Optimizing The Supply Chain Network And Reducing Distribution Costs - Part 2 An Andersen Point Of View

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Optimizing The Supply Chain Network And Reducing Distribution Costs



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 Two of a two-part note on Optimizing The Supply Chain Network. Part One discussed Levels of Supply Chain Optimization.

Network Design Elements   

A complete network analysis includes three components. This section discusses the common reasons behind analyzing each component, as well as their major features.

  1. Site location and territory definition

  2. Inbound and outbound channel and transportation mode

  3. Resource allocation

Site location and territory definition represents the most common component analyzed when performing a network analysis. Following a major change in the current business environment, the location of facilities is frequently re-evaluated. To properly address this component, we consider the problem from two levels simultaneously: the first level addresses the location and number of sites, and the second level defines the sales territory related to those sites.

Inbound and outbound channel and transportation mode selection is an important decision as well, as poor choices will result in higher operating costs despite optimally located sites. Inbound channel selection will incorporate all factors relating to import strategy and vendor consolidation, while outbound channel selection includes options such as direct-to-store delivery

Key Questions   

Figure 3. Site location and territory definition

  • Which location(s) should be closed following a merger?

  • Where should the delivery source be located (blank sheet or greenfield approach) while conforming to a delivery time of less than 24 hours?

  • From which existing location(s) should each market receive their order to minimize the total cost and maintain or improve service time?

  • Can redefining territories and delivery frequency extend the life of the existing network before major expansion costs are incurred?

  • In some regions, exclusive distributors are used: what are the territory definitions that will ensure each distributor will have comparable sales volumes?

  • In which areas are service levels far exceeding needs or underperforming, in terms of frequency or current distributor performance?

Figure 4. Inbound and outbound channel and transportation mode selection

  • What are the best distribution channels per territory and product type?

  • Can redefining the distribution channels extend the life of the existing network?

  • What products should be shipped to stores directly from the vendor?

  • Should channels change according to product seasonality?

  • What distribution cost reductions can be achieved through shipment consolidation?

  • What are the optimal transportation modes for inbound and outbound shipments?

  • What is the cost sensitivity to volume variation per transportation mode?

  • Are there some unprofitable markets? What can be done to improve this situation?

Figure 5. Resource allocation and vendor selection

  • Which plant should produce this category of product in order to minimize the total cost while adhering to capacity constraints?

  • Should our entire inventory be maintained across all distribution centers, or should some products (slow movers) only be located in selected distribution centers?

  • In which locations and proportion should the delivery fleet be located?

  • What is the distribution cost impact of selecting this vendor, considering their location, product cost, minimum order quantity and other products they are currently supplying to us?

Achieving Operational Cost Reductions With A Strategic Supply Chain Initiative

Companies are increasingly performing network analysis in today's environment of increasing merger activity, strong pressures to reduce inventory and free up capital while maintaining service levels, trends towards border elimination, and the increasing importance of market accessibility.

The results of the analysis can support management investment decisions by estimating the savings that will result from changing the number and location of sites, altering distribution channels and transportation modes, and reallocating resources.

The analysis can also support management decisions to avoid or postpone capital spending by recommending ways of using capacity better and of extending the life of existing facilities. The supply chain network design directly impacts daily operating costs. Because of the number of factors and the complexity involved in this type of analysis, powerful optimization tools can help in conducting the analysis and generating significant savings opportunities.

By tailoring the approach to the specific needs of the company and using the appropriate optimization tool, savings of between 5 percent and 15 percent of a company's total supply chain costs have been uncovered consistently (with even greater savings quite often being found). However, when a company is performing under an ad hoc or archaic network environment, no matter how well the daily operations are being performed, the supply chain outlook, while it may be optimistic, is likely far from optimal.

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