case study

Distribution Network Design

Industry: HEALTHCARE 27% Reduction in Network

CONSTRUCTING A TOTAL COST MODEL Inventory
AND PERFORMING GREENFIELD
ANALYSIS TO IDENTIFY OPTIMAL $23M Total Logistics Cost
DISTRIBUTION CENTER LOCATIONS AND
Savings
TRANSPORTATION NETWORK

CURRENT STATE Customer Challenges

The client, a healthcare product distributor, was challenged with stock outs and long lead times that caused
service level issues for its customer. Customers were indirectly incurring the cost of transportation, which
was often exaggerated to account for complex and inefficient
transportation strategies.

Suppliers faced difficulties from the large number of distribution

centers to which they were required to ship material. Excessive
purchase orders and unconsolidated freight created complexity and
cost. Current State Network

The client had no ownership and little visibility to much of the freight
planning and spend on inbound material. The large number of
distribution centers caused difficulty in providing good SKU coverage
without creating inventory bloat. The ability for the client to take
ownership of freight planning and spend hinged upon providing value to
the supplier. The client's inbound transportation consisted of a
CHALLENGES:
significant portion of LTL and parcel shipments due to the fact that
supplier freight was deconsolidated to service a large number of  Stock outs and long lead
distribution centers. Significant interfacility transfers due to poor SKU
times
coverage created excess costs.
 High transportation costs
For its metrics, the client was currently measuring inventory days on passed on to the customer
hand and transportation spend.  Lack of visibility to inbound
freight planning and spend
 Poor SKU coverage leading
to excess costs
case study

FUTURE STATE Analysis, Tools, Solutions

Vendor to FDC Shipment Lanes
LeanCor planned to create a future state model which implemented
hub distribution centers focused on rapid replenishment to the
forward distribution centers. This required understanding the optimal
locations and distribution flow strategies and the total logistics cost
associated with different options. LeanCor used total cost models,
greenfield analysis, inventory frequency analysis. For its future state
goals, the customer wanted to achieve 1) cost neutral
implementation of hub-and-spoke distribution network 2) a clear
value proposition for the suppliers to collaborate on inbound freight
cost reduction initiatives, and 3) improved service levels with overall Future State Network
inventory reduction.

LeanCor constructed a total cost model to understand the biggest opportunities for improvement and
performed a greenfield analysis to identify optimal locations for the hub distribution centers. LeanCor
analyzed facility sizing to determine space needs in the hub distribution centers. LeanCor designed an
optimal future state transportation network around the new hub locations and created a cost model for each
future state scenario. The future state model not only yielded a network with higher inventory turns and lower
cost per cube in transportation, but also a favorable shipment schedule for the supply base. A bonus
discovery was the opportunity to reduce transportation costs by using a lower cost port of entry for ocean
freight.

RESULTS Deliverables, Improvements, Customer Home-Runs

LeanCor identified two optimal hub distribution center locations and the associated size requirements.
LeanCor also developed the material flow and inventory strategies from sourcing to the forward distribution
centers. Through its analysis, LeanCor uncovered Total Logistics Cost savings of 5% ($23.1 million)
annually, overall network inventory reduction of 27% ($93.5 million), and
167% increase in delivery frequency to the forward distribution centers. RESULTS
Supplier shipments improved from 61% to 97% truckloads through
implementing milk runs as opposed to direct shipments.  5% Total Logistics

Cost Savings
Home Run:

“We developed a cost neutral or better future state model  27% Reduction in
which provides clear value to the suppliers and to the
forward distribution centers from a complexity, lead time, Overall Network
and utilization perspective.” Inventory
–Kelcy Monday, Project Manager and Lean Deployment Team Leader

167% increase in FDC delivery  36% Improvement in

frequency results in 49.8% lower
average inventory on hand at the FDCs Supplier Shipment
Utilization

Buffer/Safety Stock Inventory Buffer/Safety Stock Inventory

1.02 Average Shipments per Vendor, per week to FDC 2.71 Average Shipments per Vendor, per week to FDC