Expert Insight: Supply Chain InView
  By Ann Drake  
  November 15, 2007  

Why Focus on Pennies When you Can Save Millions?

  Find Supply Chain Savings Opportunities By Conducting a Network Modeling Exercise Using Supply Chain Network Optimization Tools  
Drake Says:
Before conducting yet another supply chain bid, consider this important part of the puzzle: You actually can seek and find opportunities for supply chain savings that can be measured in the millions of dollars.

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In previous blogs, we have focused on decisions 3PLs must make – about the scope of services and the ways in which we provide those services. At this point, I would like to turn the direction, face you -- the customer -- and concentrate on choices you can make, in tandem with your current logistics/supply chain partner or prospective provider.  

So often in the third party logistics business, the tendency is to drill down on cost savings that are measured in pennies: cost per throughput case, cost per mile or cost per cubic foot. Your company may find itself spending untold hours creating elaborate Request for Proposals, analyzing rates and negotiating commercial terms with multiple service providers, just to contain costs or to save a few pennies. But before conducting yet another supply chain bid, consider this important part of the puzzle: You actually can seek and find opportunities for supply chain savings that can be measured in the millions of dollars. This can be accomplished by conducting a network modeling exercise through the use of supply chain network optimization tools.

The goal of network modeling is to optimize your supply chain costs and service implications across your entire supply chain. Through the use of powerful algorithms, network models seek to calculate the most cost effective route for all product demand moving from production to final delivery. The typical modeling process follows these four steps:

  • Collect Data: Current supply chain data (that may include customer shipment data, plant production processes and schedules, warehouse locations and costs, transportation modes and costs, and product characteristics) is collected and analyzed.
  • Create Baseline: The data is thoroughly scrubbed and processed into the software tool, which creates a baseline model of the current network and a physical mapping of the distribution lanes. In some cases, this baseline mapping will demonstrate “misalignment” of the distribution network with the customer demand. Misalignment is caused by changes in your supply chain that are not resolved with appropriate changes in your distribution network. For example, if you switch production from Mexico to Asia, that distribution center in southern Texas may not be in the best location anymore.  (More on misalignment in my next blog…)
  • Run “What If” Analysis: After the baseline misalignment is identified, the next step is to optimize the model through controlled “what if” iterations. Each iteration will attempt to properly align the customer demand to the best network design, resulting in an optimized network. During this stage, it is crucial to model “realistic” scenarios that actually can be implemented. For example, plant direct boxcar shipments to customers would be considered optimal in most models, but not practical in every situation. Applying realism to a network model is as much art as it science and only an experienced logistician will be able to distinguish the difference.
  • Select Best Option: The last stage in network modeling is often the most exciting: selecting the best option based on the potential savings and service improvements. This is where millions of dollars of supply chain savings can be identified based on adjustments to warehousing and transportation arrangements in your network.

Once you determine your optimal supply chain network, you and your supply chain partner will be able to move ahead with confidence toward implementation and capture those millions of dollars of savings.

One more thing to remember: After implementation, your journey does not come to an end. Network modeling can continue to help you re-optimize and re-align your network in order to effectively manage change in your supply chain.

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