redesign the chain to reduce costs

As companies struggle to control climbing transportation costs in the face of soaring fuel prices, they need to take a big picture approach to solving this huge supply chain problem. One approach, described last month in this column, involves the deployment of inventory optimization software as a way to determine ideal stock quantities and the stock's location in the distribution network.

But there's another approach to consider: a complete overhaul of the supply chain network. If companies want to minimize their transportation costs, they need to take a comprehensive view of the nodes in their supply chain network. They need to look at where they're shipping from and where the shipments are going. In addition to outbound lanes to customers, they need to look at inbound movements—where their manufacturing plants or suppliers' plants are located. If the warehouses are located in optimal places, then the company can minimize its outlays to carriers to move goods. To calculate the shipping tradeoffs involved in plant and warehouse locations, they need to employ a software tool designed to facilitate supply chain network redesign.

This type of software typically models the existing network, runs test scenarios to gauge the impact of relocating plants and warehouses, and identifies the optimal supply chain structure.

This application can illustrate how transportation costs might be reduced—and delivery service to customers improved—if a company made a change to its network. For example, it could reveal the cost and service impact of moving a warehouse to another locale or adding another distribution center to the network. Because of the high fixed costs involved in factory construction, companies are generally averse to relocating manufacturing sites. Still, this application can examine both warehouse and factory placement.

Before they can run this software, companies must first gather the necessary data. Typically, these data reside in other software systems already in use, such as enterprise resource planning (ERP) systems as well as transportation management and warehouse management systems. Data commonly required include customer locations; product types, weights, and quantities bought by customers at those locations; and the frequency of shipments to those specific customers. Similar data would be required for inbound shipments.

Once the software has built a profile of existing shipping requirements, the model must be tested to validate that it does reflect what's happening today in the company's supply chain. When modeled correctly, this software can offer the big-picture view companies need in order to evaluate the costs of moving parts, components, and finished products throughout a far-flung network. Best of all, a company can model what-if scenarios to see what impact those changes would have before actually undertaking them.

There are several vendors who make this software. Here are few names: Infor, Llamasoft, Gensym, Insight, and LogicTools (now part of ILOG). I'm sure I've missed some players. In any case, make sure to contact any vendor prior to purchase to ensure that it can meet your specific business needs.

On a final note, supply chain redesigns are not for the faint of heart. If the model suggests major changes are required to cut transportation expenses, then upper management must be willing to expend capital and effort on making those changes a reality. In the past year, a number of supply chain executives have indicated to me that their companies have begun this process. With no end in sight to rising energy costs, companies have little option but to constantly re-evaluate their networks. Supply chain design software provides a handy tool to do just that.