Supply chain network design: Redrawing your DC network
With sales plummeting and stores closing, you suddenly find yourself with a distribution infrastructure that's designed to support a much bigger organization. You've got to scale back, and you've got to do it quickly. Here are seven market trends making today's DC network more flexible and more sustainable in trying times.
By Maida Napolitano, Contributing Editor -- Modern Materials Handling, 7/1/2009
It's the classic distribution network dilemma: How do I design my network of plants, suppliers, and DCs in order to provide my customers with the highest possible level of service at the lowest possible operating cost? How many DCs do I really need? Where should they be located? Which warehouse/DC must be served by which plant or supplier?
Of course, these are just a few questions that exemplify the complexities of this strategic planning problem—and the current economic environment, coupled with the push for more sustainable supply chain infrastructure, has just made this puzzle more complicated.
Perhaps, like most managers over the past two or three years, you thought you designed the perfect DC network—up until last spring when the cost of fuel shot through the roof. A second redesign of your network suggested adding another DC to reduce transportation costs. Fortunately, you had stores opening and sales were chugging along pretty well, so finding capital wasn't that much of a problem.
But then last fall the tide turned. Consumer spending shut down, the economy headed south, and you and fellow logistics managers realized you needed to reconfigure the network—for a third time—to conserve cash, minimize capital outlay, and significantly cut down on logistics operating expenses.
Marc Wulfraat, director of strategy for supply chain consultancy TranSystems, is seeing this reality unfold firsthand. "Some companies are now fighting for survival. They want to know how they can get the most out of their existing assets."
Mike Hooban, president of Microanalytics, the provider of network modeling tool Optisite, agrees, saying that saving money is now the biggest motivator for network studies. "Companies are studying their networks to somehow find a way to cut costs, yet continue to provide a decent service level."
In fact, much of the current distribution environment is in a state of flux. Troy West, assistant vice president for TranSystems, points out that trade lanes have been shifting; there's a greater need for more flexible intermodal facilities; and there is increased pressure to make the network greener. "All of these conditions have had a dramatic impact on today's distribution network," says West.
Now, how do we get a handle on it all? In the next few pages, our three network experts detail the changes they've seen in today's DC networks, many of which are in direct response to current volatile economic conditions and the move to greener operations.
1. Downsized Networks
Stores opening, companies merging, DCs bursting at the seams; those were the good old days. But as markets started collapsing and sales began shrinking, you suddenly found yourself with a distribution infrastructure designed to support a much bigger organization than what you are today. You've got to scale back, and you've got to do it quickly.
As a retailer, for example, you start by closing stores. "A publicly held retailer is going to immediately want Wall Street to know they're serious and they're going to close non-productive stores," says Wulfraat. "That's one of the quickest ways to save money." As a result, you'll find some DCs are going to be half-full and you start tightening up your budget on the operations side, in order to respond to this decline in sales.
"For many manufacturing companies, the options are pretty much limited to contracting and divesting of assets: closing facilities, consolidating, perhaps undergoing measures to improve the utilization of a facility to enable this to occur," Wulfraat adds.
You might even end up paying penalties for breaking leases in order to get out of buildings quickly. Many are now looking at their distribution networks to do very fast-track, strategic studies to try and figure out how to shed millions of dollars from their supply chains within six months.
And it's not simple or cheap. Depending on the nature of the closures, there could be union constraints, severance pays, and a number of substantial one-time expenses when you close a facility. In Wulfraat's experience, it's usually a three-month to six-month process, at a minimum.
2. Increased Use of 3PLs and Outsourcing Partners
Instead of building a new DC, companies today are leveraging the services of 3PLs in areas where they distribute. "In a volatile economy with soft demand, using 3PLs provides flexibility for companies to be able to ramp up and ramp down quickly and get in and out of certain locations easily, especially when considering volatile regional forecasts," explains West. In addition, you're likely to be more diversified and stable by sharing warehouse square footage with other companies than if you were a single firm occupying it by yourself.
3. More Focus on Product Profitability Before Network Analysis
To squeeze that next nickel, companies are taking a good hard look at everything they are doing before embarking on logistics network optimization. One of the key issues is the specific profitability of every single item, tracing the source of every financial component of that item's lifetime in the supply chain.
"Some managers don't have any idea that they're losing money on specific SKUs," says Wulfraat. He cites items that are considered direct-to-store delivery (DSD), as an example: "Because of minimum order quantities required by DSD vendors, there may be way too much inventory in the stores. What if we change the path for these items to flow through your own DCs? Here's how much cost you would generate and here's how much money you would save."
By doing so, says Wulfraat, managers can understand at the SKU level why certain products shouldn't be going directly to the store and why they should be going through the company's DC. "When you're recommending another 10,000 SKUs to go directly through your infrastructure, your network obviously needs to change, as you may need a larger warehouse," adds Wulfraat.
