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Practice Area Overview

Supply Chain Strategy & Network Design

Case Study
A Fortune 500 medical device
manufacturer had grown throughout
Europe by acquisition of national
players, thereby creating a
distribution network with one
warehouse in each country.
This network design was an accident
of history. It had made sense for
individual national players to have
their own local distribution facilities.
But it didnt necessarily make sense
for the combined company. And with
the advent of the Single European
Market in the 1990s, all remaining
barriers to cross-country shipments
were removed.
Our analysis began by mapping the
existing supply chain network and
removing the country borders from
the map. Instead of irrelevant
country borders, we focused on
customer service requirements,
lead times, and shipping costs. We
showed that demand could be met
with just three strategically-located
regional warehouses, plus a single
European hub for items with a high
value-to-volume ratio. The resulting
increase in freight costs was far

Introduction
Recent years have seen an explosion of interest in
Supply Chain Management (SCM). Movements such
as Re-Engineering and Six Sigma have led managers
to question and redesign the processes through
which they operate their supply chains.
But the biggest savings from SCM are typically
not achieved by changing how the supply chain
is operated; they are obtained by changing its
structure.
Indeed, we find that typically 70% of the cost of a
supply chain is built right into its structure placing
a severe limitation on what even world-class
operating practices can achieve. It is of little help
to have a world-class JIT production system if you
remain uncompetitive because your plant is simply
too big and in the wrong place.
Our Supply Chain Strategy and Network Design
practice helps clients attack the strategic decisions
that drive 70% or more of supply chain cost.

What is Supply Chain Strategy & Network


Design?
Supply Chain Strategy, and the closely-related
concept of Network Design, refer to how the firm
chooses to structure its supply chain in support
of its business strategy. This typically involves the
following strategic decisions:
Number, location, and size of factories and
distribution centers
Choice, number and locations of suppliers
Modes of transportation used
Location and size of inventory buffers

outweighed by a reduction in fixed

Location of the push/pull boundary


Routings: Assignment of products to plants,
plants to DCs, DCs to customers, etc.
A further complication is that the right supply
chain structure can differ markedly by product and/
or customer segment, or can change over the course
of the product lifecycle. And the right supply chain
structure for an individual product may itself be a
portfolio of multiple supply chains. (Think of fashion
retailers who sometimes combine a low-cost, long
lead-time source in the Far East with a higher-cost
but more responsive domestic source.)

Can my Supply Chain Network be


Improved?
We find that it usually can, because one or more of
the following three situations apply:
1. Optimizing one cost at the expense of others.
A common problem with companies existing
networks is that they minimize one particular
type of cost, while inflating other costs and
hurting overall profits.
For example, many companies have minimized
manufacturing costs by moving production to
the Far East, only to find that the hidden cost
associated with long lead times hurt their overall
business performance.
2. Accidents of history. Many supply chains were
never designed in the first place. Rather, they
are accidents of history - the accumulated
results of legacy facilities augmented by
piecemeal additions from mergers and
acquisitions. If the current network design is an
accident, it can almost certainly be improved.

costs exceeding $10M/yr.

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The location at which actual orders (as opposed to forecasts) drive the activities such as assembly and materials movement).

Why End-to-End Analytics?


The End-to-end Analytics team
has comprehensive experience in
designing supply chains for a variety
of products and industries: personal
and portable computers, mobile
phones, media, medical equipment,
machining supplies, baked goods,
home appliances, and more.
This experience allows us to put
together the right project team,
understand the key dynamics of
the problem, use the right mix of
tools and models (ranging from

For example, see the Case Study in the sidebar of


a European medical devices manufacturer.
3. Different businesses need different supply
chains. A companys supply chain needs to
support its business strategy. But different
business strategies have different performance
requirements (cost, lead times, reliability). If
the supply chain was not explicitly designed to
support the business strategy, the chances are
that it doesnt.
For example, companies may need their stable
products to flow through a low-cost supply chain
while utilizing a shorter and more responsive
chain for their seasonal and volatile products.
They may even need the ability to switch supply
chains during the product lifecycle.

simulation to network optimization,


to spreadsheets), and provide insights
into why the recommendation is the
right one.
The cumulative profit impact of our
network design work is estimated by
clients at well over $500 million.

Beware of Off-the-Shelf Solutions


How should a firm identify and evaluate possible
improvements in its supply chain network design?
One approach is to use one of the various off-theshelf software tools for supply chain modeling that
have become available in recent years. Some of
these software solutions stemmed from simulation
tools that were used to optimize production
processes. Others started from academic research
in inventory management. Still others started their
lives as business process mapping and design tools.

the nature of uncertainty may not be valid for all


products and networks. Data may not be available
in the desired format, or significant pre-processing
may be required.

Proven Methodology
Over the course of multiple projects across many
industries we have developed and refined the threestep methodology shown in Figure 2.
Note that we believe that the insight on why
the proposed solution is optimal is often more
important than the solution. Given how fast
conditions change supply chains cannot be static,
and these insights give our customers the ability to
monitor their business and adjust and re-visit their
decisions accordingly. We also help identify the
right level of resilience/responsiveness to changing
supply and demand conditions by incorporating
uncertainty and its associated costs correctly.

Getting Started
To learn more please visit our website at
www.e2eAnalytics.com, or contact us by email
at info@e2eAnalytics.com.

Unfortunately, generic software solutions cannot


offer enough detail where it is needed without
requiring too much information where it is not.
Tools may require too much detail before any
meaningful insights can be gained. Runtimes
may be prohibitive. The key assumptions about

Analyze
Network Economics
t

segmentation
t Establish total cost of
current network(s)
SHORTAGE COSTS
INVENTORY COSTS
FREIGHT COSTS
FIXED MFNG COSTS
VARIABLE MFNG COSTS

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Palo Alto, CA 94301
(650) 331-9659
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info@e2eAnalytics.com
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All Rights Reserved.

t Understand cost drivers


t Identify key trade-offs
t Identify constraints
t Develop high-level

network design alternatives

Model
Alternative
Network Designs
t Build right model
Intended use?
Optimization, or just
what-if?

Granularity?

t Gather and validate input


data
t Use model to analyze
alternative designs

t Validate output
t Perform sensitivity analysis

Use Model to
Drive Strategy
t Distill model output for

managerial consumption:
Total costs of alternative
designs

CURRENT OPTION OPTION OPTION


A
B
C

Intuition behind results


Risks and sensitivities
Recommendation
t Solicit feedback and iterate
as necessary

t Develop strategy
t Create implementation plan

Figure 2: End-to-End Proven 3-Step Methodology for Network Design