Designing Supply Chain Network: 5 Steps for

Optimization
Why should I be designing my supply chain network?

You’re patting yourself on the back. You’ve sorted through the Marine Shipping chaos. In the
face of volatile Marine Transportation rates, you’ve managed to negotiate great prices to
transport your North American produced bulk liquid via tank containers to ten Pacific region
countries. The contracts are signed and locked in for the next year, holding costs to a known
level. A month later you discover there may be a better way. Rather than transport your bulk
liquid separately to each of your ten Pacific region customers, you can send all the products on a
parcel tanker to a terminal in Singapore, drum it, and ship the drums from Singapore to each of
your customers. And you can do this at considerable savings without a reduction in customer
service. You looked at so many options, why didn’t you consider this one?

How do you make sure your business is aiming before it fires? 

Designing your supply chain network optimally will help you ensure that you are using the best
modes of transportation, the best routes, and the right mix of intermediate assets (e.g. storage,
inventory, etc.), to get your products where they need to be to meet your business goals. And the
icing on the cake is that it is a relatively easy and cost effective process.

[Related article: The Future of Supply Chain Network Design]

Designing Supply Chain Network: A Proven Process

So how does it work? Here is a proven process for designing a supply chain network that best
meets your business objectives.

1) Clearly define your objectives. 

No logistics manager is likely to improve all aspects of their logistics and distribution network
all at once. The most critical step of designing supply chain networks is to identify your primary
objectives. A partial list of critical decisions you might consider is:

 What level of customer service does my market demand?

 What modes of transportation should be used to balance cost vs customer service objectives?
 Which warehouses should supply products to which customers?
 How many warehouses do I need and where should they be located?
 Where should inventory be stored and how much inventory should I be carrying of each product?
 Which manufacturing plants should be making product for which customers/warehouses?
 What routes should I be using to get product from source to destination?
 Are there opportunities for pooling resources that have been overlooked?

Identify your objectives as those decisions that are most important to the bottom line and those
that you can do something about.

2) Gather supporting data. 

In order to make intelligent decisions, you need solid data to support those decisions. This step is
usually the most time consuming part of the process. The good news is that the data is available
and reusable. Most likely it exists in your new ERP or legacy system. Typical data elements
include: demand by product and container type, transportation rates, transportation lead times,
warehousing costs (both fixed and variable costs), and inventory costs. If your objectives include
determining the manufacturing source of products, you will also need data like manufacturing
and raw material costs.

3) Model your supply chain network. Today’s technology can help you make better decisions
as there are many vendors offering supply chain network optimization tools. Alternatively, you
can cost efficiently configure your own. Choose wisely, as all software is not created equal.
Make sure the software you select fully addresses the decisions you need to make and can
represent your unique business and logistics network. Typical model components include
capacity limitations, customer service requirements, lead times by mode, operating capabilities
and the cost of different options.
4) Analyze your supply chain network. 

There is no silver bullet. Using supply chain optimization tools to make better decisions for your
business requires good old-fashioned analysis, such as Profit Point’s Strategic Network Analysis
Program (SNAPTM). Relying on people to leverage the benefits of technology is the path to
success. A good supply chain analyst will be both an expert about your business and an expert
with the supporting technology. They will need to review many “what if” scenarios with
business management to finalize the supply chain network design.

5) Implement and refine. 

The supply chain network analysis and design process is not a static process. Successful ideas are
implemented and cost savings are realized. And then things change: a large new customer is
added at a new location, more production capacity is added, demand takes a nosedive, or raw
material prices swing dramatically. Thus, like all good planning processes, the supply chain
network analysis and design process must be ongoing. This process should be revisited regularly
(annually/quarterly,) and/or when big things happen within the business.

Designing Supply Chain Network: Success Metrics and Benchmarks

How do you measure the success of this business process? First, it must generate bottom-line
savings in your supply chain operations. Second, the business process must embed itself firmly
in the corporate culture. Treating supply chain analysis as a one-time effort limits your business
from fully reaping the fruits of your labor.

“Although we have achieved cost savings between 4% and 11% of our total logistics costs in our
network designs, the biggest value that we’ve seen from this type of analysis is a common
understanding of the delivery chain among Manufacturing, Marketing, Sales, Logistics, and
Planning. This common understanding of cost and customer service trade-offs results from the
more complete ‘picture’ of the network that emerges from this analysis and the ability to churn
out ‘what-if’ analysis to cover most credible business scenarios. It is this understanding and the
ability to quickly understand and exploit changes in the market that is the enduring value of a
continuing network analysis process,” says Ted Schaefer, Global Logistics Strategy & Design
Manager at the Rohm and Haas Company.

Those businesses that integrate a designing supply chain network process into their corporate
culture will reap the benefits of efficient and focused logistics operations year after year. With a
process like this in place, you can be assured that you aim before you fire.