Solutions to Optimize Your Supply Chain Operations
INTRODUCTION
Executive Summary
Strategic optimization of your end-to-end
supply chain produces significant savings
and improves your operational service
levels. Effecting this optimization requires
a carefully-considered modeling and
analysis approach and an incremental
implementation.
LLamasoft’s Supply Chain Guru® is the
key tool for evaluating supply chain
network structures, supply chain policies,
and integrated operations to:
 Optimize Supply Chain Structure to
achieve the lowest cost or the highest
profit
 Optimize Supply Chain Policies to
minimize operational costs and
improve service rates
 Simulate Performance to validate the
feasibility of supply chain strategies
 Analyze Risk and Robustness by
evaluating alternate scenarios and
designing contingency plans
LLamasoft supports Supply Chain Guru®
with the best-practice solutions and turn-
key services you need to succeed.
Network Design is an essential and
continual process for navigating the
volatile global marketplace --LLamasoft
can help you determine where to start
the process and how to achieve the
shortest time-to-benefit and greatest
savings.
If the Supply Chain and Manufacturing operations were
optimized, many companies could reduce their total
manufacturing and logistics costs by as much as 20% while
maintaining, or even significantly improving, their customer
service levels.
Best-in-class companies are continually looking to drive down
costs and improve their performance in the face of rapidly-
changing market conditions, volatile costs, and dynamic
sourcing options.
Strategic optimization or realignment of channel flows and
structural network changes are recognized to be the biggest
source of major cost reductions in global supply chains. But to
achieve these savings, a company must take a holistic
approach to Strategic Planning and Optimization.
Supply Chain Network Design is a powerful modeling approach
which has been proven to deliver significant improvements in
supply chain cost structures and service levels. It incorporates
fixed and variable costs for all the main activities and cost
drivers in a manufacturing and supply chain network:
purchasing, production, warehousing, inventory, and
transportation. Facility operating and capital costs are also
incorporated by leading applications, as are carbon emissions.
But where do you start? There is no generic prescription that
applies to all situations, but there is a hierarchical sequence of
steps a company should consider when embarking on a
strategic optimization initiative.
From this White Paper, you will learn the key criteria for
making the starting-point decision. It will delineate the supply
chain issues and the solutions to each, and it will illustrate the
relationship between the solutions, which will provide
guidance on which issues to address and in what sequence.
SOLUTIONS
Achieving the ultimate improvement of your company’s performance and profitability requires modeling
multiple functional areas, their operations and the combined network. Many of the functional
components can be optimized with standalone initiatives, but the greatest savings result from the
holistic optimization of the end to end supply chain from sourcing through ultimate delivery, and
including every station in between.

LLamasoft provides software and services to design and improve supply chain networks. Combining
optimization and simulation makes us unique. LLamasoft’s comprehensive software platform, Supply
Chain Guru®, incorporates enterprise simulation with network and inventory optimization in a single
modeling structure. It is the cornerstone for supply chain strategic planning, and can turn high-risk ideas
into low-risk implementation and improvement plans. It will allow you to:

 Optimize Supply Chain Network structures

 Model Supply Chain Network alternatives
 Quantify the effects of changing the Supply Chain Structure or Policies
 Simulate multiple Supply Chain scenarios to evaluate service/cost trade-offs
 Predict customer service, inventory investment, transportation costs, and manufacturing
utilization for corporate strategic planning functions

Clients use Supply Chain Guru® to identify major financial and operational improvements in sourcing,
production, transportation, and inventory applications. Supply Chain Guru® integrates multiple
operations research algorithms, solvers, and data visualization tools to implement Solutions for many of
the most challenging supply chain business issues. We have defined ten Solutions to common Supply
Chain business issues that can be implemented individually, or in combination.

The Solutions include:

1. Supply Chain Network Design - the extremely rapid evaluation and optimization of your entire
end-to-end supply chain. Network Structure, Supply Chain policies, and Integrated Operations
are evaluated to optimize the trade-offs of cost, time, and capacity in the Network. Supply Chain
Network Design (SCND) realigns your factory and warehouse locations and minimizes inventory
and transportation costs.

