White Paper: Combining Network Design with Process Excellence and Strong IT

PRTM (now part of PwC) and LogicTools (now part of IBM) published a white paper showing how firms create efficient supply chains:

“…the integration of a few disciplines in supply
chain management—optimization of
network and inventory, process excellence,
and IT-enabled visibility and collaboration
has proved to generate breakthrough operational
improvements at reduced overall




Mars Wrigley Presentation On Use of Network Design

IBM posted a YouTube Video of Mars and Wrigley discussing, “how they used IBM ILOG’s supply chain applications; LogicNet Plus XE, Inventory Analyst, and Transportation Analyst to maximize the efficiency of their global network for huge savings in a presentation to IBM Smarter Supply Chains Regional Symposium and Users’ Conference in 2009.”

Lead Time and Inventory Buffers

A recent article on Fab.com (a fast rising $140 million design retailer) reminds us that there are multiple lead times in a supply chain and that inventory plays a key role.  Here is  key question (from the WSJ) and the answer (from the CEO):

WSJ: Earlier this year, your average shipping time was 15 days. How have you improved fulfillment?


Mr. Goldberg: We’re living in an Amazon world—shipping should be fast and free. We’ve invested tens of millions of dollars this year on two efforts. One is to build warehouses so that we get things in and out very quickly. The other is purchasing inventory. Last year during the holidays about 10% of our product was in inventory. Seventy percent of the products that are currently on Fab right now are in inventory, which means they’ll ship within one day of purchase, which means they’ll get anywhere in the U.S. in one to four days.

This is very interesting on a few levels.

First, Amazon (and other retailers) started out just like this– with no inventory.  In fact, back in the late 90′s, there were articles saying that on-line retailers had a huge advantage because they didn’t need to hold any inventory.  They would take the order and then have the vendor ship to the customer.  It would have been a great business model if had worked.  But, like Fab.com is finding out, customers don’t want to wait 15 days.  Like Amazon before them, Fab.com is finding out that they need to hold inventory to reduce lead times to the customers and control their business better.

Second, this shows that there are multiple lead times in a supply chain.  Presumably, Fab.com’s lead time is still 15 days.  However, because they have an inventory buffer at their warehouse, their customers now only see a 1 day lead time.  So, the inventory buffer changed the lead time buffer that the customer sees.  Inventory buffers are also very useful for buffering variability that the customer sees.

In general, a company should measure the overall lead time, but also the lead time seen by different parts of the supply chain (what does the customer see?  what does the warehouse see?  what do the plants see?).

Now, Fab.com can work on reducing the 15-day lead time from vendors knowing that the customers see the 1-day lead time.  As they reduce the 15-day lead time, the benefit will be a smaller pile of inventory at the warehouse.


Economist Article on Analytics and Geography

The Economist recently published a nice survey on Technology and Geography.

As more consumers (and more technicians, delivery drivers, and so on) carry smart phones with locations, it opens up many nice opportunities for geographic services, geographic analytics, and even optimization.  This opens the door to more local uses of network design technology.

Also, if you’ve done network design, you’ve seen the value of displaying data on a map.

Taking it further, Justin Holman, CEO of TerraSeer, makes a strong case that firms should be viewing more data on maps rather than in spreadsheets.  As firms collect more data about locations, geographic visualization will become more important.

What To Do About Cheap Energy and Low Manufacturing Costs?

Cheap natural gas has to be one of the top stories of the year.   It is all over the press. Wall Street Journal had stories on cheap natural gas helping the rust belt, low-cost gas being the real economic stimulus, and new plants being built in the US because gas is a key input.  Supply Chain Digest’s, Dan Glimore thinks natural gas trucks will have big impact as well.

And, the list goes on and on.

At Northwestern’s Masters in Engineering Management blog, we had a discussion on what  managers should do about this:  The simple answer is to make more products in the U.S. The more complex answer, of course, is that network modeling will help you figure out what to do.

