Cost-To-Serve Modeling and Network Design

Earlier this week, I published an article on cost-to-serve on SupplyChainDigest.

Network design plays a nice role in cost-to-serve modeling:

Network design modeling software can complete the analysis by allocating those cost that simply cannot be allocated with Excel.  For example, it is not trivial to allocate your inbound transportation costs or costs of raw materials to your customers.  When using your network modeling software for this, you may want to model every customer and every product, but limit the amount of optimization (you don’t want to consider opening and closing facilities with this use of the tool.).  Then, when you run, the tool returns details on the cost to get each product to each customer.  In effect, this tool allocates all your transportation costs, your production costs, and your warehousing costs to a customer and product combination.  You get all this information as part of a standard network optimization run—it requires no special features.

This is another good reason to have the capability to run a network modeling tool.

Plant Location in a Global Economy

The Economist recently published an survey on Offshoring and Outsourcing.  If you follow manufacturing trends, this article is great read.

The survey covers trends in both manufacturing and services.  It goes in-depth into the manufacturing trend we are now seeing with many companies bringing manufacturing back to the US or to the market where the demand is.

The survey highlights the fact that companies are discovering the “all the disadvantages of distance.”  This includes the high transportation costs along with the extra risks.  But, it also points out that the wage gap is shrinking between China and the US, natural gas is driving down energy costs, and automation is removing a lot of labor anyway.

The article quotes one consultant who claims that if total labor costs are less than 15% of the product’s cost, then it is not worth it to pursue cheap labor.

Also, there was a nice quote that reminds us of the value and limitations of network design:

Choosing the right location for producing a good or a service is an inexact science, and many companies got it wrong.

They are correct, that network design is not an exact science, but using network design tools can help you better narrow your choices and pick good solutions.  With network design, you have a better chance of getting it right.  And, if you continually model your supply chain, you can better adjust as conditions change.

Top 5 Models You Should Build in 2013

On SCDigest, I wrote an article about the 5 models you should build in 2013.  These are simple models meant to get you started and add value.  Here is the list, but see the SCDigest article for more detail.

#1.  Plot your demand on a map

#2.  Add the current lanes you are using to serve your customers

#3.  Reassign customer territories

#4.  Model what would happen if you lost a warehouse

#5.  Model a single product

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.


Book Review of “Serious Play” and How it Relates to Network Design

Michael Schrage’s book, Serious Play:  How The World’s Best Companies Simulate to Innovate to Win, is worth a read as a general business book, but also very applicable to supply chain network design.

The book is about the prototypes an organization builds to help make decisions.  And, a network design model is a prototype of the supply chain.  So, many of the lessons apply directly to the supply chain team.  And, when you read the book, it makes you wonder why a company wouldn’t want a model of their supply chain.

One of his key insights breaks a myth that it is a good team that creates a good prototype. Instead, he argues that it is a good prototype that creates the good team and leads to discussion and insight.  He goes further to say that what is interesting about prototypes is not the model themselves, but what the models teach us about the organization.

Using a network design model as an example, he would ask questions like who gets to build the model, who gets to see the model, who gets to make suggestions, when do people get to see the model, do customers get to see the model, or do suppliers?  All these are good questions for a team building a supply chain model.

The book is full of different ideas you can apply to your modeling efforts.  Here are a few I pulled out:

  • “Waste as Thrift” (pg 100-101).  Once you have a model in place, it is relatively inexpensive to test ideas.  If you don’t “waste” scenarios, you are really risking wasting real money when you implement an idea without testing it.
  • “Bigger Isn’t Better (pg 131-137).  The object of the prototype or model isn’t to be as complex as reality.  Instead, the model needs to be understood by those who need to make decisions.
  • “The act of designing the model…is essential to understanding their use” (pg 168).  He argues that their is value in putting the model together.  We see this as well and think it is well worth your time to understand some of the underlying math.
  • It is important to create “conflict” with the model (pg 173).  The “conflict” is to set up the model to expose important trade-offs like cost versus service.  In network design, multi-objective optimization is great at bringing out those trade-offs.
  • “A prototype should be an invitation to play” (pg 208).  A great way to get value from a  model is to play with it try new things and see if you can come with some counter-intuitive solutions that change everyone’s thinking.

DC Velocity Article on the On-Going Use of Network Design

James E. Cooke ran an article on Sept 18 in DC Velocity, “A Network Design is Never Done.”

This is a nice article that highlights a trend we are seeing as well.  Their article quotes a Tompkins Supply Chain Consortium study that shows that the average time between studies has decreased from 24 months to 18 months.  Since this is the average, many firms are likely doing studies every 6 or 12 months with some doing studies on an on-going basis.

The article sites changing customer demand, the need for contingency plans, and volatile oil prices as some of the reasons for on-going network design.

This article is another reminder of the importance of network design on the overall performance of your firm.

7 Signs Your Supply Chain Needs a Redesign from CSCMP’s Supply Chain Quarterly

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:

  1. You have objectives rather than strategies
  2. People ask:  Why do we do things this way?
  3. The number of customers and products is growing faster than your budget
  4. Consolidation or collaboration is coming
  5. You experience a major service failure
  6. Fear is in the air
  7. 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.