ITW’s use of the 80/20 Rule

Illinois Tool Works (ITW) is a $17B organization with over 800 different operating units.  One of their guiding principles is the 80/20 Rule.  Here is their description:

“A driving force behind much of our success at ITW is our 80/20 business process, a practice that keeps us focused on our most profitable products and customers. The concept underlying 80/20 is simple: 80 percent of a company’s sales are derived from the 20 percent of its product offering being sold to key customers.


Put simply, too often companies do not spend enough time on the critical 20 percent of their key customers and products and spend too much time on the lower volume 80 percent…”

Earlier this year, we had a chance to speak with ITW at SCOPE.  Interestingly, you can apply the 80/20 to your network design models as well.  We spend a lot of time in the book talking about how to aggregate your customers and products.  ITW’s 80/20 rule suggests another way build models– only build models that include the 20% of the customers or products that drive 80% of the business.  This simplifies your model and gets you focused on the most important parts of your business.  (If you are skeptical, you can always build two versions of the model– one with the most important 20% of your customers and one with all of the customers– and see if they give different answers).

How Can You Use a Map that is a 1:1 Scale?

The art of modeling is to create a model that reflects reality, but is not as complex as reality.  You want to a model you can work with and analyze to help make decisions about the real world.

In network design, a big part of simplifying your model is aggregating your customers and products.  You have thousands of unique customers (or unique ship-to locations) and you typically group these by geography.  Likewise, you group your thousands of products into a few product families.

If you seen a successful project, you know that the aggregation of customers and products does not impact the quality of the results.

We have found that it can be difficult to explain why you need to aggregate at all.  In our book, we list reasons you need to aggregate and even reasons why an aggregate model can be more accurate than a detailed model.

But, sometimes all these answers do not help you convince others.  And, if you can’t convince key people that aggregation is valid, they may reject your entire model.  So, it never hurts to have different ways to explain why you need to aggregate.

The book, Serious Play, offers a another nice reason.  Ask yourself:  how could you use a map of city that was on a 1:1 scale?  That is, how could you use a map that was as big as the city? You couldn’t use a map this big.

That is why maps are not an a 1:1 scale and it is the same reason models are not as complex as the supply chain it is modeling.

Models are like maps for the supply chain.  They can’t be as “big” (or complex) as the real supply chain.  If they were, they would not do you any good.  A real map of the city leaves out a lot of detail, but is still very accurate for making good decisions.  This is what we are doing with a network design model.  It leaves out a lot of detail, but it is still accurate enough for good decisions.


Doubling the Capacity the Panama Canal

The expanded Panama Canal, which will allow much larger ships to pass through and will double the capacity, is expected to be completed in 2014.

The first impact is that port cities east of the canal are preparing the handle the larger ships.

The second impact is that firms will have to re-evaluate their supply chain infrastructure.

Many firms currently bring product into the US through the West Coast ports of Los Angeles and Long Beach.  Many of the containers that arrive on the West Coast are shipped via rail or truck to destinations east of the Mississippi River.

So, now that larger ships and more volume can pass through the Panama Canal, does it make sense to shift volume to east coast ports?

The answer will vary for every firm, but the drivers will be:

  • Cost to ship product through the Panama Canal versus the cost to ship through a west coast port
  • Time to ship through the canal versus through a west coast port
  • Location of customer demand
  • Location of existing production and distribution facilities

I suspect that these new options will increase the need for network design analysis.  Not only will the panama canal create a new option, but the west coast ports, inland ports, and railroads will likely work to become more competitive as well.

Geographic Scope of Network Design

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.

Multi-Objective Optimization in Network Design

One of the big improvements in commercial network design technology is the additional of multi-objective optimization.  As supply chain managers know, designing the right supply chain means balancing different objectives.  By being able to understand how different objectives relate to each other, you can make better decisions.

We recorded a short interview with Supply Chain Television Channel and CSCMP on multi-objective optimization (it starts at about the 7:00 minute mark).

The book has a chapter devoted to multi-objective optimization as well as information throughout the book.  For example, in Chapter 4 where we talk about different service levels we provide some insight on how to think about different objectives.