Supply Chain Network Design in the Pharma Industry

We have often heard that the pharmaceutical industry is not always a great fit for network design because the margins are so high.  The argument is that the transportation and logistics costs are so small relative to the cost of the product that they don’t matter.

I recently came across a nice case study written by consultants at McKinsey that runs counter to this argument.  The article discusses the network design process in the context of the pharma industry.  And the savings they quote are consistent to what we’ve seen in other industries:

As a result of this kind of analysis, one pharma company reduced its network of 25 separate country warehouses across Europe to eight facilities serving multiple countries. The resulting increases in warehouse efficiency and consolidation of product flows helped the company to reduce its overall logistics costs by 15 percent. In another example the reduction in warehouses was from 30 to 15 and cost reduction was 20%.


Modeling Political Risk in the Supply Chain

When we discuss supply chain risks, we often mention natural disasters, the changing price of oil, or something like a strike (at your facilities or at a port).

But, there are political risks to your supply chain.  The dramatic ones are the most obvious– like locating in a politically unstable country.  But, even in the US, changing laws and regulations can have an impact on your supply chain.  And, so you should add this category of risk to your reasons for better understanding network design and doing this type of analysis on an a more frequent basis.

I wrote more about this in my SupplyChainDigest column.


Fortune Magazine: Home Depot’s $300 Million Investment in DC’s and the Payoff

The latest Fortune magazine discusses the role that Home Depot’s CFO, Carol Tomé, played in their turnaround.  Their stock is up over 150% since the beginning of 2009, well ahead of Lowe’s.  The article credit’s her investment decisions.  And, the article gives a lot of credit to a project with a network design component:

Later, as other companies slashed outlays in response to the financial crisis, Tomé tacked in the opposite direction. During the dark days of early 2009, Home Depot embarked on an ambitious overhaul. It shed an inefficient process in which each store ordered products individually and spent $300 million to construct centralized distribution centers, which have saved time and money in ordering costs. “Home Depot readjusted the structure of the company, which allowed it to recover margin lost during the downturn and grow,” says Melich. The company’s operating profit margins, which fell from 11.5% in 2005 to 7.4% in 2008, have rebounded to 10.5% without a significant recovery in home-improvement demand or the housing market.

Of course, the network modeling was only part of this project.  But, when you are investing $300 million in new distributions centers, you want to make sure they are in the right place, they are the right size, and the right products flow through them– this is where network design comes in.
And, from the article, you can get a sense of the pay-off from overall projects like this– profit margins up to 10.5% from a low of 7.4% without a significant recovery in demand.

Same Day Delivery and Network Design

Same-day home delivery is getting a lot of attention in the press.  The stakes are high.  Amazon is trying to cut further into the market share of the brick-and-mortar retailers with delivery on the same day.  The brick-and-mortar retailers are fighting back, trying to use  their existing stores to deliver internet orders to the home the same day.

SupplyChain Digest ran an article called “Here Come the (Same Day) Delivery Wars.”  In their article they talk about programs from Amazon, Walmart, eBay, and the US Postal Service.  This is not just about the retailers.  Delivery companies are figuring out how they can profit from this as well.

The Wall Street Journal ran an article focusing on the battle between Walmart and Amazon.  In their article, they pointed out that Walmart can take advantage of their existing stores and deliver from there.  However, there is a high cost to pick a customer order from a store.  And, Walmart is creating some interesting twists to the business model– they think there are customers who want to order on-line, but want to pay in cash and would rather pick-up at the store.

Network design plays a large role in home delivery.  That is, you need to make sure you have facilities located close to customers so you can make the same day delivery.

But, network design is just part of the equation.  We saw a lot of e-commerce firms promise same day delivery before the dot-com bubble burst in 2001 and these firms couldn’t come close to making a profit with same day delivery.  Ten years later, will better IT systems and better use of existing infrastructure make this work?  I’m not sure.  I don’t know the economics of the pizza delivery market, but they seem to make it work.  Maybe other retailers will make it work this time.