Classic and Simple Network Design Case

On IBM’s blog, there is a simple case of a firm that was producing product in Mexico and Virginia and distributing from the two plants.  They wanted to simply analyze the territories of the distribution points and have more product shipped between the sites.  The maps below show the before and after for this design.  This firm spent quite a lot in transportation and this move alone saved them $5 million.



MSC Industrial’s New DC in Columbus

MSC Industrial recently announced that they are building a $55 million distribution center in Columbus, OH.  This will be their fifth distribution center (or Customer Fulfillment Center- CFC).  They are building it “to support its growth strategy and maintain its signature service model as the Company grows.”

Here is a key quote from the press release:

 ”Our current success and growth plan requires us to add a new CFC to support our world-class service model as we continue to grow.  After conducting a thorough review, Columbus provided the most compelling opportunity to expand our distribution network in the most cost-effective manner, in a region that fits well with our existing network and provides easy access to key markets and resources, as well as a rich pool of local talent. Over the long-term, our investment in this facility will yield high returns as we more efficiently manage and expand our service volume.”

Although this article does not mention network design directly (although they do mention “conducting a thorough review”), $55 million decisions like this usually don’t happen without some type of network design and optimization.  When firms are spending this much money on a facility, they do not want to put it in the wrong place.

Also, it is interesting to note that the new center was added to support growth and service, not reduce costs.


Toshiba Uses Network Design to Evaluate Options

Toshiba recently presented at the Manufacturing Leadership Summit.  They gave a talk on ”Using SCM to Create Competitive Advantage.”  (SCM = Supply Chain Management).

In the talk, they mentioned that they used network design technology to evaluate different options.  We often see this in a project.  A company many have many different ideas for changing their supply chain.  It is important to test those ideas and determine what impacts they will have on the overall supply chain. For example, if a firm can add more facilities to better serve customers, it is important to know if the transportation costs will go up by $500,000 or $5,000,000.  The importance of service may change as a result of this.

In the talk, they mentioned that their new strategies helped in the following ways:

  • The cost per shipment decreased by more than 12%
  • Obsolescence reduced by more than 40%
  • Missed service calls reduced by more than 16%


Südzucker uses Network Design to Adjust to Changes in European Regulations

IBM released a case study showing how Südzucker, Europe’s leading supplier of sugar products with an annual revenue of approximately €7 billion, used network design to adjust to changing regulations in Europe.

Here is a key quote from the case.  The link to the IBM case has more details:

When the European Union adopted a new market regulation for the sugar industry in 2006, Südzucker was forced to re-evaluate their entire supply chain network. On the one hand the company’s ability to export sugar to world markets became very limited, on the other hand major sugar deficit areas within the European Union were created. This led to a much greater focus on sales and distribution. Südzucker also knew this ruling would give them the ability to enter new sugar markets like Greece, Italy, Spain and the United Kingdom. Their challenge was to merge their national supply chain networks to create one integrated and powerful European supply chain network. The company had to determine how to modify their supply chain network by adding new facilities to ensure excellent service but also minimize transportation costs.”


Network Design in a Closed-Loop Supply Chain at Johnson Controls

IBM recently published a case study with the battery division of Johnson Controls.  The supply chain for a battery is complicated because it is a closed loop.  New batteries are shipped to the retailers.  The retailers collect the used batteries and send them back back to the recycling center.  The recycled batteries, along with new raw material, are then send back to the plants to make new batteries.

Although this closed-loop supply chain is complex, Johnson Controls still has to answer many typical network design questions such as:

  • Which suppliers and facilities should be used to optimize transportation costs?
  • How much capacity should be contracted with each supplier and facility?
  • Which battery plant and distribution center should serve which customers?


Production Sourcing Optimization at Pepsi

Consumer Goods Technology (CTG) published a case study on the Pepsi Bottling Group (PBG) (now part of PepsiCo).

In the case, they discuss how Pepsi used a network optimization approach to production sourcing.  That is, they wanted to optimize what product is made when and where.  They wanted to do this considering the full supply chain.

