Modeling allows shippers to become more efficient, reduce costs, and improve resiliency.
When Toby Brzoznowski thinks of a casino, he thinks of only one thing: failure.
“You walk up to a table in a casino, and the system is designed for you to fail,” said Brzoznowski, executive vice president of the supply chain design software provider LLamasoft. “The only way to win is to design a new game that has the odds in your favor. You can choose to play roulette or blackjack, but that’s just playing a game you’re likely to lose. To win, you need a new structure, a new way of going about it.”
And that’s where supply chain design comes in.
“Design asks, ‘what should you be doing? What should it look like?” Brzoznowski said. “We’re in the business of how good could you be?”
There has been an emergence in recent years of the importance of supply chain design, or network design, as companies seek to become more efficient, reduce costs, and become more resilient.
At the heart of this re-emergence are technologies that allow shippers to design “what if” scenarios in the blink of an eye. These modeling engines bring to bear technology like in-memory processing and 64-bit operating systems—essentially tools that eliminate worries about a lack of memory.
“Now that you can model at a minute level of detail,” Brzoznowski said. “You’re able to model more frequently, and sometimes, with more tactical decisions, you’re able to model on the fly.”
This technology has changed the way shippers think about network modeling. Instead of a once-in-a-year (or realistically, once-a-decade) exercise, the most sophisticated shippers use modeling on a continuous basis, across a number of internal disciplines.
In truth, a supply chain touches everything from transportation and logistics to sourcing to inventory management and distribution to trade compliance. A supply chain design initiative should, therefore, account for all the variables inherent in those functions.
The best tools out there do that. As do the best consultants.
First things first. There are a few different ways to attack this issue, according to experts in the supply chain design software and consultation industries. A shipper can either use design functionality included in software it already has; it can acquire design functionality through a standalone system; it can use a logistics services provider to deliver that functionality; or it can use a consultant that specializes in supply chain design.
Which option a company chooses depends on the typical factors: its appetite for investment in technology; its willingness to outsource supply chain functions; the complexity and size of its import/export operations; and perhaps, most importantly, the degree to which the company sees supply chain design as a critical function.
Clearly, shippers are increasingly seeing the need to look objectively and uncompromisingly at the way their transportation, warehousing, and inventory are set up.
“Things have definitely changed compared to five or seven years ago,” said Noha Tohamy, vice president of supply chain research with the consultant Gartner. “Most companies are re-examining what their network looks like with the hope of doing some modeling exercise. Either changing the structure of the network or how that network operates, whether that’s based on inventory or transportation. One thing that’s different is a lot of companies want to do a ‘what if’ exercise. It’s not necessarily that they will implement the design, but they want to know what their optimal network looks like.
“Companies do these analyses to see how far off they are from the optimal design, to see if there are quick wins. For example, for one product, a company typically uses a hub-and-spoke model, but the ‘what if’ scenario shows it might be better to do direct to consumer. That’s a quick win.”
Tohamy said the primary objectives in a supply chain design exercise are cost minimization and increased efficiency. The question is, how many see it as something to be undertaken on an ongoing basis, and not as something to be done once every five years?
While there is little research in this regard, there are relatively simple steps a company can take to transition from having no supply chain design capability to having some capability, or to transition from having some capability to being really sophisticated in their approach to design.
“There are all these external factors that are putting pressures on supply chain departments,” Brzoznowski said. “You have external pressures that have been exacerbated by globalization. You have commodity shifts, labor costs. You have different buying behaviors within an organization. Things like the need to deliver same day.
“Then you have internal stuff – more products, more SKUs, multiple channels, acquiring new companies in order to grow. It’s changing at a constant pace. And it’s made the idea of design as a static process obsolete. It has to be continuous. It has to be an evolution. We see it sitting alongside planning and execution as a third pillar,” he said.
And here’s a key point: there is a big difference between planning and design.
“In (transportation management systems), we use the terms planning and execution,” said Fab Brasca, vice president of solutions strategy for JDA Software, one of the major providers of TMS solutions (JDA also offers a network design solution). “In the TMS world, those are synonymous, part of the same process. In supply chain planning, there’s usually some sort of time lag. When you’re planning, you think in terms of, ‘I’ve got demand to fill or think I have to fill, so how do I distribute inventory in my network to meet that demand.’ There’s a time lag, that’s why they’re treated as a separate domain. Design is more of the analytical aspect, putting the right pieces in the first place.”
Brasca agreed that companies on the more sophisticated end of the spectrum treat supply chain design as an ongoing process.
