Take a critical look at your supply chain network

Flexible, agile, responsive… these and other such words have become increasingly commonplace, but since a couple of years ago – thanks in part to the likes of Donald Trump and Boris Johnson – there really is no getting away from them. Whether in relation to the trade war between China and the USA or the impending Brexit, you constantly have to be able to adapt to ever-changing and increasingly demanding markets.

By Pieter Bauwens

Would it be better to open a new distribution centre in the UK? Should I relocate my manufacturing activities to the USA? Do I have the right amount of capacity at my distribution centres? Which technologies should I use in which factory, and with which capacity? How can I improve the flexibility of my network, and what will it cost? These are all examples of questions that supply chain professionals should be frequently asking themselves nowadays. In addition to geopolitics, the globalization of supply and demand is also forcing us to adapt our networks, due to the ever-changing costs of labour, transport and raw materials, and fluctuations in suppliers’ costs.

You need to make ever-more complex decisions in increasingly rapid succession. That’s why it has become essential to be able to evaluate potential changes in your network quickly. Some important decisions need to be made which will ultimately affect almost 80% of your supply chain costs.

Besides the strategic issues relating to infrastructure, you should ensure that you’re also able to deal with more tactical issues – things that typically support an executive S&OP. This includes analysis of scenarios such as: What’s the most optimal route from manufacturing to the customer? Which are my top-priority customer segments? How much – and where – should I invest in stock in order to meet the service requirements of each of my segments? What is the carbon footprint of my current network and how can I further reduce it? What does it cost to adjust the service level?

4 critical success factors

It is not difficult to get hold of network optimization tools nowadays, but few companies are able to adapt their networks to the circumstances quickly and correctly. To do so, you need to take four critical success factors into account.

Firstly: build a ‘digital twin’ (a digital copy) of your supply chain network. This is necessary in order to gain sufficient trust in the network analysis recommendations so that the management team can make decisions with significant CAPEX implications. This is known as investment-grade modelling. Aggregate your demand, products and customers on a level that allows fast simulation while providing the necessary detail to answer your questions. Invest in unearthing the correct costs. Transport costs are particularly important, because in a distribution study they generally account for three quarters of the total cost in play. Focus on gathering reliable model data too (e.g. costs and lead times) for the lines and locations where you currently have no activities but which you wish to include in future scenarios. You should definitely also include sensitivity analysis so that you can check that the result of your exercise won’t change in the case of a relatively small change to your demand or cost structure.

Secondly: evaluate your network model regularly. On average, companies that only conduct a network study once every two to three years leave 20% of their cost optimization opportunities untapped. Therefore, rather than being ad hoc about gathering data and building the model, take a more ongoing approach to optimization. That will help you to retain the knowledge and also make much faster and better-quality decisions related to tactical and strategic events such as evaluating new suppliers, serving new customers efficiently, mergers and acquisitions, or new product introductions.

Do not overly restrict your network model

Thirdly: do not overly restrict your network model. To avoid limiting your potential to make savings, ensure that your model is sufficiently able to evaluate various options, e.g. import versus local purchasing, fixed versus variable production costs, manufacturing capacity, technological flexibility of factories, changes to consolidation points in distribution, opening versus closing distribution centres, product segmentation and customer segmentation, and synergy between business units.

Fourthly: create a team of network analysts. This is necessary in order to gather data efficiently and make assumptions. The team should have strong modelling skills, and must also have sufficient understanding of the business to think up and evaluate useful scenarios independently. Since there is a shortage of network analysts, it is important to think carefully about whether it makes more sense to build your own team internally (if so, take care to safeguard the knowledge) or to enter into a long-term partnership with external network analysts to support your internal business knowledge.

Once you have these four critical success factors under control, you’re ready to face the Trumps and Johnsons of this world.

Pieter Bauwens is Principal at supply-chain consultant Chainalytics