There are many strategies these tools can assess, including
those for managing seasonality, manufacturing, and sourcing, to name just a few.
Strategies for managing seasonality are relatively simple
to assess. An important consideration is how best to manage the trade-off between building stock in advance of the
peak sales season versus paying overtime for manufacturing
to meet demand as it develops. Good tools also allow managers to compare the cost of temporary warehousing versus
operating throughout much of the year with excess space.
Another factor to model is the forecast accuracy for each
product. It can be wiser to build inventory of seasonal
products for which demand is more certain—that is, stock
the products that you know will sell—rather than hold
inventory of products that may or may not sell.
Supply chain design software can assess some manufacturing strategies, such as where manufacturing should place
the customer-order decoupling point (the point in the
manufacturing process where a customer’s order rather
than a forecast determines an activity). Such an analysis
would allow you to compare the costs and delivery performance of late customization in the warehouse as well as
make-to-order, assemble-to-order, or make-to-stock/pick-to-order manufacturing strategies.
Supply chain design tools can also help formulate global
sourcing strategies and assess “make versus buy” decisions.
Ideally, these decisions should not be left solely to the purchasing function. Instead, the supply chain organization
should first ascertain the impact of sourcing decisions on
such factors as leadtimes, inventory, and customer service
levels, and then work with purchasing to determine the best
decisions, taking all of those factors into account. Often,
however, the supply chain and purchasing groups have been
handed different objectives, which hinders collaboration.
For example, purchasing earns bonuses for reducing the
price per unit, while supply chain cares about total costs
and delivery performance.
Supply chain design tools are very helpful in such situations. They can quickly assess the impact of purchasing
decisions and produce accurate numbers that will lead to
more productive discussions. Even better, the supply chain
group can model suppliers’ costs and look for ways to
reduce them so that purchasing can then negotiate discounts. For example, perhaps your company could utilize
existing backhaul opportunities to pick up a supplier’s
goods; this would reduce the supplier’s costs and open the
way for lower prices.
Good tools generate “pictures” that help you communi-
cate your chosen supply chain strategy to senior managers
and other department heads. When all the decision-makers
fully understand how certain choices will affect costs and
operations, it becomes easier to align the company’s strategy
with your chosen supply chain strategy. It’s critical, in fact,
that those strategies be aligned lest the supply chain organi-
zation and the company end up following different—and
therefore, very costly—paths. Failure to align strategies can
result in a situation such as the supply chain group’s consol-
idating 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 sec- ond 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 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