“Laggards are the ones who do this once in a while, like every two years,” he said. “These people only think in terms of network restructuring.”
“Most companies look at this as one-and-done,” said Jim Barnes, president, chief executive officer and founder of the supply chain design consultant enVista. “I’m a huge proponent of either having an internal modeling team or using a consultant to help you.”
Indeed, supply chain design experts advise those tasked with modeling a network reside completely apart from those tasked with day-to-day operations. In essence, a team that can see the forest for the trees.
“That seems to be the most common scenario,” Brzoznowski said. “What we are seeing is there is a group that is cross-functional, across business units, across geographies that are experts in design and modeling. They will often partner with subject matter experts in those business units to get details. They tend to be in their own group, rolling up to the [vice president] of supply chain, who oversees inventory, sourcing, distribution, and fulfillment.
“Design really crosses all those areas. And here’s the thing: the design may call for making one of those areas sub-optimal to make the entire network better,” he said.
Think Backwards. Barnes’ advice for those looking to jump into the network design pool is simple: think about the consumer and then set up the network to satisfy demand.
“It’s really about understanding the business from a consumption perspective and working backwards,” he said. “Most people look at this from the supply management side. The first thing I’ll ask a client is, ‘Before you get into where you’re going to put a distribution center, tell me what your allocation strategy is.’ And then I’ll determine what the downstream strategy is. And then the next question is, ‘Are you open to changing your allocation strategy?’”
Barnes said any network design exercise must look first and foremost at inventory flow.
“I’m not a fan of doing supply chain modeling without factoring in inventory flow,” he said. “How will I flow inventory flow through my supply chain to make sure I’m meeting the needs of customers based on demand variability?”
This nuanced view of supply chain design—that there are broader considerations than merely whether to increase or decrease the number of distribution centers—is only part of the reason for renewed interest in the discipline.
Brzoznowski chalks some of it up to better technology.
“A couple things have changed in the last 10 years,” he said. “First of all, planning and execution tools have really matured. But you also have 64-bit operating systems that eliminate memory constraints. Before, your models couldn’t be at that level of detail. In-memory processing as well. Now you can model at this granular level of detail.”
Brasca said companies need to incorporate design as a matter of course, because supply chain optimization is too important to forgo, and hard to do when you’re bogged down in operations.
“Whether you need a tool or not is a question, but at a minimum, this should be a competency for every company,” he said. “It’s a very important function. And it’s a sector of software that’s pretty non-invasive from a cost perspective. You don’t have to be a certain size or scale to get into this.
“But the intent of network design was to help with capital-intensive decisions. If you’re looking to design a supply chain, to build a factory, to outsource to a 3PL, these are big budget decisions. And people were using spreadsheets before, which only allows time-consuming and limited evaluations. They’re limited in scope and breadth. The tools allow you to increase the number of variables, the number of scenarios you can look at, and they shorten time to evaluate,” Brasca said.
Swoosh Design. In a panel at the Council of Supply Chain Management Professionals’ annual conference in October, Trish Young, vice president of North America supply chain operations at Nike, described how the footwear and apparel maker used LLamasoft to create a center of excellence that touches cross-functional disciplines.
“There is more to supply chain design than network optimization,” she said. “We’re starting to get to a place where we can shape how the supply chain behaves. We see it as a strategic asset for us to own this type of capability.”
Nike has a team dedicated to network modeling. The team has reached a level of maturity from using the LLamasoft tool on a continuous basis, so much so that department managers can bring tactical decisions to be modeled.
“We’ve been able to create a sustainable, scalable model through our partnership with LLamasoft,” she said. “But we also had to hire people that hadn’t lived within Nike before. PhDs in analytics to complement our internal talent. You have to think about how fast you want to get there. Mastering the analytics is a journey—it’s never finished. It sounds pretty pedantic, but it takes a lot of time to understand the data.”
Young said the single biggest benefit across Nike’s modeling experience has been reduction in inventory, and a corresponding reduction in the amount of distribution center space it requires.
Those bottom line benefits are key, Brzoznowski said. To sell the C-level on the benefit of a supply chain design function, it takes quick and decisive wins—the veritable low-hanging fruit.
“It’s a maturity process that’s a year or more in the making,” he said. “But in the first three months, you’ve delivered a couple different models, get some early wins. Each of those wins gains that group creditability. The executive team says, ‘You did this, now I’ve got another one for you.’ It snowballs in that regard. You build yourself a sustainable stream of projects and it becomes very much self-funded.”
