Supply Chain Strategy and role of Network Design (Part-I)
What is our optimal distribution network?
How can we reduce the demand fulfillment costs?
Should we run an efficient supply chain or responsive supply chain or both? How can we achieve them?
Is our current facilities capacity enough for future growth? Or should we expand it?
Should we outsource some supply chain activities?
These are the questions that come to an organization’s mind while designing a supply chain strategy. The objective of designing a Supply Chain strategy is to prepare the organization at operations level to meet the direction set by the business. For example, Amazon business strategy is to deliver the goods to customer in one day. The main objective of business strategy could be to acquire market share by providing faster service to customers and remain competitive in the ever changing market. In order to meet this business objective, its supply chain team will have to design a strategy on how to meet this one day delivery target. They might buy/lease more warehouses close to customers, maintain stocks to ship immediately, use faster transport modes to transport goods, engage with more delivery partners to deliver it on the same day, deploy relevant technology to track the shipment of goods. The cost of fulfilling the demand might increase because of these actions but the supply chain strategy is in alignment of business strategy.
In today’s competition, every business is trying to reach the customer faster than ever and at the same time as efficient as possible. By driving the supply chain strategy by aligning it to the organization’s business strategy with a tight execution, we can derive success for the business.
Even though new generation start-ups are starting online, lot of them (Lenskart, Zivame etc.) are moving towards Omni-channel strategy to be close to the customer and also to provide the customer the complete buying experience. Basically, every business needs to decide their supply chain strategy. One of the key steps in building a successful supply chain strategy is designing the supply chain network.
When is the time to design/reconcile your network of manufacturing plants and fulfillment centers?
- Cost to serve a customer demand is on higher side (than market)
- Delivery time is more than what customer is expecting
- Current warehouse costs are high (labor shortage)
- Demand shift to new markets (Tier-II and Tier III locations)
- Target new market opportunities
- Lack of capacity in existing facilities
- Warehouse consolidation (due to acquisition or Tax change)
One can argue that we can handle all the above simply by handling each problem separately as highlighted below.
- Add one more warehouse where the service level is low
- Shift the warehouses to cheaper locations to reduce the costs
- Automate the warehouses where labor cost is high
- Consolidate warehouses and move them close to high demand locations
Each statement will contradict with others when we look at them holistically and cost of any changes will be high if we handle them individually. The decision of location of a facility cannot be changed so easily because of huge cost involved but at the same time if the location of facility is suboptimal, it results in higher operational costs. In today’s world, any decision should be backed by data, scientific methods and logical explanations as every decision will have huge impact on the organization’s future. How to handle all these aspects of supply chain and arrive at an optimal network and align the network as per the company’s supply chain strategy?
Supply Chain Network Design helps at addressing this problem by analyzing the demand, existing network and new probable locations data in a more scientific manner (Optimization/Simulation methods). Optimization techniques are part of Prescriptive Analytics where the optimal decisions are made considering various constraints of the supply chain network.
Many factors influence the supply chain network. Some of the key factors business looks at while designing or re-designing the supply chain network.
§ Environmental factors
§ Technological factors
§ Government Regulations & Taxes
§ Political Factors
§ Infrastructure & Resource Availability
Typically, supply chain network design is done in multiple steps.
Step 1: In this step, the objective of the supply chain is to form the basic design in line with the supply chain strategy. Major decisions like in-house/outsourced distribution and manufacturing, defining the responsiveness in terms of fulfilling the customer are taken.
Step 2: Segregate the market by dividing them into multiple regions and then configure the facility separately for each region in terms of determining their capacity requirement to handle region demand. This step will give a high-level view of how many facilities (large/small) are required to handle the regional demand.
Step 3: Potential sites are evaluated in the regions by looking at the factors listed above. Sites are determined based on the industry. Warehouse facilities are built closer to the market where as manufacturing facilities are built far from residential areas.
Step 4: In this step, the objective is to find the exact locations which determines the supply chain network that will minimize the total costs.
In the next post we will see how we can use mathematical techniques to find the probable locations for facilities and how to determine the optimal facility locations and then perform scenario analysis marginal analysis to determine the ideal network for the business.
