is the second answer:  Maybe, but there are still benefits to splitting the model.

If the answer is “maybe,” you likely have a very complex supply chain.  And, counter-intuitively, the more complex the supply chain, the more benefit from starting with a simple model.  A simple model lets you understand

Columns by Dr. Watson

Supply Chain by Design: Seven Ways You Can Think About Christmas Capacity to Avoid Having the Press Blame Your Supply Chain for Missed Deliveries

Supply Chain by Design: Machine Learning and High Quality Potato Chips

Supply Chain by Design: Simple Models to Solve Complex Fast Delivery Problems

Supply Chain by Design: CSCMP Report - Five Take-Aways on Natural Gas Trucks from the AB InBev and Owens Corning Talk

Supply Chain by Design: CSCMP Report - Six Insights from LLamasoft and JLL

Supply Chain by Design: CSCMP Report - Five Supply Chain Design Lessons from Benjamin Moore and How One is Used by Amazon in their 1-hour Delivery Service

Supply Chain by Design: CSCMP Report - Two Supply Chain Design Lessons from Starbucks CEO

Supply Chain by Design: Four Groups that Need to Step Up to Help Make Network Design More of a Profession

Supply Chain by Design: Top Four Best Practices for Multi-Objective Optimization

Supply Chain by Design: Caesars Entertainment's Customer Data is Worth $1B - How Much is Your Supply Chain Data Worth?

Supply Chain by Design: Using Transactional Data to Estimate Truckload Market Conditions in Near-Real-Time

Supply Chain by Design: Routing Optimization is Hard: Lessons from UPS

Supply Chain by Design: Eli Goldratt's Book "The Goal" is on Jeff Bezos (Amazon) Reading List

Supply Chain by Design: Top Five Rules for Cleaning Data for a Strategic Analysis

Supply Chain by Design: Network Design and Accounting Data

Supply Chain by Design: Sears Case Study - Same Day Delivery

Supply Chain by Design: Three Ways UPS and FedEx Handled Christmas 2014

Supply Chain by Design: Deepen Your Optimization Knowledge Over the Holidays with Free E-book

Supply Chain by Design: Calculating Supplier Lead-Time Variability - Not as Easy as It Seems

Supply Chain by Design: The Myth of the Market Rate and Network Design Projects

Supply Chain by Design: Three Ways the Supply Chain Wastes Big Data

Supply Chain by Design: Three Supply Chain Lessons from the book Scaling Up Excellence

Supply Chain by Design: What to Do About the Rise in Costs Because of the Trucker Shortage

Supply Chain by Design: Modeling Your Competitors

Supply Chain By Design: Just Because the Feature Exists, Doesn’t Mean You Should Use It

Supply Chain by Design: Just Because People are Talking about Big Data Doesn’t Mean it is Clean Data

Supply Chain By Design: Can Western Manufacturing Be Saved: What Does it Mean to Your Firm?

Supply Chain By Design: Optimized Baseline and the "Perfect" Network Design

Supply Chain By Design: Become more Analytics-Driven to Recruit Talent

Supply Chain By Design: Step Up Your Preventative Maintenance with Predictive Analytics

Supply Chain By Design: Demystifying Stochastic Optimization

Supply Chain By Design: More on Big Data in the Supply Chain

Supply Chain by Design: Should You Extend Your Network Design Capability with a Map Portal?

Supply Chain by Design: A New Trend in Network Design: Flow Path Modeling

Supply Chain By Design: Top 5 Skills You Need in a Supply Chain Modeler

Supply Chain By Design: Comment on Biggest Supply Chain Planning Technology Challenges

Supply Chain by Design: Beyond the Square Root of N Rule

Supply Chain by Design: UPS's Christmas Problem Explained in One Graph

Supply Chain By Design: Your One Network Design New Year's Resolution

Supply Chain By Design: 80/20 Rule for Supply Chain Design

Supply Chain By Design: What Makes a Good Inventory Buffer

Supply Chain by Design: Some Things Do Not Change: Cost and Service Trade-Offs with Air Shipments

Supply Chain By Design: The Impact of Natural Gas Trucks On Your Supply Chain Design and Capabilities

Supply Chain By Design: Controlling Inbound Transportation with Inventory

Supply Chain by Design: Three Types of Supply Chain Buffers

Supply Chain by Design: Systems Thinking and the "Limits" of Optimization

Supply Chain By Design: 3D Printing and Robotics - Disrupting the Dominant Supply Chain Model

Supply Chain by Design: Future Supply Chain- Airships and the Physical Internet

Supply Chain By Design: Avoiding Capital Investments - A Hidden Benefit of Network Design

Supply Chain by Design: Three More Reasons the Impact of the New Hours of Service Rules May Not Be So Drastic

Supply Chain By Design: Three Ways to Handle the Lag Time from Modeling to Implementation

Supply Chain By Design: Three Quick Steps for Analyzing Big Data

Supply Chain by Design: What is Big Data?

Supply Chain By Design: Using Optimization to Compare Facilities or Internal Benchmarking

Supply Chain By Design: Four Steps for Thinking About An Optimization Problem

Supply Chain By Design: Don't Let the Term "Optimization" Become a Buzzword

Supply Chain By Design: Supply Chain Models Can Go Wrong - A Different Perspective

Supply Chain By The Numbers: Top Three Ways Supply Chain Models Can Go Wrong

Supply Chain By Design: Supply- and Demand-Centered Modeling: A Follow Up to 2013 Priorities

Supply Chain By Design: Three SCDigest Predictions You Should Be Modeling

Supply Chain by Design: Cost to Serve Modeling

Supply Chain By Design: Top Five Models You Should Build in 2013

Supply Chain By Design: Should You Source from China or the US? Why Not Both?

Supply Chain By Design: Same Day Delivery and Network Design

Supply Chain By Design: Political Supply Chain and Network Design

Advanced Analytics in Supply Chain - What is it and is it better than Non-Advanced Analytics?

important trade-offs and complexities.  A simple model helps you discuss the supply chain with others in your organization.  Then, with several simple models you can start to create larger models.

Now that you’ve decided to split up the models, here is how you can start to think about the models. 

A demand-centered model starts with your customers and their demand.  You are plotting customers by the ship-to location.  It is a typical practice to aggregate customers by 3-digit zip code and then segment them by characteristics like mode (TL or LTL), channel (stores or on-line), and service (next day or 3-day).  These models then decide how many, where, and the territories of the warehouses.

Many good demand-centered models stop there.  Some will model the location of the plants or suppliers, but treat these locations as fixed.  These models are primarily looking at reducing cost and improving service levels.

A supply-centered model starts with the suppliers and ends at the assembly plant or the final warehouse (which is modeled as a fixed demand point).  These models do not get into the details of the final customers, but instead analyze products at a more granular level.  The purpose of these models is to determine what is made at each plant, how many shifts to run, where to add equipment, how to best use suppliers, how to deal with seasonality, and possibly where to locate plants. 

Final Thoughts

A good practice at companies with sophisticated modeling capabilities is to iterate between the demand-centered and supply centered models. That is, instead of eventually building one large model, these firms have a lot of success iterating between the two models. Implementing changes is can be complex and the two simple models allow you to do this in a more manageable way.

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