Expert Insight: Guest Contribution
By Steve Cumbo
Date: July 30, 2009

Optimizing the Supply Chain Network


An Important Opportunity to Reduce Costs and Improve Customer Service

As companies struggle to stay in the black and conserve cash in today’s market, optimizing the supply chain network offers an important opportunity to reduce costs and improve customer service. Logistics Network Analysis enables forward-thinking decision-makers to answer the following:

1. Should we service our customers from a multiple facility network or should we consolidate our inventory?


If we consolidate, what are the inbound and outbound transportation premiums, labor and customer service trade-offs?  Consolidation will lead to a lower inventory carrying cost, safety stock and a reduction in inventory tax.

2. Does our network provide the optimal DC to customer alignment? 

Optimally aligning DCs with customers significantly reduces outbound transportation costs, which, in turn, reduces safety stock levels. A reduction in inventory also leads to lower holding costs.

3. How can we get product to our customers quickly, without paying significant transportation premiums?

An optimized network will effectively improve customer service by minimizing the average distance to each customer. By minimizing distance, product transit time is reduced, improving customer service time.

4. Are we overspending on transportation?

Optimizing distribution networks can significantly reduce transportation costs by identifying the most cost-effective mode to service customers. Key drivers include shipment weight and distance to the consignee. Many businesses find that they are able to reduce transportation costs by simply selecting the proper mode of transportation (i.e., LTL vs. parcel). A network analysis is critical to determining the correct mode of transportation, quantifying savings, and projecting the payback period and ROI.

5. Can we really save on operational costs by relocating our distribution operations?

Many businesses are overspending because they are not operating from an optimal location. In addition to transportation spend, a truly optimized network will factor in other decision criteria, such as lease rates and labor rates. Considering lease/labor rate research ensures that organizations understand the true operational cost to operate in various cities.
6. We may save in outbound transportation costs with an optimized network, but what about inbound costs?

While inbound transportation costs are certainly another important element in optimizing a network, we must consider the difference in the physical flow of product. Product that is inbound to the DC will typically come in larger shipments (truckload). For some businesses, product that is outbound from the DC will be in smaller shipments (parcel, LTL). These smaller shipments will result in significantly higher transportation costs per unit, thus having a larger impact on the total cost of the network. Most businesses will see an inverse relationship between inbound and outbound costs. As businesses locate closer to customers, outbound costs will decrease, but inbound costs will increase. Again, since most of the majority of transportation spend is on the outbound side, an optimized network is generally one that minimizes distance to customers.
7. Once our network is optimized, can we select any available site in the recommended city?

While most sites in recommended cities will result in reduced costs for your business, a detailed site selection can help identify unforeseen issues with potential sites. Traffic flow patterns, congestion, railroad traffic bottlenecks, etc., need to be identified and accounted for before final site selection.
8. We are looking to expand into new markets, does it make sense to operate a warehouse in that net market, or should we select a 3PL to manage this flow?

This answer is not a simple one, and requires detailed analysis of current demand, growth projections, self-managed vs. 3PL costs, risk, inventory requirements, facility size, etc. A supply chain consultant can assist greatly in this decision-making process, offering experience and analytical tools for this sort of analysis.

Agree or disgree with with our guest contributor's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the website. Upon request, comments will be posted with the respondent's name or company withheld.

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profile About the Author


Steve Cumbo is a Practice Development Manager at enVista. A Network Modeling expert with over ten (10) years of logistics network modeling experience, he has participated and managed projects involving logistics strategy, supply chain and transportation optimization, freight and warehouse analysis, warehouse slotting, and lean process improvements. Steve Holds a B.S. in Business Logistics from The Pennsylvania State University.


Cumbo Says:

Many businesses find that they are able to reduce transportation costs by simply selecting the proper mode of transportation (i.e., LTL vs. parcel).

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