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.
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.
is Part Two of a two-part note on Optimizing The Supply Chain Network.
One discussed Levels of Supply Chain Optimization.
complete network analysis includes three components. This section discusses
the common reasons behind analyzing each component, as well as their major
location and territory definition
and outbound channel and transportation mode
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.
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
3. Site location and territory definition
location(s) should be closed following a merger?
should the delivery source be located (blank sheet or greenfield approach)
while conforming to a delivery time of less than 24 hours?
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?
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?
products should be shipped to stores directly from the vendor?
channels change according to product seasonality?
distribution cost reductions can be achieved through shipment consolidation?
are the optimal transportation modes for inbound and outbound shipments?
is the cost sensitivity to volume variation per transportation mode?
- Are there
some unprofitable markets? What can be done to improve this situation?
5. Resource allocation and vendor selection
plant should produce this category of product in order to minimize
the total cost while adhering to capacity constraints?
our entire inventory be maintained across all distribution centers,
or should some products (slow movers) only be located in selected
which locations and proportion should the delivery fleet be located?
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?
Operational Cost Reductions With A Strategic Supply
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.
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
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
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.