The supply chain of an organization is an overarching structure that encompasses the suppliers, plants, warehouses, and flows of products from their origin to a customer’s location. While the network in itself is complex, the degree of complexity only increases when various business functions of a company have different expectations of the same network. Executive A’s main objective would be to reduce transportation costs but Executive B might want to increase customer service level, which might increase transportation costs!
Network Design is a method that can be used to find solutions for such conundrums. A Network Design study can help improve the long term performance of the supply chain of an organization, while answering numerous questions for people from different facets of the business. Every individual with a direct or indirect relationship will have many questions about all the aspects of a network and as many as answers for them also. But intuition does not always get it right. A network design study can answer many of those questions with properly substantiated mathematical and analytical logic and help you make decisions with confidence.
The following are a few questions that a network design study can help you answer with confidence:
Is My Current Supply Network Lean Or Does It Have Inefficiencies?
Network Desing involves modeling the entire supply chain in order to analyze the network, identify trade-offs and calculate total landed costs. It gives the firm the ability to visualize the network and pinpoint significant bottlenecks. For example,
a plant which is running over capacity
a Distribution Center (DC) at one end of the country serving customers on the other end, thus increasing the overall lead time/service level
Most of the network design models are strategic because they are intended to answer broad business questions. But the beauty of network desgin modeling is that it is not restricted to addressing only strategic issues. Detailed models can be built to identify bottlenecks in the current flow of products and recommend new efficient flow paths for each product.
What Is The Effect Of Cost, Service Level And Other Parameters On My Current Network?
In network design models, most of the parameters used are levers which can be turned up or down and their effect on the whole network can be understood. One of the most important tradeoffs that executives want to understand is Cost versus Service Level. In addition to having a Cost versus Service Level trade-off, network design models offer a selective turning of the levers and we can do the tradeoff curves tier by tier and see which affects the network more. The visibility over the entire network for running sensitivities is one of the biggest advantages of network modelling.
Should we Make Or Buy? What should we manufacture internally, what should we outsource and where should we make these products?
Network design models use optimization to find the tradeoffs between different what-if scenarios. Suppose a product which is currently made in a manufacturing facility A has a prospect of being produced in an external supplier facility, then the best way to calculate the benefits of procuring it from an external supplier is through the model. It helps in making sourcing decisions by not just looking locally at that product level but by optimizing the entire network, thereby accounting for the effect of that particular change in the other parts of the network. Choosing the best supplier is based on cost, distance, effectiveness (fill rate, service level) etc .Network design allows you analyze this even before setting up the supply chain by running an optimization across prospective suppliers and choosing the right number of suppliers.
Should I add new DCs/Plants/Suppliers to my network? If yes, How Many?
Based on current demand, plant capacity, product flows and customer distribution, a network design model can answer whether you need to set up any new DCs/Plants/Suppliers. One of the biggest constraints in setting up a new supply chain or expanding your supply chain is the capital requirement. Capital requirement is not just the cost required to setup the facility but also the cost effect of duty, tariffs and economic regulations that comes with it. The model allows you to select a location based on capital constraints as well as these other financial parameters.
What changes do I need to make to my existing network if demand grows by X% in 5 yrs?
Network models can also be used to understand the effect of demand growth on the network. Can the existing network handle the growth? Do we need to expand existing facilities or build a new DC in another location? Scenarios based on demand growth, product line change and new market penetration can be analyzed using the Network models. These results will help in building a roadmap to move from the current state to future state. Below is an example of that this would look like:
These are some questions a network design model can answer. The main effort is to build the initial model as it involves collection of data and processes from different businesses and facilities within the same organization. Once the model is built, the benefits that can reaped far outweigh the effort to create the model.
Modeling the supply chain network is important because a good design helps a firm execute its strategy. To do it right, it requires analytics and optimization. And, when firms do it right, they can typcially reduce supply chain costs by 5-15% which can translate into tens of millions of dollars of savings for the firm.
We described Why build a network model. You may also be interestined in When is it a good time for supply network design?
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