By Illian Hoekstra | Manager | Chainalytics
As Gartner has rightly noted, 80 percent of total supply chain costs are determined by the strategic decisions that take place up front in the supply chain network design process. So it’s no surprise that supply chain network design can significantly reduce supply chain costs and improve service levels over time by better aligning your supply chain with your business needs.
There’s just one caveat.
To identify and leverage the improvements possible through both supply chain network design and redesign–and to get ahead of the changes that affect your supply chain–you can’t get away from supply chain modeling.
Under normal conditions, companies design or redesign their supply chains for mixed reasons, including market and business changes (expansion or growth), changing customer requirements or increased cost pressures. In the case of mergers and acquisitions, they may seek to accrue the value from supply chain synergies that have emerged.
But given the extensive upheaval in our industry and region lately, we see many more long-term potential supply chain trends that will likely drive supply chain redesign projects and models over the coming months:
- Brexit–along with Russian and Crimean trade sanctions–will inevitably change regional, cross-border and even global business conditions and impact long-term shipping and trade patterns.
- Mergers and possible takeovers or acquisitions (like Tyco International and Johnson Controls, Bayer and Monsanto, DOW and Dupont, ABinbev and Sabmiller, FedEx and TNT, etc.)
What to Model in Your Broader Supply Chain Network
All this upheaval can potentially impact your increasingly global, complex supply chains. And it also means an effective redesign model will need to take into account:
- Meeting Your Required Customer Service Level: The number of locations within the supply chain network strongly impacts how easily and quickly your customers can be served, therefore it impacts the customer service level metric, typically measured by the number of on-time, in-full (OTIF) orders. While network design impacts the “on-time” portion inventory management impacts the “in-full” dimension.
- Optimizing Supply Chain Costs: The trade-off between inbound and outbound transportation costs, warehousing costs and inventory carrying costs must be taken into account. And the importance of each of these costs differs from industry to industry.
- Respecting & Even Leveraging Regulations: Given a constantly shifting mix of trade and tariff agreements that impacts duties and taxes, supply chains must adapt to ensure compliance in a cost-effective way.
- Taking Risk into Account: Supply chain risk comes from many sources, including centralizing and/or establishing your operations in a politically unstable region, which makes your supply chain more vulnerable to outside effects.
As you can imagine taking all these parameters into account creates a complex, multi-dimensional problem that requires more than a piece of white paper, a sharp pencil and some sketching ability.
To regularly evaluate your supply chain options–and explore how your key criteria impact and interact with each other–you need an optimization model. If this is your first time working with a model, you’ll quickly see how a model allows you to do what-if checks and supports you in making the best fact based decisions around how the supply chain infrastructure should look like to support your business. It can be an eye-opening experience that quickly illustrates the importance of “getting it right” the first time.
Illian Hoekstra is an experienced manager within Chainalytics’ European practice. He joined the company in early 2015, after working for several other supply chain management consultancy companies. Illian has helped many global multinationals to design and redesign their supply chain networks by employing his supply chain modelling expertise. He also specializes in product and customer portfolio optimization, cost-to-serve and working capital optimization projects. His industry experience includes agriculture, food and beverage, pharmaceuticals, medical devices and construction.
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