Supply chain network optimization – not a one off exercise

If a sub optimal situation is known, why do companies wait for a strategic distribution network exercise to improve it?
Luc Baetens

Recently I got the opportunity to work on a distribution network design project for one of our clients. The business unit we were working for decided to expand its business into the United States and Canada. For some of the costs related to distribution in this area, e.g. warehousing, we proposed to use comparable data from other business units. But the client asked to review the collected costs because the costs for warehousing were considered suboptimal. This made me wonder:

If a sub optimal situation is known, why do companies wait for a strategic distribution network exercise to improve it? And more fundamental: does this mean that companies accept paying too much for logistics operations until a major change comes along?

Supply chain network design has long been considered a very infrequent process: once the network was in place, it was considered to be set in stone. This was possible as long as significant changes in the market place happened at a slow pace. It was the role of an ever more complex supply-demand planning to cope with the changes in the environment. Just as the change, the network was considered a given rather than a variable.

As companies undergo major changes, like the integration of a newly acquired business or the introduction of a new product range, they realize that changing the number and location of warehouses and production facilities means by definition a change in the physical network. The need for supply chain network design becomes apparent. A network redesign project is defined, a team of people is dedicated and a major effort kicks off.

This approach for supply chain network design comes with a multitude of difficulties: which variables to take into account in our analysis? How and where to collect usable data? How to integrate the data in a usable model? Is it possible to validate the outcomes of these models? And is it possible to implement them given internal commitments and contractual agreements with service providers?

Unfortunately for this high-effort approach, the state of business no longer changes yearly or monthly: it changes a much higher pace and this pace is only increasing.

  • Consider last mile delivery in a retail environment: an increasing number of methods to get goods from the last node in the network are offered to customers. Retailers who don’t optimize the upstream supply chain, delivering from distribution centers designed to supply “classic” retail stores, will have a very hard time competing. As last mile delivery is still changing daily, a one off network design exercise will probably be very quickly outdated.
  • A number of trends might cause a need to shift sourcing or production to other regions: changes in legislation, pressure on ports requiring to shift trading routes, environmental regulations, changes in raw material prices … If a company doesn’t spot these changes timely and doesn’t respond flexibly to such changes, it risks losing its competitive position.
  • For a lot of industrial companies, the potential for growth lies in emerging markets. As it is highly uncertain how these emerging markets will develop, the required supply chain capabilities to fulfill their demand are also yet unknown. Periodic review of the distribution network is required to keep it aligned with business requirements.

It is fair to say that the competitive environment of today is different of the one yesterday. It should be clear that reviewing your network on a yearly basis in this environment (even today still a high frequency for most companies), actually means operating in a suboptimal way for 364 days … a situation often mitigated through adequate planning, but never solved.

But if the idea of the ever changing market place is becoming more and more generally accepted, why is then that very few companies have a process in place to review their network more frequently? This finds its origin in all hurdles mentioned earlier: difficult data collection, complex model building, difficult outcome interpretation, … And above all: the latency of the network to transform towards the optimal set-up.

In order to overcome these hurdles, supply chain network design should change from project to process:

  • Standardized: making it efficient and resulting in comparable results.
  • Starting small (e.g. by limiting the number of variables taken into account).
  • Frequent enough to allow for continuous improvement.

It is important to stress the continuous improvement element here: the variables taken into account should constantly be reviewed for validity and completeness. Otherwise the risk to end up in a suboptimal situation remains. Consider for example 3D printing: if one would keep thinking in classical “production to distribution” patterns, all possibilities of this technology, e.g. “drawing to printing” would never be available.

Of course some elements in the distribution network are not changed as easily as others. Consider for example contracts with logistics service providers: the scope of the contract often set the boundaries for possible change. But even within those “hard” boundaries it remains important to evaluate your network: is the routing of SKU’s through the network optimal? Do we use the existing production capacity (which is often not incrementally adaptable) efficiently? Are the SKU’s optimally distributed across the production units? Is the transport method between nodes still appropriate? All these questions often remain unanswered for a long time if the network isn’t assessed periodically.

If you want your distribution network to be and remain perfectly aligned with the nature of your business, it is wise to replace the infrequent network design exercise with a true network design process: standardized, frequent and continuously improved.

How high on the priority list is network design in your organization? Do you have a process in place to assess it periodically? Which hurdles refrain you from doing so? I would be glad to learn about your experience.

Thanks for reading

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