Craig Ryder and Gavin Parnell, Directors at The Supply Chain Consulting Group recommend a five-step approach. When is the right time to look at optimising the network? The glib answer is ‘constantly because change never stops’. But there are times when optimisation is more than usually important. This may be during or anticipating periods of rapid growth after significant mergers or acquisitions.
It might be due to substantial channel shifts – into online retailing, for example, or a shift from wholesale to retail. Ultimately, the customer will tell you it’s time to renew the logistics offer, but by then, it may be too late.
Optimisation involves examining many factors and the trade-offs between them: the number of facilities, their locations, their purpose and how they are managed, what this means for delivery mileages and response times, and the nature of the product. The nature of the product is significant, and there will also be constraints—the best locations for outbound delivery may not be well placed to receive inbound freight.
All these factors and numerous others create trade-offs in terms of cost, time and inventory. However, above these essentially technical factors, optimisation must consider the nature of the business and the long-term business strategies being followed.
What, for example, are the expectations of future growth and expansion, is the business proposing to meet eCommerce challenges, is price or service seen as the more important differentiator, is capital expenditure or operating expenditure the more significant constraint? What counts as ‘excellence’ varies between industries – for some, it is worth spending significant money chasing minuscule improvements in On Time In Full delivery: for others, not so.
There may even be a strategy to outsource logistics – although we would suggest that the company needs a plan of what an optimal logistics network would look like before trying to outsource its operation. However efficient the network, if it isn’t serving the business strategy it isn’t optimised.
So the first step for successful optimisation is:
The nature of the trade-offs involved means that you can’t optimise each network element and expect the overall network to be optimised. We have to ask: what are we optimising towards, or for? What are the high-level goals? Is it primarily to meet or anticipate changing customer needs, is it to meet growth requirements, is it to minimise operating costs, is it to reduce capital requirements? Different stakeholders will have their own priorities and wish lists, so it is vital to get agreement on the strategic goals from top management early on.
There is a lot of data associated with a logistics network. It is, however, rarely all in the same place and equally rarely is it all of high quality. You need to be able to study all the costs, volumes and operations over at least 12-18 months to capture both planned and unexpected peaks and troughs fully. There will be surprises. How costs are allocated may no longer be appropriate – for example, a nominal storage cost for traffic that is now cross-docked. There may have been unexpected capacity problems for which a clever workaround has been found: there is a good chance that any extra costs have been buried in overheads and that no one has looked into the root cause of the problem. The list goes on.
Additionally, data is rarely as good as it seems. Does ’50 cases per pallet’ mean that for every pallet, or is it an average? Are all deliveries for multiple retailers going to their London HQ’s invoice department? Postcodes, a fundamental part of delivery routing, are notoriously inaccurate. Multiple systems may not talk to each other; if they do, they may have different ‘names’ for the same objects or locations. Finding and cleansing all this relevant data is often the longest and most demanding part of optimisation.
This may be not very comfortable, though it is surprisingly common. Still, you may not have a consolidated list of all your locations and facilities, let alone the locations of all your suppliers and customers. To do this, you must map complete information about products, volumes, demand patterns, and the times taken for ancillary processes such as deconsolidation and repacking. Other processes, such as the handling of returns, need to be included, as well as all the requirements for disposable and reusable transit and packaging materials.
Your largest single product category may be carrier bags or cardboard boxes. There will also be capacity and logistics constraints to be noted. There may, for example, be reasons why the full nominal capacity of a warehouse is not available or why, on some delivery routes, the truck cannot be fully loaded. The current situation and any known and planned changes need to be captured at all points. It is important to ask all the right questions of all the players: as far as possible in the customer and supplier base and within your own operation.
This is the clever bit. All the plausible scenarios are considered, numbers crunched and the outcomes tested. Some can be eliminated rapidly – they may require improbable amounts of capital expenditure, they are suited to markets that the company doesn’t intend to enter, or they in some way conflict with the agreed business strategies and objectives. For those remaining, a range of tools and techniques can be applied – such as centre of gravity analysis and routing/scheduling packages – and information captured – such as labour availability and property costs.
A hefty dose of reality is also applied to create a workable set of scenarios that best offer the desired trade-offs between cost and service. These should be plausibly achievable within a sensible timescale. The effects of future changes in volumes and inventory levels can also be modelled, and the impact of processes and activities that the company hasn’t performed hitherto but may need to in the future can be estimated. It is important to involve end users in reviewing these scenarios.
This creates ‘buy-in’ for any subsequent implementation of a chosen scenario and may also reveal issues not captured in the formal analysis. Take, for example, a reluctance to open a second DC that would improve customer service and increase management complexity.
You can now evaluate the remaining scenarios and choose which, if any, to implement. Often, it will make sense to implement a pilot to gain a full assessment of the scheme’s merits, but this isn’t always possible – if the key element is a move from one DC to two, you can’t do one and a bit as a pilot. Ultimately, you, the company, can only make this decision. Although they can make recommendations, the decision can’t be outsourced to consultants. What is usually offered is an implementation plan, which also shows what benefits should accrue, where, and when.
Cost savings of 10-20% are quite typically available, but if the network has been improved recently, that level may not be obtainable. Nonetheless, even much smaller cost savings will be very attractive if combined with significantly enhanced customer service and the knowledge that the new network is, to some extent, ‘future-proofed’ against change and growth. This five-step approach to logistics network optimisation will create a road map aligned with current and future strategic needs and allow for direction changes if events turn out differently.
Ultimately, it will deliver a vital competitive edge in customer service. Are you ready to take that first step in transforming your logistics network? See more about our service.