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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

March 19, 2014



A New Trend in Network Design: Flow Path Modeling

What is Flow Path Modeling and How Does it Work?


Dr. Watson Says:

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...Any company that realizes there may be benefits to having product flow through the supply chain in different ways could benefit from flow path modeling...
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One of the newer trends in network design is the rise in flow path modeling.  That is, how should product flow from the supplier to the end customer.  The basic concept is that there are many different paths a product could take—it could go directly from the supplier to local warehouse or it could flow from the supplier to a central warehouse, to name just two examples—and the modeling helps you figure out the best path for every product. 

It is probably not surprising that the rise in flow path modeling closely follows the increase in interest in modeling omni-channel supply chains.  Retailers realize that they are under more pressure to deliver to the customer across many channels.  This often means that the same product may follow a different flow path, depending on its end use. 

Keep in mind that flow path modeling is more than just omni-channel.  Any company that realizes there may be benefits to having product flow through the supply chain in different ways could benefit from flow path modeling.

But, there is some confusion about what flow path modeling is.  Is it an inventory problem, because one of the typical benefits is reducing inventory (think about centralizing slow moving items)?  It is often discussed in the context of network design, but you usually aren’t making facility open and close decisions when you analyze flow paths. 

Previous Columns by Dr. Watson

Supply Chain by Design: Why Driverless Trucks May Create the Need for More Drivers

Supply Chain by Design: A Non Obvious Way Self Driving Trucks May Impact Your Network Design Strategy

Supply Chain by Design: How You Should be Using Multi-Echelon Inventory Tools

Supply Chain by Design: You Don't Need the Optimization in Multi-Echelon Inventory Optimization

Supply Chain by Design: On Network Modeling - Blaspheming the Baseline

More

In practice, flow path modeling typically is much closer to network design.  Instead of giving the network design tool options in terms of warehouses to open and close, you give the network design tool options in terms of flow paths that the products can take.  For each option, in addition to the inventory implications, there may be implications to capacity required, labor costs (if we flow the product in full pallets or in cases), or transportation costs (if we flow the product in full truck or LTL).   On top of this, you may model economies of scale.  For example, if you can ship enough total volume into a central warehouse, you may be able to more easily get daily full trucks to the regional warehouses. 

When solving a flow path model, the optimization sorts through all the possible options (and they add up quickly in these models) and considers all the possible economies of scale to find the best flows through the supply chain.

You do need to be careful when modeling the inventory implications because inventory costs are typically non-linear with respect to total flow.  That is, the inventory costs of 100 units of flow may be $25, but the costs only $35 when the flow is 200 units.    



Final Thoughts:

Flow path modeling is not trivial.  But, just setting up the model can teach you a lot about the subtle trade-offs in your supply chain.  And, solving the model can uncover some nice benefits.



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