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April 5 , 2007 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Supply Chain Network Optimization and Competitive Advantage

Is the evolving way some companies are using Supply Chain Network Planning and Optimization tools changing the basis of supply chain competition?

I think maybe so.

As many of you know, the redesign and optimization of supply chain network is very hot right now, more so than ever it seems to me. Virtually every week carries another story about one of more companies planning a major change to their supply chain networks. Recent examples include Hershey and ConAgra, but there are many more.

There are any number of factors driving these network changes, from the relentless need to reduce costs, taking a more holistic supply chain view, the way outsourcing and virtualization are changing supply chains, globalization, inventory reduction initiatives, transportation pressures, etc.

While there are a number of ways to approach the problem, use of what is generally termed “Network Planning and Optimization” software to drive the redesign process is common, and these tools are currently enjoying strong use and adoption as the number of network optimization projects expands.

The most recent issue of The Supply Chain Digest Letter, our hardcopy newsletter focused on a single topic, covered Network Planning and Optimization software in detail. If you didn’t receive your copy in the regular mail, go to to subscribe to The SCDigest Letter, and to access our resources page for Network Planning. There, you will find a pdf version of the newsletter, white papers, an excellent video overview, other articles on the topic, vendor profiles, and more.  

In doing research for this issue, what stood out is the changing way a growing number of companies are using these tools. In the past, network redesigns were generally undertaken every 3-7 years, when either the pain of logistics costs got too great, there was a merger or acquisition, or some other catalyzing event occurred. Generally, given this approach, companies would leverage a Network Planning software tool through a consultant, who are generally able to use the software for a specific project rather inexpensively.

What we found, however, is that a small but growing group of companies are adopting the use of these tools on a continuous basis. This means buying the tools, not just “renting” them from a consultant, and forming a dedicated team of some sort to continually help answer supply chain questions. Our research has found “teams” as small as one to as many as 6-7 at the very high end.

Perhaps the highest form of evolution here is Pepsico/Frito-Lay, which has such a dedicated team and uses a network planning tool to help drive a continuous series of strategic, operational and tactical decisions.

We provide a fairly detailed case study in this issue of The Supply Chain Digest Letter. I’ve spoken to several other companies in the last year or so that are taking somewhat similar approaches, and think this change might be more profound, and have a bigger impact on supply chain competitiveness, than is generally recognized.

Here’s the thesis:

First, companies using these tools on a continuous (Frito-Lay) or near continuous (quarterly review – Henkel Adhesives), are simply powering more decisions more often using smarts and processing power that are frankly impossible for humans to replicate across dozens or hundreds of options.

Second, companies taking this approach tend to not only use the tools for broader strategic decisions and network “tweaking,” but also to support much more near-term planning decisions, from master planning to support for sales and operations planning (a growing trend), new product introduction strategies, production line decisions, and more.

Third, these companies seem in parallel to build into their cultures a bias towards change and action – a more determined approach to continuous improvement and performance optimization.

The challenge with network planning tools in part has always been that they can just make recommendations. To unlock any value, companies must take these recommendations and put them into action, never an easy course.

I don’t know if it’s the chicken or the egg, but what our research shows is that companies using network planning tools not only get smart technology support for an ever widening array of decision-making, which should be worth a lot on its own, but also make more decisions, and execute those decisions more quickly. They strive more continuously towards optimality.

It seems to me that if I am even close to right, this is a huge competitive advantage for companies like Pepsico/Frito-Lay and others in terms of supply chain cost and responsiveness.

Or so it seems to me. But I would welcome your thoughts.

If this is an area on your radar, we think you will find The SCDigest Letter and accompanying Resource web page of interest. We put a lot of effort into this – think you will benefit from that work.

Do you agree that companies employing Supply Chain Network Planning and Optimization technology on a consistent basis can gain an important competitive advantage? Why or why not? Do you think times are changing enough that more companies could be taking this approach? Let us know your thoughts at the feedback link below.

Let us know your thoughts.


Dan Gilmore


Supply Chain 

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After a very strong performance the week before, it was a strong down week for our supply chain and logistics stock index, though the losses were modest.

Only three of our 22 index stocks managed a gain as the third quarter came to a close.

See stock report.


This Week’s Supply Chain News Bites – Only from SCDigest

April 5 , 2007
Williams-Sonoma Continues to Use Supply Chain to Drive Shareholder Value

April 4 , 2007

New Application for Making Supplier Managed Inventory Work

April 4 , 2007

Is the Expanded Manhattan Associates and IBM Relationship a Bullish Sign for Best-of-Breed Software?