2. Cost-to-Serve Optimization - the financial analysis of your end-to-end Supply Chain, making the
tradeoffs necessary to achieve required customer service levels at the lowest total cost. Cost-to-
Serve Optimization evaluates the end to end supply chain with the same scope as Supply Chain
Network Design, but the emphasis is different. Cost-to-Serve utilizes more detailed financials,
and incorporates a costing approach that focuses on properly representing fixed costs. Cost-to-
Serve optimization incorporates the decision to serve or not to serve various customers, and to
deliver or not deliver various products, in order to avoid incurring fixed costs (labor, shifts,
assets/capacity, facility charges.) Indirect and direct cost pools are defined and allocated as part
of the model setup to ensure that each alternative configuration is as accurate as possible. Cost-

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 to-Serve analysis can also be performed using detailed simulation, for incredibly precise costing
of defined alternatives of interest to the CFO.

3. Strategic Sourcing - the evaluation and quantification of new sourcing options, such as off-
shoring to lower-cost manufacturing facilities, switching to new suppliers, or determining optimal
locations to service customers. It allows you to model the entire supply chain network to
determine how sourcing decisions will affect business as a whole. Each option may present
tremendous cost-saving opportunities for the business, but each also carries its own unique risks.
Strategic Sourcing evaluates total landed cost, and not simply manufacturing cost. It also
considers the trade-offs implicit in each option: cost-versus-time; inventory-versus-service; and
fixed costs-versus-variable costs.

4. Production Modeling - the balancing of supply and demand, linking strategy with operations.
Production Modeling can become the key driver for optimizing resource utilization and
maximizing Return-on-Assets. It depicts the relationships between Sales Demand and
Operational Requirements to meet Customer Service Level Benchmarks. Challenges to
production and supply chain capacity, such as seasonal demand, promotions, lengthy supplier
lead times, and supplier bracket pricing, can be addressed cost-effectively. Production Modeling
becomes a truly proactive capability for allocating capacity.

5. Transportation Modeling - the identification of the optimal transportation plan, based on the
end-to-end costs and your defined service constraints. You can model your entire supply chain
network, incorporating alternate transportation options and key variables such as cost, time,
capacity, and delivery parameters. You can determine the best modal mix or the optimal number
of transportation assets and the positioning of these assets. You can simulate routing strategies
to predict actual costs and service levels. Optimal daily, weekly, monthly, or quarterly plans can
be used to set inventory levels, schedule production, and define distribution routing.

6. Inventory Optimization - the creation of highly-accurate inventory requirements across all

echelons of the supply chain. The optimization identifies the lowest-cost operation plan by both
reducing variability that can be controlled, and planning for the lowest possible inventory
necessary to counteract the variability that cannot be controlled (safety stock). It considers the
need to keep inventory to cover normal replenishment frequencies (cycle stock). You can
simulate operations to predict the service rates, inventory levels, and site capacity constraints for
any supply chain structure.

7. Product Life Cycle Planning – as products move through their phases of their life cycles, from
launch, through growth, maturity, and decline, the optimal supply chain configuration can and
will change based on the competing priorities of availability and profitability. You can also
determine the optimal manufacturing footprint, given new product mixes. You can analyze
challenging demand- and flow-patterns influenced by seasonality, promotions, fashion trends, or
commodity pricing. You can change your supply chain design or operating policies to address a
new product mix and new product service requirements, and accommodate fluctuating demand
patterns.

8. Merger and Acquisition Rationalization - the evaluation of alternatives, the optimization of the
proposed new structure, and simulation of multiple scenarios in order to predict the financial
and operational performance of the newly merged enterprise. This analysis identifies redundant

Optimize Supply Chain Operations Page 3 August 23, 2010

 facilities, assets, suppliers, customers, and products. Divestitures pose similar challenges, often
leading to new transportation lane volumes, inventory strategies, and Greenfield facility options.

