Software: A new supply chain by design
Optimization and simulation programs are moving outside the four walls of the DC to build more efficient supply chains.
By Bob Trebilcock, Editor at Large -- Modern Materials Handling, 12/1/2008
When Japan's Coca-Cola Bottling Company wanted to launch a new soft drink, it faced an age-old manufacturing and distribution problem: Given that the product had no track record, how much should they bottle to bring to market and where should they bottle and warehouse it to best meet demand?
Traditionally, those decisions were made in silos: The marketing, manufacturing, inventory and transportation teams would make decisions about their areas of responsibility. Those teams rarely shared plans with each other. More often, the end result was stock outs in one market while unsold product piled up in another market's warehouse.
“It's a linked problem that has rarely been linked,” says Don Hicks, president and CEO of LLamasoft (734-418-3119, www.llamasoft.com), a provider of supply chain network design and optimization software. “But in this case, Coca-Cola took its marketing plan and modeled the bottling, warehousing and transportation networks in one solution.”
When the product took off, Coke was able to model nearly 100 bottling lines and warehouses to figure out the best way to meet demand. Today, Hicks adds, the bottler plugs in consumer demand on a daily and weekly basis to figure out what product to run on which lines over a three-week period, and what inventory to transfer between warehouses based on real sales in real markets.
End users like Coke have been using design and simulation tools to optimize factories, warehouses and transportation departments for years. Supply chain practitioners, however, are learning their limitations. It's great to optimize materials handling inside a distribution center, for instance, but how much value do you gain if that DC is in the wrong location to service your customers?
That's where the new generation of supply chain network design and inventory optimization applications come into play. These tools allow a supply chain manager to:
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Design the optimal network to meet cost and service level requirements.
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Perform what-if scenarios to model various solutions as well as changes to the network as business conditions change.
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Optimize the levels and location of inventory in the supply chain based on constraints like budgets, service requirement levels or profit margins.
Who is using network design? “The interest is coming from companies with tiered distribution networks, global sourcing strategies, or fairly comprehensive manufacturing networks,” says David Johnston, senior vice president of supply chain for JDA Software (800-438-5301, www.jda.com). “We're also seeing interest from companies that have acquired competitors and now have redundancy around manufacturing and warehousing capacity. They want to figure out how to service a customer from one manufacturing plant or one regional distribution center instead of the three that are now in their network.”
How big are the savings? According to the Aberdeen Group (800-577-7891, www.aberdeen.com), inventory reductions of 15 to 25% are not unusual.
Managing complexity
What's different about this new approach? Traditional supply chain design takes a demand forecast to determine the right location for a facility or the right amount of inventory to go into a warehouse based on priorities like service levels and buffer stock. The focus, however, is on a single location or the processes and amount of inventory inside that location.
The new set of tools understands that a facility doesn't operate in a vacuum but is part of a broader network. They take a holistic view of a supply chain, including inventory in warehouses, inventory at the line, inventory in transit, and inventory at a third-party logistics provider (3PL) or co-packer facility.
“One of our customers is a Canadian brewer with breweries and warehouses across North America,” says Andrew Kinder, director of product marketing for supply chain solutions at Infor (800-260-2640, www.infor.com). “They are plugging in constraints as varied as their different product types, different packaging types, the capacity at the line level in each brewery, the warehouse space at each DC, the labor content for producing product at each facility, the cost of transportation, and finally, the demand at the stock keeping unit (SKU) level on a regional basis.”
But it's not just figuring out where and how to produce and warehouse a product. Network simulation and design tools can also be used for risk mitigation—simulating what might happen across the network if a plant or warehouse unexpectedly went offline for several weeks because of a natural disaster—and for determining the carbon footprint associated with a particular supply chain model.
Network design and simulation
While design and optimization tools use complex algorithms to work their magic, understanding how they work is basic.
“Fundamentally, when we're talking about network design, we're looking at the structure of the supply chain,” says Hicks. “We're making strategic and tactical choices about how the supply chain should be run to support a marketing plan and service level agreements at the lowest possible cost.”
That process begins with a baseline understanding of an existing strategic network. The system takes information such as where manufacturing facilities and warehouses are located, where inventory is stored, and what type of transportation network is in place. The system can also consider variables like the cost of labor, currency exchanges, and the tax consequences of one design over another.
Using that model, the application then runs a series of what-if scenarios to determine how the supply chain performs when changes are made. What happens if inventory is shifted from a storage location in one region to another, or if manufacturing is moved from North America to South America?
Crunch the numbers, run the what-if scenarios, and the system is able to create a map of what the manufacturing, distribution and transportation network should look like within a region, or across the globe.
Once a supply chain design is in place, the application is used to simulate the network to make decisions on an ongoing basis. “Users will take real demand, real orders, and real forecasts with all the variability in the market and make choices,” says JDA's Johnston. “We're seeing customers use the tool to decide things like whether they want to do all of their manufacturing overseas, send semi-finished goods to the U.S. for packaging once a customer places an order, or some kind of combination of the two.”
Optimizing inventory
Inventory planners also face increased complexity in their jobs. “A major retailer today may have millions of SKUs,” says Rod Daugherty, a senior product strategy director of inventory optimization at Manhattan Associates (770-955-7070, www.manh.com). “On top of that, they have more than one sales channel with different DCs supplying stores and direct-to-consumer orders. They want to be able to optimize inventory across all of those different tiers or echelons.”
The answer to that problem is multi-echelon inventory optimization. While traditional inventory optimization solutions look at the inventory levels at a specific location, like a parts depot or warehouse, a multi-echelon solution looks beyond the inventory levels at one spot, and optimizes inventory positions throughout a network of trading partners.
These solutions begin with a forecast that aggregates the demand from all of the various channels along with the availability of inventory across the network. Once that's done, Daugherty says, the tool can be used to optimize inventory in a variety of ways. They include:
Lead-time forecasting takes into consideration how much time passes between placing an order and having that product in the DCs or the stores and available for sale.
Order frequency simulation balances the costs of carrying goods versus the cost of acquiring goods under different service requirements. Is it cheaper, for instance, to pay the added manufacturing and freight costs to expedite an order versus the cost of carrying the inventory in a DC?
Service investment strategies allows a company to identify inventory target levels for various service level agreements.
Replenishment optimization models inventory levels to determine the rules for reordering and where to place that inventory.
Special orders is used to determine how much inventory will be needed and where to support a marketing event. Or, it can be used for investment buying, such as getting a special buy on a product or buying in advance of an announced price increase.
Who's getting value out of inventory optimization? “Our original customers were retailers,” says Daugherty. “But today, it's any industry vertical that needs to buy product on a regular basis or is constantly replenishing finished goods.”
While companies like Coke in Japan are taking advantage of these new tools to take costs out of their supply chain, the real value is that they allow forward-thinking logistics professionals to use their supply chains strategically to gain a market advantage. “These are decisions that used to be made based on the experience and best guesses of planners,” says JDA's Johnston. “Now, they are moving up to a higher level to drive business results.”
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