April 4 , 2007
HP Announces Energy-Saving Initiatives

April 4 , 2007
Supply Chain Executives on the Move at Retailer Sterling Jewelers, Chemical Manufacturer Rohm and Haas

April 4 , 2007
Hanesbrands, Hoover Vacuum, to move U.S. Factories Offshore to Reduce Supply Chain Costs


Tesco's CEO Identifies Key Retail Trends

Sir Terry Leahy sees opportunity in simplifying life for shoppers, supporting interest in "green" and healthy products; consumer "trust" is also increasingly important


by Mike Loughrin

Let's Get Lean in 2007

New SCDigest Lean Expert Columnist Presents Lean Supply Chain Model, Asks for Reader Feedback for On-Going Program


by Dr. John Gattorna

The People Impact on Supply Chain Performance

Are We In Denial, or Just Don't Know?


Have a supply chain or logistics related questions you need answered?

Ask our panel of experts.

See our growing list of questions and answers - share your insight.

Featured Question and Answer: Are there any rules of thumb about when you should use floor storage versus rack storage? Is there usually a "right" answer for a given operation?


Q. What was "The Machine That Changed the World"?

A. Click to find the answer below


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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We're now reallyl behind - be patient if your letter has not yet been published

We had a decent number of responses to our First Thoughts a few weeks ago on Reverse Logistics (see Logistics in Reverse Gear). That includes our Feedback of the Week from Jeff Moore of Excel Fashions, who shares a personal anecdote, a letter from India, and another from friend of SCDigest and Expert Panel member Chris Norek of Supply Chain Connectors. Good comments all!

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week – Reverse Logistics

I have heard an interesting anecdote that raises several issues.

A friend employed in the furniture industry sold product in stores and online through Costco. Apparently Costco's guarantee stated that you could return a product at anytime for any reason if you were not completely satisfied for a full refund. A check of their site confirms a similar statement is still in effect with some limitations on electronics. The deal with Costco was initially a no claims discount negotiated up front. That left all claims to be handled by Costco. This arrangement benefited my friend's company greatly. The product usually involved a suite of furniture sold as a single SKU by Costco. The Costco service center's typical response was to send a replacement. This meant my friend's company sent out a complete suite regardless of the problem and was paid again under the no claims agreement.

I think things in general have changed with the big retailers. You see more and more on products they sell, instructions not to return to the store but contact the supplier with claims. This was indeed the case for my friend's company. Costco droppedthe no claims agreement and all service issues were referred to them. They had to hire additional staff to manage consumer complaints and develop outsourced service strategies to fix problems in consumer homes to prevent returns. When replacement was required, they were able to better address service issues by only replacing actual problem items as opposed to the entire suite as was previously the case.

My friend received a call one day from a consumer who just didn't like his furniture anymore after having it in his home for 18 months. He requested a refund under Costco's satisfaction guarantee and got it. My friend has developed a new service option, the outsourced “pick up and destroy” order. They do not allow the goods to remain in the consumer's home and receive a refund yet theywere not worth the cost to return.

I am not aware of the change in costs associated with their responsibility to handle service directly, but they must far exceed their earlier no claims agreement. The shift to service responsibility under the warrantee promises of the retailer is an issue any company must consider before entry into these business arrangements.

Jeff Moore
Excel Fashions

More on Reverse Logistics:

Reverse Logistics is not getting the importance it deserves, even in the developed economies. A major reason is the lack of incentive - or shall we call disincentive -that is associated with good reverse logistics management. Today, the main driver and objective of the financial part of the supply chain is understandably on the goods reaching the customer. Apart fromabsolute necessity, restrictive laws in some countries, and thesense of corporate responsibility exhibited by the supplier, little else is provided as incentive to manage your own reverse logistics.

It is high time that the return logistics is taken seriously especially in those goods, especially in the non-biodegradable segment

Larsen & Toubro Limited

I just read through your commentary on returns management.  I spent a significant amount of time four to five years ago in this area and I was definitely premature.  I was on the board of directors for ReturnCentral, which was purchased by Manhattan Associates.  Through the board and post-board experience, I published three articles on returns management and did several presentations on the subject.  As a result, nothing really happened. It may have just been too early.

I think it is an area ripe for help but unfortunately, most companies don't see it as an area for immediate investment.

Chris Norek, Ph.D.
Senior Partner
Chain Connectors, Inc


Q.  What was "The Machine That Changed the World"?

A.  The Toyota automobile, , or really rather the Toyota Production System, detailed 17 years ago in a book of that title by Jim Womack, Dan Jones, and Dan Roos.

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