Designing Supply Chain Networks the Right Way

By Gene Tyndall
Executive Vice President, Tompkins International

Network planning, network analysis, network optimization, and network studies - these terms have been used over the past 25 years to represent the work to determine how to set-up logistics networks, how to analyze them for cost reductions, and how to re-plan them when something important changes.

Over the years, the robustness and functionality of computer-based models have improved significantly. Today's leading computer models are accommodating multi-echelon networks, with thousands of SKU's, and with nodes and links totaling in the hundreds of thousands. Further, the traditional problem of data availability is also not as limiting of a factor, since most companies have "Big Data" files that exceed the basic requirements of network models - data on products, sales, customers, orders, costs, freight, and facilities. What is missing, however, in most network planning, is conducting these projects with the business objective of strategic action-oriented designs.

Following are innovative practices for effective network designs:

• Design networks for decision-making. Too often networks are analyzed or planned for analysis purposes in "back room environments". The operations strategy, with its required operational capabilities, should drive the network design for the enterprise. Moreover, a multi-functional team should direct the work so that it produces the right business solution.
• Establish the business objectives up front. The business objectives should drive the analysis. Set the objectives up front, in order to structure the analysis. Include the operational capabilities, and the missions and functions of the needed facilities, along with the preferred flows of goods. Set overall targets for inventories.
• Factor in total costs, not just the obvious ones. Instead of incorporating only the normal costs of outbound freight, warehouse operations, and inventory carrying, also include all inbound freight, real estate, order processing, planning and management, and taxes.
• Apply advanced analytics to the data. "Big Data", while often including all that is needed to model the current state, is often not organized for network designs, nor is it analyzed for reasonableness and relevance. Analytics can yield insights that help define realistic scenarios.
• Design scenarios that address the supply chains. The real value of network design is found in its ability to meet the business strategies of the enterprise. Whatever these are - in markets, products, and product value propositions - must be delivered (enabled) by the supply chain networks. This means that scenarios should include DC's, FC's, Cross-Docks, alternative storage locations, and creative product flows. How well the scenarios are designed will determine how well the network serves the company successfully.
• Apply advanced analytics to the scenarios. Traditional network planning has been designed to meet specific service levels at total minimum logistics costs, given sales forecasts. But, the real question should be, "how to setup the network to impact customer satisfaction, while operating at expected cost levels?" This objective requires advanced analytics to help frame the scenarios around what is possible, not what is forecasted to be needed.
• Develop the business case from the preferred scenario. At least 3-5 business scenarios should be examined before selecting the right one for a company. Once the preferred scenario is clear, the business case should include value-based metrics that incorporate the "balanced scorecard" - i.e., financial as well as operational measures. Total investments should be clear, as well as estimated paybacks, along with expected total costs and margin implications, and expected revenue gains. These should all tie to the company financials, and of course, link with the business strategy that drove the network design. Time to benefit is also an important metric. In addition, the risks should be defined and mitigated.

Network designs in 2016 and beyond should be planned and produced much differently than those three years ago. Today, the right way takes into account the primary gaps and addresses the advanced principles that resolve the gaps and mitigates the risks. This will produce action-oriented network improvements that will satisfy and grow the customer base and thus can differentiate a company. We can expect to see more network designs, and hopefully more strategic and action-driven ones.