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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

July 30, 2013



Avoiding Capital Investments: A Hidden Benefit of Network Design

People Expect to Find Savings when Doing a Network Design Study, Often Overlooking the Value of Delaying Capital Investments


Dr. Watson Says:

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...you can often avoid capital investment with a good network study.
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When people talk about the savings they get from network design, they mostly focus on the transportation, warehousing, or manufacturing savings.

This is a reasonable thing to talk about since network design studies are good at finding these savings.

But, there is another category of savings that doesn’t get as much attention as it should: capital avoidance. This doesn’t get as much attention, because the result is that you do nothing. But, it shouldn’t be like this. If the alternative to “doing nothing” is investing $15M in new capacity, then you should consider “doing nothing” a big success.

So, how do you find savings by avoiding capital investments? When a firm thinks it is running out of capacity, it will allocate money to invest in more. But, you can avoid this capital investment with a good network study.

A network design study with a special focus on capacity can help avoid this investment in capital by forcing the organization to understand capacity and by looking at the supply chain.

Capacity is tough to measure. A warehouse manager may claim that they are running at 125% of capacity. This seems impossible until you consider that they may be measuring against an outdated theoretical number or may be storing product in creative ways. Likewise for a manufacturing plant, the capacity may change with small staffing changes, changes to overtime policy, or the mix of products running down the line.

Previous Columns by Dr. Watson

Supply Chain by Design: Reinforcement Learning Explained Using the Beer Game

Supply Chain by Design: Simple Game for Teaching the Value of Optimization

Four Supply Chain Lessons from the Amazon book The Everything Store

Supply Chain by Design: What Toyota, Schneider National, PayPal, and Palantir Got Right

Supply Chain by Design: Service Level Measures in the Supply Chain, Part 2

More

I have found that companies are often surprised by how much capacity they have when they go through the rigorous process of loading capacity into a network design tool. This process alone may help avoid the capital investment.

In addition, a network model that considers the entire supply chain can often find additional capacity by shifting products to different plants or reassigning customers.

In the end, if the expenses go up a little, but you are able to avoid a big capital investment, you have done well.


Final Thoughts

One company I worked with took this idea to the extreme. Instead of investing in a new plant to support some of their remote markets, they decided to get out of those markets and focus on their markets closer to their existing plants. So, this type of analysis can be quite strategic.


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