Supply Chain Network Optimisation - How to Avoid Extinction
Yes, the over the top' title is partly for dramatic effect
. However, the global economic landscape is changing rapidly, and evolution tells us that failure to adapt leads to extinction (or at least a rather nasty repositioning in the food chain). The analogy for business is clear.
Economic volatility, rising energy and transportation costs, new regulatory frameworks (emissions trading, anyone?) and tight credit markets have furrowed a few brows and raised that age old question of "What if?"
Global manufacturing has been consolidating for decades. Supersized focus factories' pump out all manner of consumables in vast quantities for the rest of the world. A key assumption in the Focus Factory' model has been cheap transportation relative to other costs. "What if" transportation and energy costs keep rising? From a local perspective, "What if" electricity and water prices in Victoria and New South Wales become significantly different? Hmmmm
But perhaps I'm getting ahead of myself. "What's all this then?" you say.
Well, to describe Supply Chain Network Optimisation in simple terms, you could say it considers all the options in the end-to-end supply chains and finds the best solution. It answers those lingering "What if?" questions.
No, it's not magic dust', and no, it's not a decision-making tool. However, it is a powerful, fact-based decision-support tool, and given the data intensity, complexity, interrelationships and multitude of options in real world supply chains, answers to "What if" questions in its absence often leave significant opportunity and risk on the table.
Applied effectively, Supply Chain Network Optimisation can deliver superior, sustained improvements in return on capital employed (ROCE) by:improving both fixed (facilities) and current asset (working capital) efficiencyimproving profitability by reducing fixed and variable operating costs such as manufacturing, storage, distribution, transportation, procurement and labourreducing inventories and improving operating cash flowimproving customer service levels and responsivenessBest practice Supply Chain Network Optimisation employs proven supply chain design and feasibility analysis methodologies, as well as world class optimisation, modelling and simulation toolsets that consider all possible supply chain options. The following diagram highlights some of the key factors that should be considered when designing optimal supply chains.A range of current and future strategic, operational and tactical scenarios for both local and global supply chains can be assessed to identify:quick wins in the current supply chain,how and when the supply chain should transform in response to change,supply chain risks and opportunities,the timing, transformation costs and return on investment (ROI) for different scenarios,where capital should be allocated, andthe appropriate transition and implementation plansBy employing these techniques, additional value is delivered in:the ability to consider and factually assess a broad range of business options,fully analysing, quantifying and prioritising the options,understanding the sensitivity of each option, including risks and key performance drivers,shaping general strategic directions, and ensuring that the supply chain is optimised and capable of supporting the business' strategic plans and operational requirementsFollowing are some examples of how and where Supply Chain Network Optimisation can be applied:StrategicWhat are the right facility numbers, locations, sizes and functions given facility capacity, fixed and variable operating costs, investment, expansion or shutdown costs and geographic positioning relative to suppliers and markets?What is the optimal supply chain response to 20% demand growth by year over ten years in key markets noting rising energy costs and carbon costs?If we wish to enter new markets, how should the supply chain transform to support this strategy? For example, will we need new facilities, new manufacturing equipment, additional inventory and/or different delivery modes? Given the new market forecasts, how long will it take to pay back the investment, and does this meet our hurdle rates? Will the price we can charge for our products and services in these new markets deliver acceptable net margins?Merger and acquisition analysis. How should we optimally rationalise the supply chain assets from a newly merged organisation? What are cost/benefits of rationalisation?Operational/TacticalWhat, where and how much inventory should we hold to meet service level targets at the lowest total annual cost? Which order fulfilment strategies (Purchase to Order, Build to Order, Configure to Order, Build to Stock) achieve customer service requirements at the lowest cost? For manufacturing, where should we produce what products and under what scenarios?Should we rationalise or expand our distribution network, including assessing alternate warehousing and conversion centres, to optimise local cost structures, transportation economies of scale and/or inventory economies of scale?Are there opportunities to realise quick win' cost savings by refining our customer delivery policies? For example, which locations should supply what orders to which customers and by what transportation method?How will the supply chain be impacted by product introductions and deletions?BenchmarkingWhat are the optimal costs by activity in the supply chain, and how are we performing relative to these today? Where are the greatest variances, and why do they exist? What can be done to narrow the gaps?What service levels should our current supply chain enable us to deliver, and how are we performing relative to these today? Where are the greatest variances, and why do they exist? What needs to be done to deliver market leading customer service?Cost to Serve (C2S) and Time to Serve (T2S). What are the current costs and times to serve by product, channel and customer? Where are the key performance improvement opportunities? How would these impact profit and service performance?What are our supply chain costs as a percentage of sales? How does this compare with our industry peers?Risk ManagementWhat are the contractual liabilities associated with the current supply and sourcing model? What are the liabilities and risks associated with our 3PL contracts? What operating policies should we put in place to address these risks?How would supply, demand and/or capacity disruption affect the supply chain? For example, what if demand drops by 50%? What risk mitigation strategies should we put in place?What changes in the supply chain could reduce net margins below an acceptable level?What do proposed regulatory changes mean for our supply chain? How might they impact operating costs and service standards?In summary, we all agree that the landscape is changing rapidly. However, a recent global survey by McKinsey found:"The results show that supply chain risk is rising sharply. Executives point to the greater complexity of products and services, higher energy prices, and increasing financial volatility as top factors influencing their supply chain strategies. Relatively few respondents, however, say that their companies are translating the importance they place on these factors into corporate action."Source: Managing global supply chains - McKinsey Global Survey Results' - McKinsey Quarterly' 20 August 2008In short, we know there are significant issues that need to be addressed, but in the main, we're not doing much about it. If evolution tells us anything, it's that those that fail to adapt don't fare too well.There is still time to act, but the evolutionary window' won't stay open forever. Supply Chain Network Optimisation - How to Avoid ExtinctionBy: Carter McNabb
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