Supply chain design is a powerful modeling approach proven to deliver significant reduction in supply chain costs and improvements in service levels by better aligning supply chain strategies. It incorporates end-to-end supply chain cost, including purchase, production, warehousing, inventory and transportation. While this is considered a strategic supply chain planning initiative, organizations can gain competitive advantage by running supply chain network scenarios, evaluating and proactively implementing changes in response to dynamic business scenarios like new product introduction, changes in demand pattern, addition of new supply sources, changes in tax laws and so on.
Supply chain networks have increasingly become global and dispersed. A variety of factors—ranging from cost structures, tax laws, skills and material availability, new market entry and others—have driven companies to redesign and reconfigure their supply chains continually. The consequent increase in complexity of market, channel, supply networks and distributed facilities has rendered related planning more intricate and complex.
Dedicated centralized supply chain teams have sprung up to help manage the complexities of global supply chain effectively. This article discusses the strategic needs around supply chain network design and the need to periodically make key strategic, tactical and operational decisions.
Companies have invested in processes, tools and resources to achieve efficiency and effectiveness through their supply chains. Many of them have migrated to an integrated planning approach with the objective of increased service level, responsiveness and on-time full delivery while judiciously balancing working capital needs. However such integrated planning often starts with an assumption that supply chain networks are static and tend towards driving optimization around the same. Since supply chains themselves are dynamic, supply chain network design exercises attempt to make supply chains agile enough to address current changes and future uncertainties.
The Why and When of Supply Chain Network Design
Companies have realized the importance of supply chain network design exercises but are still unable to make the best use of it. The challenge typically lies in selecting the right approach. Internal factors driving supply chain network design are focused on driving service delivery and working capital optimization across existing networks. As an example, inventory optimization exercises across the supply chain network focus on getting the inventory strategy right at each node of the supply chain using a customer-centric approach.
On the other hand, external factors also drive significant structural changes. For example, proposed tax reforms would provide a completely new strategy around supply chain network design and move to changes such as larger and more centralized warehousing facilities.
Internal Factors: Often, individual (function-specific) objectives and company objectives are not well defined or aligned. Different functions work on their individual objectives, often achieving local optimization while adversely impacting the overall supply chain performance.
As a result the costs associated with certain service levels could become a concern. Conflicting optimization objectives by functions lead to sub-optimal supply chain performance.
External Factors: Traditionally, businesses have established supply chains and different facilities across the network to gain tax benefits, trade concessions, labor arbitrage, capital subsidies, reduced logistics cost and customer proximity. Many of these factors can be impacted by political and economic policy changes, calling into question the relevance/optimality of the current supply network. In many cases, the impact of these changes is large enough to drive strategic structural supply chain changes. Preparing for such changes is important through use of strategic modeling and network design exercises.
Supply chain decisions typically are taken at three levels: strategic, tactical and operational. At the strategic level, decisions typically link to business strategy and involve high investments, high change-over lead times and longer horizons. At the tactical level companies focus on adopting measures that focus on competitive needs, such as moving to a target cost structure for servicing certain markets. At the operational level the major focus is operational efficiency. Decisions are typically made on a day-to-day basis under the framework defined at strategic and tactical levels.
The figure below provides the hierarchy of supply chain needs addressed through such exercises and also typical questions that can be answered through the same.