Barnes sounded a similar note, relating a story about how enVista helped a major retailer shave off $90 million in inventory costs by moving inventory closer to the end consumption point, but without allocating it.
“We did this analysis at the SKU (stock-keeping-unit) level,” he said. “It may seem better to fulfill in a certain way, but that may lead to poor stocking on the shelves, so there are merchandising considerations. It’s not just about where you put your DC.”
Barnes said many simple supply chain design tools don’t account for these granular implications. The problem, he said, aren’t the technological shortcomings, but rather the data sets. Design models run through an enterprise-resource-planning (ERP) system, for instance, are limited because ERPs tend to be transactional in nature rather than strategic.
A Design Tool? But Brasca said there’s not a huge difference between design tools.
“In the technology sector [supply chain design has] existed for 10 to 15 years, but there hasn’t been huge penetration,” he said. “But now many companies have a tool or at least a function that does design. How other providers are doing tells me there’s a maturity and a good ecosystem of consultants.
“All the solutions kind of do the same things. This is not a market where you see huge advancement. The new kid on block might have a slicker [user interface] or better reporting, but it’s not a huge difference,” Brasca added.
Indeed, for each backer of LLamasoft, there’s a backer for AIMMS or River Logic, analytics tools that are used for functions beyond supply chain. For every JDA or MercuryGate, there are smaller design software providers (Brasca calls them boutique tools). And for every enVista, there are myriad consultants and 3PLs that can undertake the process of supply chain design.
The key is understanding the depth of what you want to design and accounting for all the variables. Is the exercise primarily to reduce cost? Is it to better serve your customer? Is it to build resilience into your supply chain, or all three? Other factors: is there investment available? And, are the data points that feed into effective modeling already well established?
“It really depends on how far the company is in their technology adoption,” Tohamy said. “If the company is struggling with an ERP or TMS implementation, chances are they are still bogged down with these projects, and network design is not a short term project they want to undertake.
“Similarly, I might be a VP of supply chain or transportation, and I see the LLamasoft booth, so I come back to the company and want to do a supply chain-design exercise. But quickly I realize I don’t have enough data about suppliers and cost. There have to be the foundational systems and data to make this exercise worthwhile,” she said.
Outsourcing And Back. A common progression for companies to undertake is to have an outsourced logistics partner help with network design, until the benefits are clear enough to compel the company to bring the function in-house, Tohamy said.
“It is often outsourced to a service provider,” she said. “If a company has a good relationship with a 3PL and they have strong analytics capabilities, it’s the type of service that the 3PL might be considered for. A lot of companies that have the vision to see that this is a core competency, outsourcing is a transitional step. That’s a common model that I see out there.”
But there are some limitations in outsourcing network design to an logistics services provider (LSP). For one, not all truly have the technological scale to act as genuine 4PLs. Shippers might also worry that their LSP might model in a way that suits the LSP’s network more than their own (hence, the trust factor that Tohamy mentioned). And lastly, modern network modeling accounts for factors that might be outside the scope of what some LSPs can account for, like sourcing and merchandising considerations.
Working with a supply chain (not just logistics)-oriented tool, or working with a consultant well versed in all the variables that affect a model is key. That’s because modeling is pretty heavy lifting. There’s a reason why Nike’s Young mentioned her company needed PhDs to dive deep into the analytics.
Another key consideration is the extent to which a company can apply its model to actual planning and execution. On its own, a model is a theoretical or virtual representation of a company’s ideal supply chain. But bringing that model into the physical supply chain is a challenge unto itself.
The tools and assistance are out there, but companies need to start somewhere.
“Lot of times it starts with one project, one person,” Brzoznowski said. “They hire Tompkins or Deloitte to help with a process. They see the model, and they say, ‘when you leave, I don’t want you to take that with you.’”
- Supply chain design should be a competency of every shipper, whether it handles this action internally or outsources it to a logistics provider or consultant.
- What you put into a supply chain modeling initiative is what you’ll get out—the more variables you account for, the more accurate (and useful) the model will be.
- Supply chain design should not be limited to determining the number and locations of distribution centers or sourcing points.
- The most optimal total network may include requiring certain functions—say, transportation—to operate at sub-optimal levels.
- The starting point for a supply chain-design exercise should be at the point of consumption, not supply.
- Those shippers that handle supply chain design in-house should do so with a cross-functional team outside of operations, and one that includes experts in analytics and modeling.
This article was published in the November 2014 issue of American Shipper.