mitigate these increased costs, managers typically choose to
hold less stock, but that could result in more frequent deliveries, which would drive up transportation costs. Good
supply chain design tools will produce a model that optimizes both operating and inventory holding costs. From
this model, managers can then estimate the total cost
increase after they have partially mitigated the impact of
rising interest rates.
To an extent, it is even possible to model natural disasters
that close transportation lanes or nodes. Predicting the
impact of something like the eruption of a volcano (think
of Eyjafjallajökull in Iceland, which disrupted European air
transport) is relatively easy. This is because alternative
transport modes can still operate, although initially they
will be constrained by capacity and time issues, and there
are relatively few secondary impacts.
However, modeling the effects of a wider disaster is much
harder because today’s multitiered supply chains involve so
many “layers” of suppliers and subcontractors, some of
whom dominate their product niches. Consider the secondary impacts of the recent Japanese earthquake, tsunami,
nuclear plant breakdowns, and power shortage. Few people
knew, for instance, that the market for the resin that bonds
microchips in smart phones is almost a duopoly between
Mitsubishi Gas Chemical and Hitachi Chemical, both of
whose plants were damaged. That is why the resulting slowdown in smart phone production came as a surprise to
many buyers.
Supply chain design tools can evaluate most nodes of a
multitiered inbound chain. They can assess, for example,
whether it would be better to buy from two different
sources of specialized components even though doing so
will raise operating costs. Another option might be to negotiate something akin to an insurance policy, such as paying
a premium for a guarantee of preferential treatment in the
event that another supplier fails to perform. And if your
company is a very important customer for one of your suppliers, then you may want to encourage that supplier to
open a plant in a completely different geographic location
in order to hedge against risk. To properly develop and evaluate these and similar solutions, procurement must understand the risks in the supply chain and the value of any mitigation strategy. Supply chain design tools help calculate
both of those factors and communicate the results.
7It’s time to renew a third-party logistics contract. It is difficult to revise your supply chain when your company is tied into long-term contracts with third-party logistics
(3PL) partners. Best practice, however, is to review your
network design every three to five years, which tends to be
in line with the length of third-party logistics contracts.
Thus, about a year before a contract is scheduled for renewal is a good time to begin reconsidering your supply chain
configuration. This gives you time to obtain support for
change within the organization and to negotiate contracts
for new lanes or locations.
A network review is also timely if you are putting a 3PL
contract out to bid. In order to submit accurate bids, potential suppliers need forecasts of freight volumes and lanes,
inventory volumes, and desired service levels. Supply chain
design tools also consider that same type of information,
and when the company’s sales forecast is included, they can
generate the forecasts that 3PL bidders require.
While your current network might be optimized to suit
the 3PL’s resources when the previous contract was signed,
your incumbent 3PL may be unwilling to change to meet
the proposed redesigned supply chain, or it might lack the
infrastructure to provide a better solution. Hence, a
planned network redesign may show managers that they
should put the contract out for bid and seek other, more
appropriate logistics service providers.
WHY WAIT?
If suppliers always delivered on time, production always
adhered to its plan, and customers always ordered what your
forecasts said they would order, then supply chain management would be simple. But it is not, because business conditions and circumstances are constantly changing, therefore
no company can afford to establish a supply chain network
and simply assume that it will always be the optimal design.
Fear of the time and cost involved often encourages supply chain managers to postpone an evaluation and redesign.
In practice, however, most such projects start with a quick
estimate involving perhaps 20 days of work. This initial
stage is a time for roughly assessing the potential for alternative designs and for determining that there is indeed a
business case for changing your current configuration. The
second step typically requires between 50 and 100 days to
accurately calculate the cost of change and the potential
reduction in supply chain costs.
Supply chain design tools are particularly versatile and
are invaluable in performing the necessary assessments. For
a wide variety of important issues, these tools provide
insight and analysis where once only opinion prevailed.
Now management can make better decisions that have been
rigorously assessed and justified. Managers can assess the
merits of multiple scenarios, knowing that they are comparing like with like. This is because supply chain design
tools deliver an optimum solution for each scenario. This
rigorous justification helps win over colleagues across the
organization and thus speeds implementation of the new
supply chain configuration. ●
