Logistics executives must periodically re-evaluate the locations of their distribution centers (DCs) to minimize shipping costs. A network strategy worked out four years ago, when fuel was three dollars per gallon, might not be the best strategy now when fuel costs are 30 percent higher. Other factors affecting this decision include rate increases, driver shortages, new labor laws and consumer demand for free and fast delivery within 24 to 48 hours.
A distribution network strategy must consider many supply chain factors, including strategic product sourcing, supply chain vulnerability, throughput capacity, mergers and acquisitions, inventory, omni-channel requirements, warehousing, transportation, outsourcing, labor procurement, capital investment, ROI and profitability.
Network Optimization Elements
A comprehensive distribution network optimization considers five primary functions:
Data Discovery – Precise detailing of a company's distribution network is the initial step. Both business and facility discovery identifies assets, capacities, facilities, operational processes and performance. This process incorporates such critical factors as supplier sources, transportation costs, regional labor availability, property information, customer and store locations, etc. Data discovery also includes interviewing stakeholders from not only logistics, but from every aspect of the company necessary to understand the pain points and potential bottlenecks in the organization that influence distribution.
Predictive Analysis – This is used to determine future infrastructure requirements. What-if analysis is used to show the tradeoffs of various demand levels with different network configurations. Both a qualitative and quantitative assessment, this step analyzes findings, observations, alternative options and business cause for action. It should provide an assessment of opportunities and change impact, prioritization, timelines and transition planning.
Baseline Model – Utilizing information gained from data discovery and predictive analysis, a baseline model of the existing distribution network is built so alternative scenarios can be compared to it. Used properly, the baseline model is a highly accurate valuation tool.
Modeling – Given fixed or variable inputs, modeling will process events and calculations to produce scenarios for expected throughputs. Multiple scenarios can be derived, based on projected requirements, using software modeling tools such as Insight's Supply Chain Optimizer (ISCO), or Llamasoft's Supply Chain Guru. Modeling enables the supply chain team to develop alternative supply chain networks focused on minimizing costs and maintaining service levels.
Strategic Plan – Once the supply chain model is defined then a distribution strategic plan is developed that aligns the company's business, technology, operations, vendors and customers. Fundamentally a strategic transition plan, it lays out for supply chain executives how to go from the existing configuration to the optimal. The steps include facility role and configuration concepts, operational process flows, implementation timelines and a market impact assessment. A critical component of the strategic plan is detailed financial projections, prepared on a year-by-year basis and extending out five years. The five-year plan typically includes capital investment requirements, network costs, expected cost savings, cash flow and return on investment including the internal rate of return.
Assuming that the above steps are conducted comprehensively, the resultant strategic plan provides a comprehensive roadmap for achieving an optimal network configuration, and permits tactical implementation plans for moving forward.
A network optimization plan can be extended and integrated. This integration will give supply chain executives a comprehensive view of the solution.
Even before the go-live or switchover takes place, it is important for the DCs' staffs to be fully trained in all operations of the distribution centers. This includes integration with the company's core systems (ERP, OMS, WMS, TMS, etc.) to enable receipt of orders, WMS/WCS operation, inventory storage systems, picking, packing, sortation, shipping, transportation and the dozens of sub-functions involved with the operation of the network's DCs. This requires considerable coordination between equipment manufacturers and installers, the DCs' executives and operational personnel, and the company's executive management.
Network Planning Frequency
How often should logistics executives consider optimizing the company's distribution network? Once a comprehensive network optimization is done, logistics consultants recommend an annual network rationalization to ensure that factors which impact transportation, service and costs are reexamined. It makes sense to revisit the criteria that were used and substantiate that the network is staying current. Then, if changes need to be made, the impact on service and costs will be minimized if caught early.
An optimized distribution network will define the requirements for achieving targeted throughput and efficiency, minimize capital outlay and deliver the expected return on investment with an optimal balance of transportation costs, labor, systems and facilities.