The savings reported were significant.  The article quotes:

  • An increased number of cases available to sell due to reduced warehouse out of stocks
  • Reduction in raw material and supplies inventory from $201 million to $195 million
  • A 2 percentage point decline in the growth of transport miles even as PBG revenue grew
  • Increase in the return on invested capital

This example reminds us that an important part of network design is about deciding what products should be made in which locations.

Value of Network Design: Supply Chain Transformation at The Home Depot

Network design can play a key role in transforming a supply chain.  Dan Gilmore of SupplyChainDigest wrote a nice article on the transformation of The Home Depot’s supply chain.

In the article, Mr. Gilmore reported on the aggressive transformation of The Home Depot’s supply chain from one where the suppliers mostly delivered directly to the stores to one where product flowed through distribution centers first.  The Home Depot had to use network design software to determine the best number and locations of these distribution centers.  The article did not mention the transportation savings, but mentioned that the strategy could help free up $1 billion in inventory.

The transformation of the supply chain was so important that it was mentioned in the letter to shareholders in the 2009 Annual Report.

Example of Network Design Savings: MillerCoors Merger

In the summer of 2008, Miller and Coors merged US operations to become MillerCoors.

When two firms merge, they can often find savings by combining their supply chains.  This means sharing suppliers, plants, and distribution centers.

MillerCoors reported on their supply chain savings in their quarterly earnings announcements.

For example, in a May 2010 letter, they announced that they were on track for $750 million in synergies (with network design an important part of this).  Specifically around network design, they mentioned:

“Supply chain integration continues to proceed on schedule. The brewery optimization project is nearing completion, as product moves are more than 90 percent complete.”

By the November 2010 letter, they mentioned:

“In the third quarter, MillerCoors successfully completed initial product transitions within its national brewery network. The company will continue to focus on further network optimization through peak/non-peak season sourcing changes, as well as opportunities for increased efficiencies. “

By the November letter, it is interesting that they mentioned that they would continue to their network optimization work to look at different strategies for different times of the year.

GE Healthcare and IBM Webcast presented by IndustryWeek

IBM (led by Sara Lewis, one of the co-authors of the book) presented with GE Healthcare at an IndustryWeek Webcast.  Click here to go to a link that allow you to view a replay of the event.   This event gives you a good overview of how network design is applied in practice.

The following is from the IndustryWeek registration page:

Conference Information

Managing a global supply chain is a constant balancing act. Making sure you’re getting the best results means calculating thousands of trade-offs. You need to consider every cost and constraint associated with transportation, production, storage, and global trade, while keeping service levels as high as possible. And when you consider how unpredictable high-growth markets can be, the levels of complexity increase exponentially.

Attend this IndustryWeek webinar featuring experts from IBM and GE Healthcare to learn best practices for simplifying the complex. Find out how your company can calculate the best possible supply chain network design to meet rapidly expanding business needs.

You will learn:

  • Why leading companies are integrating ongoing network optimization into every major supply chain planning activity — and how you can benefit from their insights
  • How major companies such as GE Healthcare are managing their global supply chain structures in order to reduce costs, improve customer service, and prevent disruptions
  • How solutions can help your company simplify the complex though all-in-one packaged network design and planning


Ryan Hahn, Global Network Optimization Manager, GE Healthcare

Sara Lewis, WW Technical Lead, IBM


Mars and Wrigley Discussed Network Design at CSCMP

In the 2009 annual CSCMP conference, Mars and Wrigley spoke with IBM about network design.

The talk was covered by a post from IBM’s blog site and one from Bob Ferrari’s Supply Chain Matters.

The talk did a nice job of highlighting the value of network design.  They spoke about $10M in savings just from the initial models.

Of the points mentioned by Supply Chain Matters, the following helps highlights points from the book:

“When modeling scenarios were completed, combined management was in a better position to make more informed  decisions regarding warehouse synergies, potential common systems, or customer shipment consolidation.  Additional insights were also gained regarding potential impacts of an increased cost of energy, or reduction of overall carbon footprint.”

This is an important part of network design:  running multiple scenarios to help the management team make a better decision.   Since decisions are still made with uncertainty (what will happen to the price of oil?  to demand?) and strategic considerations (what is important the Mars and Wrigley brands), the modeling can better help quantify alternatives.