savings. But in practice such rationalization can be difficult,
largely because both parties have implemented different
processes using different information systems. In such
cases, supply chain network design software can develop a
realistic estimate of the cost savings from merging companies’ distribution chains.
Collaborative supply chains, in which unrelated and even
competing companies share distribution and transportation
resources, are generating some interest, particularly in
Centralization of supply chain functions,
often driven by a shift from country-based
to regional management, is another com-
mon trigger for a network redesign. A good
example of a regional approach can be seen
in North America, where U.S. companies
have long regarded that continent as a single
market and manage their supply chains on
that basis. In Europe, by contrast, it is really
only in the last decade that companies
began to replace the traditional nationally designed and
managed supply chain functions with pan-European ones.
That has required major shifts in transportation and dis-
tribution patterns. It’s common nowadays for a European
supply chain design to encompass manufacturing in
China, importing via Rotterdam, a primary distribution
center in the Benelux countries, and secondary DCs some
distance away, in places like Spain, Northern Italy, or
Romania. For a company to do this properly, it must first
model its supply chain to determine the optimal location
for manufacturing, primary DCs, and secondary DCs as
well as transportation routes.
to buffer things going wrong.
This lack of redundancy or buffer stock can make it difficult for companies to manage variability, a situation that
can also cause service failures. This is especially true when
there is variability in multiple factors, such as demand levels, on-time delivery rates, and manufacturing uptime. You
may not worry much when each individual factor’s variability is a standard deviation away from the average levels
you assumed when designing your supply chain. But if
demand is higher than normal, suppliers’
deliveries aren’t as prompt as usual, and a
critical production machine breaks down at
the same time, then problems emerge.
Supply chain design tools can help simulate, to an extent, such variability in supply,
production, and demand. Although the tool
does not provide the solution to those problems, it enables managers to evaluate variability and assess the performance of their supply
chains under real-life, rather than average,
conditions.
It’s also possible to assess the impact of
solutions you could adopt to better manage
variability. Examples of these solutions
include postponement and late customization in the distribution center and other “
to-order” strategies. Vendor-managed inventory
or supplier-managed inventory can also be
effective. Yet another option is to manufacture base products or components that enjoy stable demand
and then locally customize, to order, each variant that experiences more variable demand.
5You experience a major service failure. An important customer has just called and expressed dissatisfaction
concerning a service failure. If this is not the first time that
problem has occurred, then you may have a systemic problem, and a redesign could help prevent it from happening
again.
A common cause of supply chain service failures is a lack
of robustness in supply chain design. Lean supply chains in
particular can be fragile, as by definition there is little stock
6Fear is in the air. Your company’s own practices and processes are in good shape, yet the CEO is nervous.
What’s worrying him or her? The things the company can’t
control, like supply chain disruptions that will affect profits
and investors’ earnings. When that’s the case, it’s time for an
assessment (or a reassessment) of potential risks to your
supply chain and perhaps a network revision that will
reduce the potential for disruption.
Conducting such an evaluation will require you to identify risk factors and assess each one’s probability of occurrence and its likely impact. Having that information will
focus management’s attention on developing appropriate
mitigation plans for the key risks.
Supply chain design tools can help managers to assess the
impact of some, but not all, risk factors as well as to model
mitigation plans. A simple example would be the impact of
rising interest rates on inventory holding costs. If interest
rates increase, then inventory holding costs also rise. To
