Supply Chain Network Design: Linking Strategy to Operational Efficiency

By looking at the supply chain’s network design, with a holistic view of all facets, it is possible to bring about improvements which will ultimately improve operational efficiency and reduce costs. Thoroughly evaluating network design, within the framework of the business strategy, can help to avoid disconnects between strategy, tactics and operations and help to deliver a responsive and efficient supply chain.

What is supply chain network design?

Supply chain network design is a model-based approach to identify supply chain costs, where changes can be made, and improvements brought about. At its core is driving a single strategy across the supply chain and optimising the tactical approaches to achieve that strategy. Supply chain network design involves analysing end-to-end supply chain cost and performance with all its different facets from purchasing and production, through to logistics network design.

By taking this holistic view and approach towards the supply chain, organisations can create a competitive edge that allows them to be dynamic, and maximise their potential, whilst minimising costs. This is particularly important in the contemporary arena of global and dispersed supply chains. Supply chains are continually exposed to change, whether from customer expectations and demand, or tax laws, political upheaval, new market entrants, or other angles. Having a means of adapting and thriving in this complex process is paramount.

Supply chain network design in action

To meet this need for increased ability to face change in the supply chain, there has been a growth in centralised supply chain teams with a remit of holistic modelling and optimisation. Companies are aware that they need to invest throughout their supply chain in terms of processes, resources, and tools so that they can be efficient. The aim is to incur reduced costs whilst simultaneously becoming more responsive, better meeting on-time delivery requirements, and improving the level of service.

Traditionally, this process has been based around the premise that supply chains are fundamentally unchanging, even if the forces around them aren’t. However, this isn’t the case for the modern supply chain. They themselves are agile, and need to be so, to meet the changing demands of the environments they operate in.

How to make the most of supply chain network design

Taking the right approach to supply chain network design is crucial. It requires looking carefully at both internal and external factors that drive it. Internal factors include a plethora of issues from procurement and manufacturing through to inventory management and logistics. External factors may include changes to tax regulations or geographical occurrences.

Supply chains can become closely focused on function-specific objectives without realising their full impact across the entire supply chain. For example, reduced shipping frequency will lower logistics costs but will drive up inventory costs, or warehouse relocation may improve service times but may increase the inbound logistics cost.  This vertical view often drives sub-optimisation in the supply chain – driving costs down in one area whilst inadvertently increasing them in another. Consequently, supply chain network design must be undertaken holistically, rather than in one functional area.

Due to the size and number of variables in many global supply chains, holistic modelling becomes a highly complex task using traditional spreadsheet techniques. However, there are now a host of supply chain modelling tools available on the market using heuristic algorithms that enable fast-paced scenario modelling of changes to asset location, demand territories, demand patterns, inventory levels and logistics networks.

Supply chain network design – hierarchy

When we look closer at the nature of supply chain decisions, we realise they are made at three distinct levels: strategic; tactical; and operational.

At the strategic level, decisions connect between the wider business strategies and involve the ‘big’ factors of change, and the long-term. Tactical decisions are made with competitive advantage in mind, such as entering a certain market. Operational decisions are focused on ‘on-the-ground’ daily efficiencies, in areas such as warehouse operations management.

Creating supply chain network response – the approach

Network design can be a complicated and arduous process. The approach needs to be both diligent and pragmatic to illicit the best results. By taking such an approach it is possible to implement changes quickly that allow for rapid response, and which therefore reduce costs.

Primarily, it is important to ensure there is openness, transparency and clarity in the network design process. Each element of the hierarchy has its own unique pressures, demands and needs. Therefore, whilst a top-down approach can drive success, it needs to be followed through with drive from within every level of the hierarchy. This will then feed down from the strategic level to the tactical level.

At the operational level, this is when we see the fruition of decisions at the two levels above. Focus needs to remain on cost-efficiency, and how to achieve this at an operational level. Although this is part of network design strategy, it should be highly responsive at this level, with decisions changing and taking place regularly on a day to day basis. The overall goals and aims are the same, but how they are enacted will depend on the environment of the moment.

It is also paramount to adopt a two-stage approach to optimisation. This is relevant at all levels of the hierarchy. Various scenarios can be created and planned for, allowing for the ability to change and adapt quickly. Therefore, to ensure the best and most likely scenarios are planned for, it is best to limit the scenarios at the first stage. For example, you can look at scenarios involving return on investment or cost of ownership.

Once this first stage is complete it is possible to achieve greater optimisation by conducting sensitivity analysis before making the most appropriate strategy recommendations for the network design. This way you can model the different variables, for example cost inflations, tax changes, increased demand, and so on.

Then it is time to ‘run the model’. This will give you important insight in to each different scenario within the network design, and what might happen under different circumstances. This needs to be a systematic testing process involving statistical feedback to give greater understanding and clarity around all the important Key Performance Indicators (KPIs).

How often you should undertake this process will vary from one supply chain to another depending on the resources you have available versus the need. In principle, this should be a continual process of refinement, constantly adjusting and adapting. This will ensure costs are continually reduced going forwards. Nothing in the supply chain industry stays the same, and network design needs to reflect that.

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