If you work in the world of supply chain or logistics management, you understand the volatility of both fuel and restraints on rising freight capacity. Whether driven by reducing costs or by new business strategies, rethinking your distribution network optimization has become more important than ever.
An Overview of The Importance of Distribution Network Optimization
The implementation of new business strategies has also been another major driver beyond the capacity crunch and reducing total costs. In the last two years many companies, especially those looking to get into the multi-channel, or omnichannel logistics arenas, are reengineering their logistics network to either enhance customer service or to help launch a new customer channel, such as e-commerce.
Recent network studies have not only been initiated by ongoing mergers or acquisitions, but also by corporate edicts looking for cross-divisional synergistic opportunities. With the latter, while the individual businesses may operate with great autonomy, the corporate parent still wants them to look at opportunities to share distribution and supply chain resources.
Whether driven by reducing costs or by new business strategies, rethinking your distribution network optimization has now become more relevant than ever. With typical cost savings of 15 percent and more, these studies also result in allowing companies to service their customers more quickly. This can make a huge difference in how a company is perceived by its customer.
The ability to get the product to market in one to two days or “just-in-time” when the competition can only deliver in three to five days is considered to be a serious weapon. It may be worth it to spend more to conduct this distribution network optimization study to gain more market share and insight into your overall supply chain and logistics departments.
Distribution strategy defines how we move goods to market. Regardless of company size or industry, every company participating in the global supply chain has some form of distribution strategy. To maximize your ability to stay competitive and drive bottom-line improvements, consider a distribution network optimization study, either in-house, or by a consultation with a professional or services provider.
But first, let’s talk about what is distribution network optimization?
To back up a bit, we also need to understand what is a distribution network? A distribution network is a system a company uses to get products from the manufacturer to the retailer. A fast and reliable distribution network is essential to a successful business because customers must be able to get products and services when they want them.
Distribution Network Optimization enables an intimate understanding of the trade-offs between the optimal network for operating expenses versus customer service level (turnaround time). Distribution Network Optimization is essentially a balancing act between operating expenses and working capital as opposed to Service Level requirements or Service Level versus Costs.
14 Areas to Prepare and What to Ask For to Get Ready for a Distribution Network Optimization Study
The Distribution Network Optimization study takes top management involvement, a potential cross-functional team of key employees, a Project Plan, and a Project Team leader. It could take from three (3) to six (6) months depending on the availability and complexity of the data.
There are drivers to Optimize the Service Level, some are:
- Business Growth
- Competitive Pressure and Increasing efficiencies to reduce Logistics operating expenses
- Reducing working capital
- Optimizing inventory assets
- Changes in customer service requirements
- Changes in Supplier or Customer base
- Increases in transportation/fuel costs, all and other drivers.
Furthermore, you will need to pull in a lot of departments for the distribution network optimization study. There are questions that need answers in Supplier/Sourcing, Procurement channels, Importing, Distribution and Transportation.
For the distribution network optimization study, these are the following areas that need attention/data gathering in this study:
- Customer Analysis: Demand volumes by customer point; the history of detailed customer demand and order shipments; transportation history
- Suppliers: Points of origin and ports of entry; the history of Purchase Orders; history on paid inbound transportation/transfers, and ports of entry by TEU (containers).
- Products: Product and inventory assessment; one-year movement inventory history by SKU by distribution location; cube/weight data by distribution location by SKU
- Key Issue: Financials: Knowing your money/cash flow; Logistics related financials; working capital investments, inventory (DC inventory allocations, inventory accuracy, inventory management, inventory turns, inventory reduction, optimum inventory, non-moving inventory management, and potential inventory slotting), building equipment; obligations: leases, Third-Party Logistics (3PL) contracts/commitments, and sacred cows of any kind.
- Process overview: Business assessment and data collection; Baseline and Modeling; transportation planning and implementation
- Software applications can be used in this optimization study: Examples: IBM iLog Visualization/Optimization Software System; CAST Network Optimization Software; and Monte Carlo Simulation Software with excel.
- Network Optimization: Pros and Cons: measuring various scenarios, like a Foreign (Free) Trade Zone (FTZ)
- Challenges: Obtaining accurate data for baseline scenarios and inbound and outbound transportation paid
- Deliverables: Potential, new scenarios mapped against the baseline
- Transportation Geography: % of market-where? Best case lead time DC vs. population how many DCs: 1, 2, and 3 4, 5, 6, 12, and 20? The more DCs, the more inventory?
- Looking ahead: Transportation costs are rising and causing distribution networks to expand closer to their markets and reducing miles; analyze US freight index
- Key takeaways from Optimization Study: analysis of Service Level, extensive effort to gather, cleanse, and organize: customers, Suppliers, Investments, and transportation data.
- Transportation Cost Increase Analysis
- Brainstorming discussion and final decision as to what direction benefits you financially, and the decision’s effect on your Customers.