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
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).
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.
On Sept 21, on the Ops Rules Blog, David Simchi-Levi responded to a question about whether to make network design decisions with a spreadsheet or commercial tool.
He says the main reason is that Excel is not set up to handle the complexity of the problem and the mathematical optimization. In addition, he cites several advantages of a commercial package:
- Ease of use of setting up the data and validating it
- Built in optimization and analytics which cannot be done with a spreadsheet
- Built in maps, graphs, scenario comparison and reporting capabilities
- Tested and stable platform for continued analysis – easy to transfer and share with other users
If you want to see a 15-minute video of commercial tool, here is a link.
I would add just one more point: There is a lot at stake with network design. You can be making decisions that impact significantly impact your costs and service. You should make sure you understand, at least at a high level, the math involved in these before you do the project in Excel. This way, you will have a sense of what you are giving up.
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.