9. Risk Analysis - the evaluation of alternate sources, routes, transportation modes, or production
processes to address key risk factors throughout the supply chain. You can analyze sensitivity to
key supply chain, or commodity, costs to determine when new strategies should be employed.
You can use simulation to introduce disruptive events or supplier uncertainty into your network
to get a better understanding of the robustness of your supply chain, and to predict the
operational and financial effectiveness of contingency strategies.

10. Greenhouse Gas Emissions Analysis - the calculation of your supply chain network’s carbon
footprint as it currently exists (footprinting); the determination of the most cost-effective
network that will meet your defined GHG emissions cap or a percent reduction target; and the
incorporation of Carbon Offsets into cost and footprint calculations to optimize Carbon Offset
purchases.

SOLUTION RELATIONSHIPS
Supply Chain Network Design is the cornerstone of the LLamasoft Solution Suite. It is the ultimate parent
of many of the component solutions and, in many cases, the logical starting point for all other
optimization projects.

At least four of the other Solutions can be considered subsidiary optimizations to Supply Chain Network
Design, since they are each individual components of the SCND process. These components include:
Strategic Sourcing, Production Modeling, Transportation Modeling, and Inventory Optimization.
Tradeoffs between these four supply chain components are typically analyzed during a SCND
optimization project.

There is a special relationship between Supply Chain Network Design and Cost-to-Serve Optimization
(CTS). Cost-to-Serve Optimization can be considered a subsidiary process to SCND, or it can be
considered a peer process with a different emphasis and audience. The table below contrasts SCND with
CTS.

Supply Chain Network Design Cost-to-Serve Optimization

Evaluates: End-to-end supply chain
Audience: Manufacturing and Supply Chain
Operations Management
Detail Level: Product groups and families
Optimizes: Total supply chain cost
Results: Realigns factory/warehouse
locations, assigns customer servicing
locations, determines lowest total
network cost
End-to-end customer fulfillment cost
Chief Financial Officer
Customer and/or SKU specific
Total supply chain profitability
Balances required customer service
levels with lowest landed cost for each
product in product category, identifies
profitability of each customer

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To visualize these various relationships on a spectrum, the graphic below depicts the spectrum from
macro focus on the supply chain itself (SCND) to the micro focus on individual products (CTS) and the
functions of Strategic Sourcing, Production Modeling, Transportation Modeling, and Inventory
Optimization as subsidiary functions to both.

The remaining four

Solutions are point
solutions that tend
to be used to
address a specific
business initiative,
such as a new
product launch or
key acquisition.
With each of these
point solutions,
the Supply Chain
Network Design
baseline models
serve as the key
launching point for
analysis.

Certainly, Product Life Cycle Planning accounts for many of the same factors that Cost-to-Serve
Optimization considers, but it adds often focuses on product phase-in/phase-out decisions, asset
utilization, and sensitivity of long-term forecasted demand. Merger and Acquisition Rationalization is a
form of Supply Chain Network Design that accounts for merging two disparate supply chains or the
impact of subtracting elements of a single supply chain. Risk Analysis takes Supply Chain Network Design
to another level, analyzing the impact of uncertainty and disruption. Finally, Greenhouse Gas Emissions
Calculation is a special-purpose Supply Chain Network Design dedicated to determining carbon emission
reduction strategies.

WHERE TO START
With the Solutions in context, the question of “where to start?” remains. The simple answer is that a
company should start where they perceive the greatest short-term return. Most often, a company
embarks on an initiative with a specific objective in mind, e.g., reducing transportation costs, or off-
shoring to lower cost manufacturing facilities. When such a project exists (or has been dictated), it is the
ideal starting point.

Absent such a specific project, a company should start with Supply Chain Network Design. It is the basic
building block of a holistic optimization effort and is logically executed first. Further, any optimization
project must be visualized as a continuum, not as an isolated instance.

Savings are obtained in increments and often savings from a former optimization project can be used to
justify the next project increment. Ideally, a company should develop a strategically-incremental
strategy -- develop a holistic vision of all of the optimization projects possible and their sequence, then

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divide that strategic vision into increments for implementation. This also implies periodic review of
successes and savings and adjustments to the incremental strategy as conditions dictate.

