Balancing Cost and Service Variables in Manufacturing and Distribution Networks Post-Covid Supply Chain Networks
Companies are experiencing surging consumer demand while at the same time dealing with significant supply chain interruption and capacity issues. While the first order of business is to secure the resources required for increased supply chain resiliency, supply chain cost remains a critical concern, especially considering the rising supplier costs. Operating cost structures and transportation rates often create a focal point for company cost reduction efforts within the supply chain. While these areas are important, the best approach is often to modify the manufacturing and distribution network to make it more efficient, i.e. eliminate activities and miles from the network versus decreasing the cost structures and transportation rates associated with the activities and miles. In other words, the best advice may be to focus efforts on eliminating miles versus focusing primarily on decreasing rates.
When properly developed, manufacturing and distribution networks are designed to balance costs and service considerations within the network: inbound transportation costs, distribution operating costs, inventory costs, outbound operating costs, various plant costs, product constraints, customer constraints, capacity constraints, etc. Aside from cost and service tradeoffs, other decision variables such as taxes, business incentives, growth/acquisition plans, local labor conditions, disaster recovery, and other related items need careful evaluation. Our experience has been that improvement potential of 10%-25% of total distribution costs is often achievable in distribution networks not recently analyzed.
Companies often seek to perform network improvements by specifying alternative networks of facilities and volumes, developing costs, and then comparing the cost of the alternatives against one another. This method, cost analysis, is unable to leverage the true benefit of network optimization. Other companies will utilize a hybrid optimization approach, using single variables such as transportation cost for optimization with analysis. However, the value of manufacturing and distribution network optimization is often realized in optimizing multiple cost, service, and constraint variables throughout the network.
Geographical locations of company facilities relative to suppliers and customers play a significant role in network costs and service. Therefore optimizing how company facilities interact with suppliers and customers in terms of products and volumes is critical in the overall cost decision process. However, it is often the constraints associated with production, handling, customer requirements, and facility capacities that create the layers of complexity which require higher-level capabilities of optimization modeling. Results achieved through this type of network optimization are often eye-opening in showing not only potential for cost reductions and service improvements but also in the strategic insights demonstrating a need for reduction or addition of production lines or other facility capital investments or even shut-downs.
Over the years, we have performed multiple types of network optimization analyses for clients in several industries. Typically we are engaged because of a need to identify new sites or rationalize locations and to otherwise realign with shifts in the business that are made up of:
- Volume growth or contraction
- New or lost customers
- New or changed customer requirements
- New or changed distributor capabilities
- New or reduced service
- New or retrenched geographic markets
- New products or product line
- Acquired, merged, or divestiture of businesses
- Desire to outsource or insource the logistics function
Savings opportunities for our clients have ranged up to the tens of millions of dollars. At the same time, service improvements may also be part of the improvement potential. Often the realization of the improvement opportunities requires planning and investment of resources over a period of time to secure the savings. However, in some instances, significant savings can be obtained with limited resource requirements. In one client example, savings of more than 20% were obtained by reassignment of customers to distribution and plant facilities in an alternative configuration, rather than implementing major manufacturing or distribution changes. Regardless of the initiatives required, a significant return on investment can and is often obtained through focused network optimization efforts.
There are always changes in the various cost and service elements in the network. However, the current environment of spiraling costs, decreasing supplier availability, significant logistics capacity constraints, and surging consumer demand has placed significant pressures on manufacturing and distribution networks. These pressures affecting both supply and demand as well as capacity have created added urgency for companies to reevaluate their distribution networks to optimize the cost and service delivery structures.
We also understand the need for practical improvements. By practical we mean those improvements that can be made with minimal capital investment along with smaller changes required and with minimal risks. One way of improving a firm’s network is placing inventories in shared facilities where there is an economy of scale already present, along with labor and other logistics services. We also work with shippers in leasing part of their warehouse for the long term on a seasonal basis. With ever-changing customer requirements, the ability to be nimble goes well beyond modifying your network and leveraging other, more innovative ways to be nimble and flexible, without assuming more cost.