Bridging Supply Chain Strategy Gap through Network Design & Optimization

As Supply Chains become more complex, organizations have started investing heavily in processes and tools to build and run efficient and effective Supply Chains. The advent of Analytics and Data Science revolution has led companies on shopping sprees -buying tools  and technologies to transform their Supply Chains.

There are now tons of Supply Chain “Analytics” tools available these days and Network Design and Optimization tools are one of many such tools. However, an important differentiating factor between a Network Design tool and other logistics planning tools (for example-a route optimization tool) is that Network Design is a strategic planning tool-and can be a pretty powerful weapon in your arsenal when you are evaluating your current Supply Chain strategy. Network optimization tools can be really useful when you are looking to bridge the gap between your organization’s overall strategy and your operational practices.

To illustrate this, we will go through an example where I will use the strategy continuum approach shown below. The strategy continuum framework below postulates that a good Supply Chain strategy helps you bridge the gap between your overall strategy and operational practice. This is a really useful framework to evaluate your existing Supply Chain strategy. Since the purpose of this post is to indicate how Network Design can help bridge the strategy gap, I think it makes sense to do a high level overview of strategy operation continuum.

 

The framework above may look complicated at first but is essentially easy to decipher. At a high level, it shows that Supply Chain strategy serves as a bridge between overall strategy and operational practices. Within Supply Chain strategy are three different layers-Principles, Imperatives and choices. The best way to go deeper into the framework above is through an example, and I will later use that same example to show how we can leverage Network Design to solidify the Supply Chain strategy layer.

Deciphering the strategy operations continuum

Let us assume that the overall strategy of a fictional organization, which is an Illinois based regional supermarket chain, is to provide low cost products to its customers along with good service level (good service in this scenario will be to replenish quickly and keep shelves stocked). Also, let us assume that we have observed two operational practices for this company-One is that the company is leasing  Warehouses closer to its stores and second is that they are creating optimized transportation routes using Transportation planning tools. Now we will first use the strategy continuum framework to evaluate the existing Supply Chain strategy and then see how Network design can help contribute to the overall Supply Chain strategy.

 

There are two ways to bridge the strategy gap using the strategy operations continuum. You can either move from top to bottom, asking the questions “How?” or move from bottom to top, asking the question “Why?”. To understand this better, we will use the example shown in the illustration below.

As mentioned earlier, the overall strategy of the company is-“Offer low cost products and good service”. Now, if we are moving from top to bottom, we need to ask-“How?”. How can we offer low cost products and good service? Well, one way is to fulfill demand in the most cost efficient way-which is our Supply Chain Principal in the Supply Chain strategy. Remember that there can be more principles that feed into the overall strategy and hence there is a “Thematic Range” arrow in the framework. That arrow suggests that you can have multiple principles in the same layer. So even though I show only “Fulfill Demand in the most cost efficient way” as one of the Supply Chain principles, that is not the only one feeding into the overall strategy. Any additional principles will add to the Thematic range.

So, once you have decided that your Supply Chain principle is “Fulfill Demand in the most cost efficient way”, you need to again ask the question-How? Well, one of the things we can do to fulfill demand in the most cost efficient way is to minimize distribution cost  -and that is an imperative as per the framework (again, there can be more than one imperatives, and you can add them across the Thematic Range). You again ask “How?” to get to a choice-which is “Build and run an efficient Distribution network”. Now if you ask the next how, it will lead you to your Operational practices- “Lease distribution centers close to stores” and “Create optimized delivery routes”.

Now that you have followed the Top to Bottom “How?” approach, you can easily see that you can move from Bottom to Top using the “Why?” approach. Why do you need to build DCs close to customers and create Optimized Delivery routes ? Well, to build and run an efficient Distribution Network. You can follow this pattern all the way to the top.

Where does Network Design & Optimization come into play?

At this point you may ask -How does this framework help me articulate that Network design is a more strategic exercise than some of the other logistics planning exercises? Let us go back to the example again. Here, Network Design and Optimization can help you at the “Choice” layer in the Supply Chain strategy. When your choice is that you want to build and run an efficient Distribution Network, you can leverage a Network design tool in multiple ways to achieve that choice.

An example can be to determine optimal location for your DCs, based on the current location of your stores (a Greenfield analysis). The exhibit below shows this scenario for our fictional retailer. Assume that the retailer wants to determine what would be the two best locations to serve its existing stores and then it will plan to lease spaces in these locations to open new DCs, since the lease on its existing DCs is expiring. A Greenfield analysis will determine these optimal locations, and leasing spaces in these locations will minimize the total weighted average distance, hence creating a network that will minimize total miles traveled to fulfill demand and also places us closer to our stores ( we have ignored various other aspects like Inbound, supplier locations etc. in this example to keep it simple). This minimization hence supports our choice of an efficient distribution network.

Note that in reality a retailer will not have stores that are very close to each other. The store locations are for illustration purpose only.

 

Another example can be to determine the optimal allocation of stores to your existing DCs, as shown in the exhibits below. Exhibit A shows the current state for our retailer-a spider web pattern in store allocations which often is an indication that the store -DC assignments are not optimal. Exhibit B shows the optimal allocation, which obviously translates into fewer miles traveled to fulfill demand, being closer to the stores and hence a more efficient Distribution Network.

 

There are other ways to leverage Network Design tools to formulate your Supply Chain choices in addition to the two discussed above but the above two give you a good flavor. Now consider the exercise of creating daily optimized loads and routes for efficient deliveries. This will contribute to the operational practice layer in the strategy continuum so it is an operational exercise. Generally, you will use output from a Strategic exercise to guide your operational practices. Similarly Distribution Resource Planning (DRP) planning exercises will also be considered operational in nature. Operational planning tools generally require more granular data and are run more frequently.

To summarize it, Network design tools helps formulate Supply Chain strategy and hence contributes to an organization’s strategic objective. If used effectively, they can help you gain a competitive edge and can help build Supply Chain strategies that will be strong foundations underneath your organization’s overall strategy.


References:

Dr. Roberto Perez Franco, “Rethinking your Supply Chain strategy”- MIT Supply Chain Strategy Lab

 

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