Optimizing The Supply Chain Network And Reducing Distribution Costs - An Andersen Point Of View

  • Written By: Josée Dupuis
  • Published: December 2 2001


The objective of supply chain logistics - to provide goods to the right place at the right time in the right quantity - is easy to understand, but achieving this objective while minimizing costs is not an easy task.

Each decision made at one level of the supply chain has an impact on another level. The goal of conducting a network analysis is to determine: "From how many facilities, which ones and how will which products service which customers?" By optimizing the network while factoring these variables (and more) into the equation, a company can save between 5 percent and 15 percent of their supply chain costs.

This is Part One of a two-part note on Optimizing The Supply Chain Network. Part Two will discuss the Network Design Elements.

A Network Analysis Example   

If a company increases the number of distribution centers (DCs), they will be closer to their customer base, reduce outbound transportation costs and improve service levels. On the other hand, this solution will have a negative impact on the Inventory Carrying Costs (ICCs), inbound transportation costs and fixed costs at the DCs, so the total logistics costs may not be reduced. Figure 1 illustrates this example and the relationship between different elements of a supply chain network analysis and the total cost.

Figure 1. Relationship of supply chain costs

Two Levels Of Supply Chain Optimization   

Complex supply chain decisions are made at two levels: operational and strategic. The operational decisions involve satisfying demand with high service levels, while trying to minimize costs within the constraints of an existing network. Different decision support tools, such as manufacturing planning systems and transportation management systems, are available to assist enterprises in making the best decisions regarding optimizing and scheduling production runs and raw material utilization, as well as delivery routes and frequencies. Enterprises have created value by using these tools in their daily operations.

The strategic decisions include questions about the number, type and location of manufacturing and distribution facilities, as well as the transportation channels and modes used to service customers. The target service level itself is an important strategic element. Just as with operational decisions, excellent tools are available to optimize these strategic decisions and, in so doing, create value for the enterprise. By taking advantage of the tools' powerful linear programming and algorithms, between 5 percent and 15 percent of total supply chain costs can routinely be saved.

Why Perform A Network Design  Analysis

Changes in supply chain strategy directly impact the performance of a supply chain network, and network changes, in turn, directly impact daily operations. Major changes to the supply chain strategy (from customer demand to supply), as well as changes to the supply chain (network) itself are good reasons to perform a network analysis. (See Figure 2.)

Figure 2. Examples of triggers to performing a network analysis

  • Mergers and acquisitions

  • Significant increase/decrease in market demand, new geographic markets or new market segments

  • Network reconfiguration (lease expiry, new facility purchase)

  • Service level improvement initiatives and cost impact evaluations

  • Poor performance of logistics operations (costs are above average, increase in logistics cost as a percentage of sales, low inventory turns)

  • Consolidation of purchasing/sourcing operations

  • Consolidation of shipments across company division

The strategic plan will have a significant impact on operational planning and optimization, because strategic planning outputs or elements will often form the constraints with which operational plans must comply. For example, an element of the Supply Chain Strategy might require that customers be delivered to within one day of ordering for certain items. This strategic element has a clear impact on transportation planning, as well as on inventory planning. Other network design elements also have a clear impact on operational planning elements. Optimizing these network design elements will improve the basis on which operational plans are built.

For more information about Optimizing The Supply Chain Network And Reducing Distribution Costs - An Andersen Point Of View contact Claude Dion at:
claude.dion@ca.andersen.com or visit www.andersen.com.

This concludes Part One of a two-part note on Optimizing the Supply Chain Network. Part Two will discuss the Network Design Elements.

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