result in a situation such as the supply chain group consolidating two divisions’ supply networks, only to discover later
that the board is selling off one of those divisions.
2People ask: Why do we do things this way? The second sign that it may be time for a redesign is that few people in your organization recall exactly why your company’s
warehouses are located where they are. It may mean that the
current supply chain configuration is no longer fit for
today’s requirements.
Perhaps a number of years ago your predecessors
designed your company’s supply chain to optimize the supply of products for delivery to customers. Since then, both
the product mix and the customer base have changed.
Moreover, longstanding customers have probably relocated
their inbound warehouses. The result: Your current supply
chain design is no longer optimal for today’s product range
and ship-to locations.
Or maybe a senior manager asks, “Why are we shipping
from high-labor-cost countries to low-labor-cost countries?” This may have made sense many years ago, when
sales into low-labor-cost countries were relatively small.
However, these economies have grown rapidly in recent
years, and sales volumes may now be significant with the
potential to increase.
Frequently things that should change often stay the same
because managers tend to focus on short-term, monthly
changes and miss the long-term, year-on-year trends. They
also tend to apply established assumptions to new challenges. For instance, traditionally holding stock was expensive and transportation was cheap. These days, with fuel
costs continually rising and the cost of capital and warehousing declining (at least for the time being), that assumption no longer holds.
It is time to test many long-accepted assumptions. Is it
still better to purchase stock when it is required, or to hold
stock? Is it appropriate to incur the higher costs of expedited delivery in order to reduce stock-holding costs during a
period when interest rates are low? Are the labor, transportation, and distribution costs at your manufacturing
sites still the most advantageous for serving your current
markets, or would it be more cost-effective to manufacture
and/or distribute from neighboring countries?
3The number of products and customers is growing faster than your budget. The third sign is that your
budget is not growing as fast as your product range and
customer base.
Budgets often are set as a percentage of company revenue
or spend without understanding the effects of changing
demand or supply profiles on supply chain costs. Consider
this scenario: Every few weeks, the marketing or research
and development staff comes trotting along, excitedly
describing their latest product that’s bound to be a best-seller. Similarly, the sales team is forever in the bar, celebrating winning yet another new customer. Meanwhile,
your logistics team is stuck wondering how to handle the
extra costs associated with the additional stock-keeping
units (SKUs) and new customers, which weren’t accounted
for in their budget.
How to address this problem? A colleague once resorted
to configuring his company’s enterprise resource planning
(ERP) system to allow only 25,000 products. Although this
was a radical and perhaps crude solution, it at least forced
the company’s marketing department to think about dropping an existing product whenever a new one was launched.
Once again, modeling with supply chain network design
software can help you foresee the cost and service impact
of change. Managers can simulate how keeping or dropping particular customers and products will affect profits.
Be prepared for some pushback when you present those
figures, though. Marketing will argue that particular customers give you much of their business because your company supplies them with a low-volume, specialized product, so that product must stay in the catalog. They’ll also
argue that other customers have potential—perhaps
because they are a high-growth business or the sales team
has just won a foothold by offering a huge discount—and
therefore the pricing for that customer cannot be changed.
Regardless of the response your simulation elicits, remember that supply chain design tools generate accurate numbers that support a rational discussion.
4Consolidation or collaboration is coming. An impend- ing acquisition, collaboration with another company
to share resources, or centralization of previously decentralized supply chain functions all suggest that a network
redesign is probably in order.
Typically companies form merged, collaborative, or centralized supply chains with objectives such as achieving
economies of scale in warehousing, better utilizing transport, and increasing freight purchasing power. Using supply chain network design software to perform a supply
chain redesign before such a large strategic change will give
companies a better sense of just how feasible these objectives are.
In a merger or acquisition, for example, the acquiring
company sometimes pays too much because management
overestimates the level of supply chain savings and efficiency improvements. Acquirers often justify paying a high
acquisition premium because they expect that eliminating
redundant supply chain functions will lead to a high level of
