Bob Trebilcock

What’s the deal with network design?
May 22, 2008

If you’re like me, you probably don’t think of cement makers as trend-setters. You might want to think again, suggests Kelly Thomas, senior vice president of manufacturing industry sector for i2 Technologies.

Turns out, the cement industry was an early adopter of sophisticated supply chain network design and optimization tools. These are software applications that model and simulate complex supply chains. Using these programs, decision makers can decide the optimal way to source materials, locate manufacturing plants and set up transportation lanes and distribution centers.

While making cement may seem no more complicated than mixing together some basic commodities, the trick to making money in any commodity is to make and distribute the product at the lowest possible cost. That’s a sophisticated proposition, especially in the current economy. “The raw materials used to make cement are going through the roof along with transportation costs,” says Thomas. “So cement producers want to look at their network, particularly their sources of supply, on a more frequent basis.”

Enter supply chain network design. As Greg Aimi, a supply chain research analyst at AMR Research, told me last month, supply chain network design is one of the hot supply chain management trends, especially among large, global enterprises.

I checked in with i2 to find out what kinds of companies are using network design programs and what kinds of problems they are trying to solve.

First, it’s primarily big companies with $500 million a year or more in revenues and large 3PLs handling distribution for big companies. “There really is a relationship between the size of a company and the complexity of the supply chain,” says Thomas. “And 3PLs provide network design as a service to their large customers.”

As to how they’re using the solutions, Thomas says there are several trends at work.

One driver is merger and acquisition activity. Before making a deal to buy a rival, an acquiring company’s M&A team will use a network design tool to analyze both companies’ supply chains. They are looking for synergies, overlaps and opportunities for consolidation.

Global expansion is another, especially as order profiles and sources of supply migrate geographically. “A few years ago, the demand profile for many of our large customers was 60% U.S. and 40% non-U.S. Now, it’s the complete opposite,” says Thomas. “That changing demand profile is having a huge impact on supply chains.” You need a different supply chain when you’re shipping from Alabama to South America, instead of to Ohio.

Optimization of the existing network is a third. Companies turn to network design to decide whether to expand capacity at an existing plant or distribution center, and where to locate inventory to best meet demand or service level agreements. “One large company we work with has put in place a dedicated supply chain network engineering department,” says Thomas. “They work with all the divisions in the company as they introduce new products or look for new sources of supply.”

Let us know if your company is re-engineering its supply chain.

Posted by Bob Trebilcock on May 22, 2008 | Comments (9)