4. More Use of Rail, More Need for Intermodal Facilities
When oil hit $150 a barrel in 2008 it sent shockwaves through companies that built distribution networks predicated on the supply of cheap oil. Although the price of oil has since receded to less than half that amount, industry analysts agree that when the economy does recover, the price of oil will recover very strongly in the next years to come. According to Wulfraat, that's what's going to drive the way companies move product to market over the next five years.
West concurs. He has already seen an increase in the theoretically cheaper use of rail when making modal decisions. As a result, networks are now seeing a more prevalent need for intermodal facilities—one that can accommodate not only tractor-trailer traffic, but also rail transport.
"Studies are currently being conducted to locate distribution facilities that are directly rail served," says West. "In addition to our network modeling optimization software, we use other tools that incorporate rail networks into the distribution network being modeled." He uses geographic information system (GIS) tools that, when used in combination with network analysis tools, permit an overlay of rail networks and other relevant data to help identify candidate distribution facility sites.
5. A Shift from Centralized to Regional Warehousing
In an effort to keep transportation costs low and position products closer to customers, West notes that more companies are transforming from a centralized network to a regional network, especially in companies with substantial "last mile" costs of distribution.
"With more DCs needed for network regionalization, companies are working with 3PLs to gain flexibility without the need for high upfront capital investment," says Hooban. In this economy, however, Hooban sees some of his customers re-running their regional networks to see what they can shut down while realizing some economies of scale with the facilities that are left.
6. Increased Use of East Coast and Gulf Ports.
Growth of the import trade from China, India, and other countries west of the Pacific a couple years ago forced capacity to a critical mass in West Coast ports. "As a result, we're seeing trade lanes moving, greatly changing the flow of merchandise into North America," says West. "Trade routes have shifted with additional routes to East Coast and Gulf Coast ports via the Panama Canal and the Suez Canal." And in turn, regional DCs and inland ports with intermodal facilities have developed over these new corridors. "Large importers are also spreading their risk by using multiple ports as gateways to their distribution network," he adds.
7. Greening of Networks The pressure to reduce a company's carbon footprint has penetrated the realm of network modeling. New offerings by providers of network modeling tools can now measure a network's carbon footprint by tracking CO2 and energy usage. These tools seek to arrive at network solutions that reduce harmful emissions and let companies evaluate their environmental impact along with operational costs when designing their network.
Can adding more warehouses be greener? It depends: "We've seen with carbon footprint examples where it does make more sense to increase the number of warehouses and reduce emissions by reducing transportation miles," says West. From a manufacturing perspective, however, it may have the opposite effect as adding more plants with high emissions may result in an increase of a network's carbon footprint.
The last word: Perhaps the biggest lesson learned from maintaining the optimal DC network is that it will always be subject to change. The savvy managers are the ones who stay on top of it; continuously adjusting it and preparing it for the world of tomorrow—be it for better or for worse, for richer or for poorer.
| TROY WEST, assistant vice-president, TranSystems | |
| ON THE MAPPING CAPABILITIES OF MODELING TOOLS | "A picture is worth a thousand words. Utilizing the geo-coding and mapping capabilities from the tool allows management to visualize the results of scenarios and helps bring out further discussions; whereas if I were looking at a spreadsheet it does not stand out as readily." |
| ON LEVERAGING A MODELING TOOL'S OPTIMIZATION ENGINE | "We have a tendency as humans to think sequentially and linearly in our logic. We can only handle so much manually as far as the amount of variables. With all the trade-offs in the supply chain and the amount of variables that are involved, I would rather use a tool. Once you develop your baseline, your future state scenarios and your what-if analysis can also be done much quicker." |
| ON GOING GLOBAL WHEN MODELING | "Make sure you have local representation as part of your project team when doing global supply chain modeling. They will provide their local subject matter expertise and brief the team in the nuances of various countries, their culture, their trade programs and taxes." |
| MARC WULFRAAT, director of strategy, TranSystems | |
| ON FORMING THE NETWORK MODELING PROJECT TEAM | "You need to have knowledgeable people on board who truly understand the business. They can be internal or external resources, but they must have strong analytical skills and financial acumen to go through one of these projects." |
| ON WHEN TO USE MODELING TOOLS | "The modeling tools are not necessarily the end-all solution. They're really broad-based planning tools and great for modeling complex networks, but in a number of situations you may need to first get down to the brass tacks and figure out exactly how an SKU is going to affect the network." |
| MIKE HOOBAN, president, Microanalytics | |
| ON CREATING THE NETWORK MODEL | "The devil is in the details. People need to understand that they are doing a strategic analysis and they need to focus on the essential components and not get bogged down by details." |
| ON ADDING FORECASTS | "It's a bit spurious to take consolation in the fact that you've included every possible data point because in the end, it's still just a forecast. As any sensible statistician would tell you, beyond a certain point, it's not really possible to overcome uncertainty by adding more data. You can be more detailed, but you will not necessarily be more accurate." |
| Maida Napolitano is a contributing editor to Modern Materials Handling. |
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