Part of a strategically-incremental strategy is dividing optimization projects into two major phases for
sequential execution. Included in the first phase are the projects that deliver the “low-hanging fruit” --
the greatest savings that are easiest to actualize. These tend to be projects that optimize channel flows
through policy changes, but do not change structure. For example, a company can consider changing:

 Where an item is manufactured (in the existing plants)

 Where an item is stocked and in what quantities
 How an item is transported -- mode, carrier, and time
 Which suppliers to use and in what locations
 What is the ideal customer service level and the policies to support that strategy

All of these are “policy” decisions that do not affect the overall supply chain structure. They allow you to
reduce operating capital and logistics costs without significant capital investment.

In the second phase, one removes the structural change constraints that were imposed in the first phase
and considers changing the physical plant and network configuration, including: where manufacturing
plants should be located (changed, opened, closed) and should manufacturing be outsourced.

These structural changes can introduce another level of savings to the overall network, but often require
capital investment and, therefore, more thorough financial analysis and justification.

OPTIMUM SAVINGS ASSESSMENT

If you still struggle with where to start, LLamasoft can help! We offer an Optimum Savings Assessment
that can quickly help you determine where your greatest short-term benefits exist. Our professional
services team has developed a structured methodology that will assess your current state and develop
the types of economic benefits you can expect.

Through interviews (we provide an interview sheet and the roles to be interviewed), we identify
problem areas, develop metrics, frame opportunities, and develop preliminary expected results. When
the assessment is complete, we are able to:

 Define the key issues

 Describe opportunities -- optimization that addresses the key issues
 Define solutions to optimize specific business processes
 Recommend alternatives
 Present potential value propositions for each component

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CONCLUSION
Historically, network re-design initiatives were performed every one to three years to help a company
realign its warehouse and factory locations and minimize transportation costs. Network design projects
took 4-6 months or longer, and model accuracy was limited by the need to limit the number products,
sites, and demand transactions.

Now, Supply Chain Network Design projects can be accomplished in weeks or less. Models can be run at
the SKU level, with multiple time periods, and entire end-to-end supply chains are evaluated and
optimized. Supply Chain Guru® can evaluate network structure, supply chain policies, and integrated
operations. Your holistic solution allows you to:

 Optimize Supply Chain Structure to achieve the lowest cost or the highest profit
 Optimize Supply Chain Policies to minimize operational costs and streamline processes
 Simulate Performance to validate the feasibility of each scenario
 Analyze Risk and Robustness by evaluating alternate scenarios

LLamasoft has created a breakthrough application, Supply Chain Guru®, supported by the best-practice
Solutions, and turn-key services. This extends Network Design optimization to a whole new audience
and makes it a strategic imperative. Network Design is now an essential and continual process of
evaluating operational strategies and navigating the volatile global marketplace.

Further, you have multiple implementation options from do-it-yourself to having LLamasoft do-it-for-
you. You can acquire the strategic capability, get your team trained, and bring the technology in-house
to enable rapid response to ongoing business initiatives. You can also outsource your projects to the
LLamasoft Solutions Team as your partner for outsourced network design business services. Finally, you
can implement a mixed model and have the LLamasoft Solutions Team deliver rapid benefits for your
first project, then transfer the models, technology, and know-how to enable your team to build on our
initial success.

ABOUT LLAMASOFT
LLamasoft provides software and expertise to design and modify supply chain network operations.
Supply Chain Guru® is the leading supply chain strategic planning application available in the market
today. It enables companies to model their supply chain operations, optimize the structure for cost and
profitability, and simulate proposed changes, allowing users to implement their changes with
confidence. The world’s leading corporations across nearly every major industry vertical, including over
half of AMR’s Supply Chain Top 25, leverage Supply Chain Guru® to help them achieve a competitive
advantage through superior Supply Chain Design.

The privately-held company, based in Ann Arbor, Michigan, was founded in 1998 as the first company to
combine enterprise-level simulation with full-feature network optimization within a single modeling
structure.

For more information, visit www.LLamasoft.com or contact info@LLamasoft.com.

Telephone: 734-418-3119

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