We are often asked the question about the geographic scope of network design studies.
We have seen studies done at the global, continental, country, regional, and metro areas. The last two are usually the ones that people question since they usually see examples of a national study.
However, when a firm makes home or local business deliveries within a metro area, they often have exactly the same trade-offs you would see in a national study. These firms don’t want their expensive (and maybe small) delivery trucks to spend a lot of time in traffic or driving across the city. They would rather these trucks spend time at customer sites.
Therefore, they will often need to set up hubs within the metro area. The product moves from a central warehouse to these hubs. Then, the delivery trucks pick up product from these locations and spend time serving customers in their area.
An on-line grocer would be an example of this. The on-line grocer doesn’t want its delivery trucks fighting traffic. Instead, a central location (where they can get economies of scale in processing and inventory) will truck the groceries to hub where multiple delivery trucks will take it from there.
In general, if you need multiple locations, network design can help you.
Last week, I had the opportunity to participate in a panel discuss at the Journal of Commerce’s Inland Ports conference in Oak Brook, IL. The panel was moderated by Adam Roth of NAI Global Logistics and included Jeff Starecheski of Sears Holdings and Brent Lindstrom of Caterpillar Logistics Services.
In a previous post, we shared an article on seven reasons why you need to do a supply chain network design study.
On this panel, one of the questions that received a lot of attention was about how frequently you should do a study. Some people tend to think that you need to do a study once every 4-5 years.
Interestingly, the consensus on the panel was that firms were doing major studies on a 2-year cycle with minor studies done on an ongoing basis. Now, some investments are expected to last 10 years so not everything is open within a 2-year window, but firms find too much savings to ignore the structure of the supply chain. There is no reason to wait five years for the supply chain to get out of sync.
I have found that understanding the underlying math and logic of network design software, like IBM’s ILOG LogicNet Plus XE, makes me a better modeler. That is, it helps me structure the problem so that the tool can answer the question I want it to.
In fact, one of the ILOG LogicNet Plus XE customers had such a good understanding of the underlying logic and math that he could make the product answer many questions that we had never dreamed up when we created the interface.
I asked him why he didn’t just build the a custom model for these problems and his reply was that since he understood what the tool did, it could answer the question and came with the interface, error-checking, and reports.
The book, Supply Chain Network Modeling, will give you a deeper appreciation of the underlying logic. This will allow you to create better models of your supply chain. And, you might be surprised that this understanding allows you to solve many new types of problems.
In the 3rd Qrt of 2011, CSCMP’s Supply Chain Quarterly ran an article by Simon Bragg, Richard Stone, and Julian Van Geersdaele discussing the 7 signs you need a redesign.
Here are the 7 signs from their article:
- You have objectives rather than strategies
- People ask: Why do we do things this way?
- The number of customers and products is growing faster than your budget
- Consolidation or collaboration is coming
- You experience a major service failure
- Fear is in the air
- It’s time to renew a third-party logistics contract
These are all good reasons and the article can be a nice reference for you.
Besides helping you become a better modeler and a better manager of network design projects, this book can also help educate your clients.
This applies to internal and external clients.
Within your company, the book can help you publicize the value of your network design work, help your projects go smoother, and help you uncover new opportunities.
If you work for a 3PL, the book can help educate your sales team so they better understand client needs and understand when a network study may be needed.
If you are doing a project for a client, the book can help your client understand what you are doing and why you are doing what you are doing (like aggregation).
Network design is not just driven by transportation costs.
Yesterday’s Wall Street Journal article about an Egyptian firm investing $1.4 billion in a fertilizer plant in Iowa. Why Iowa? Well, according the article, natural gas is a key raw material in fertilizer and the low natural gas prices in the US are encouraging investment. This firm is not the only one:
Low gas prices have spurred other investments by chemical makers. Deerfield, Ill.-based CF Industries Inc., another big fertilizer producer, increased its projected capital spending on new nitrogen capacity to $2 billion through 2016, up from a prior forecast of $1 billion to $1.5 billion. Much of the capacity is expected to debut in 2015.
Dow Chemical Co.announced earlier this year it will build a multibillion-dollar plant to convert natural gas into the building blocks of plastic in Texas, creating 2,000 construction jobs before the plant is completed in 2017.
That news followed Royal Dutch Shell PLC’s announcement it would build a similar, $2 billion chemicals plant near Pittsburgh, above the Marcellus Shale.
Currently 50% of the fertilizer used in the US is imported (incurring extra transportation costs, but the article doesn’t mention how much might come from Canada). So, with the lower price of natural gas, the balance tips in favor of investing close to the source of natural gas and demand points.
It will be interesting to see how the price of nature gas impacts other manufacturing firms. Network modeling can help a firm understand when it makes sense to take advantage of the price of natural gas and move plants to the US.
(I posted this at IBM’s site yesterday. So, if you read both blogs, I apologize for the mostly duplicate post).
Sara Lewis of IBM (and one of the authors of the book) is speaking with Josh Buchanon of Dr Pepper at SCOPE in Dallas (Sept 9 – 11).
Here is the description of the talk from SCOPE’s website:
“Dr. Pepper Snapple Makes the Most of their Supply Chain by Utilizing Network Design for Ongoing Sales and Operations Support”
· Supply Chain Network Design is not only a powerful business tool but if applied well can provide great value within all areas of your business.
· Sales and operations at Dr. Pepper Snapple Group must continually ensure the operation of an optimal supply chain structure is in order to allow for the best service levels to stores at the lowest overall cost.
· Come learn how Dr. Pepper applies supply chain network design down to the regional level by rationalizing warehouses and flow of product to stores as part of their territory planning.
Josh Buchanon, Packaged Beverage Network Optimization Manager, Dr. Pepper Snapple Group with Sara Lewis, IBM Smarter Commerce Supply Chain Marketing Lead, Co-Author ofSupply Chain Network Design: Applying Optimization and Analytics to the Global Supply Chain
We were recently interviewed on the book by Dan Gilmore from The Supply Chain Television and CSCMP.
See the interview here. We start around the 2:50 mark and run for about 6 minutes.
IBM published a case study on Armstrong World Industries on-going use of network design. This ranged from full studies to ad-hoc studies. Network design became something the business relied on:
“Some business units within Armstrong do not make a change or investment without consulting with the central modeling team. Sometimes the modeling results confirm the preconceived notions and sometimes the results cause people to change their mind. In all cases, the process makes the managers in the business think more rigorously about the problem and allows for better solutions.”
This is a trend we are seeing with network design. More firms are relying on network design to make better decisions. If you are going to rely on network design, it is not only important for the network design analyst to understand the subject matter, it is important that the greater organization has an appreciation for this as well. The book, Supply Chain Network Design, can help you educate your organization on this important practice.