Supply Chain Trends and Issues: Our Weekly Feature Article on Important Trends and Developments in Supply Chain Strategy, Research, Best Practices, Technology and Other Supply Chain and Logistics Issues  
  - Oct.10, 2012 -  

Supply Chain Network Design: Where the Real Money Is

Too Many Companies Still Stuck in Yesterday's Approach, Expert Says; How to Think About Customer Service in the Context of Supply Chain Costs

  by SCDigest Editorial Staff  

Despite at one level widespread recognition of how supply chain network design tools can be used to analyze and optimize many areas of the supply chain, a surprising number of companies are still sort of stuck in the old model of "How many DCs do I need and where do I put them?" with regard to use of network optimization tools.

SCDigest Says:
The real money in optimizing a supply chain network is usually beyond a single question such as where a company should locate DCs or plants analyzed sort of in isolation, but rather "at the seams, where I am looking at the supply chain altogether," Karrenbauer added.

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That at least according to Jeff Karrenbauer, president of Insight, a provider of network optimization software and supply chain strategy consulting services, during a recent Videocast on our Supply Chain Television Channel. Karrenbauer is generally recognized as one of the supply chain industry's foremost experts on network design software and strategy.

Far too often, companies limited the scope of a supply chain network study to simply distribution centers and related customer service targets, and then do what Karrenbauer calls a "big bang study."

"We look at that, we're happy with the DC locations, we've done the customer service tradeoffs, we've fixed everything for the next five years - and so we're done," Karrenbauer characterrized the approach of many companies during the broadcast.

At that point, many of these companies say they have "identified our winning strategy, so let's abandon the tool, break up the team, we check the box for management, and move on. Wrong, wrong, wrong." Karrenbauer observed.

Of course, a supply chain network strategy involves a lot more than where a company places and sizes it distribution centers, Karrenbauer said, yet many companies do limit the scope to just that. Even just in that area, there are so many changes over time in the overall environment, the assumptions a company uses, the company's business strategy and supporting supply chain strategy, logistics dynamics and a lot more that it makes the idea of a one time, big bang approach almost antiquated, he argued. The supply chain world has never been more fluid and dynamic.

Instead, a growing number of companies are using network design tools on a permanent basis to address a series of supply chain issues and questions.

In fact, Karrenbauer believes such a tool and related modeling effort should be done in parallel to developing and evolving an company's supply chain strategy, rather than using such modeling tools to flesh out the optimal network after the strategy has been determined, as is often the case in companies today.

"When it comes to supply chain strategy, I think it is kind of a chicken and egg thing," Karrenbauer said. "At the outset, you need to know what the general supply chain strategy is, but then you need to be able to test those ideas... You want a tool that can maybe discover some things you haven't thought about."

When you move from business strategy to supporting supply chain strategy, "I would build a model really early, and I would test the current ideas and - this is what you really pay a modeler to do - look for the counterintuitive stuff... The things that make you say 'Wow, I hadn't really thought about that idea.' That's how you come up with new ideas."

SCDigest editor Dan Gilmore and Karrenbauer also discussed this linkage of business strategy and resulting supply chain strategy in the context of how to think about supply chain cost optimization, shown in the short video clip below. The interesting question: just how much is it really worth for that next increment of customer service improvement?

A New Way of Thinking about Cost-Service Trade-Offs


The full Videcast, as well as a copy of the slide materials and a podcast of the excellent QA session, can be found here: Videocast: Supply Chain Network Design - Where the Real Money Is.

(Supply Chain Trends and Issues Article - Continued Below)



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In addition to deciding about the DC network, Karrenbauer says many companies for a long while have been using network design tools to address such issues as: where manufacturing plants and individual product lines should be located; where to optimally locate or find suppliers; whether to insource or outsource a facility or function; network capacity and planning analysis and a lot more.

Currently, Karrenbauer adds, the "hot" issues leading companies are using network design tools to help them make decisions include strategic sourcing strategies, understanding specific customer profitability and how network design can impact that; support for the Sales & Operations Planning process, carbon footprint analysis, international trade and especially the impact of duties, tariffs and other international trade costs in making decisions about sourcing, physical flows and more.

In fact, in part 2 of this series, Karrenenbauer will discuss how more specifically bringing demand and marketing spend into the network design model can add even more value in support of S&OP, and result in true profit maximization, not just lower supply chain costs.

To learn more or register for that broadcast, go to: How to Integrate Supply Chain and Marketing to Achieve a Profit Maximized Corporate Strategy using the Next Step beyond Integrated Business Planning

The real money in optimizing a supply chain network is usually beyond a single question such as where a company should locate DCs or plants analyzed sort of in isolation, but rather "at the seams, where I am looking at the supply chain altogether," Karrenbauer added. "That's the right way to do it, looking at it comprehensively."

Are too many companies still stuck in old style thinking about how to use network design tools and the scope of the study? Does your company have an on-going, dedicated effort? Why or why not? Let us know your thoughts at the Feedback section below.

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