In March 1998, Timothy Cook joined Apple as Senior Vice President of Worldwide Operations. One of his first assignments was to clean up Apple’s manufacturing, distribution and supply chains.
In the process, he closed many of Apple’s factories and warehouses around the world moving the company away from being a manufacturer into one using almost exclusively contract manufacturers.
Cook transformed the way Apple, and later everyone else, looked at their supply chain by not only closing the ecosystem for maximum control over every aspect of manufacturing, but also by opening multi-million dollar credit lines, locking companies into exclusive long-term supply agreements and even going as far as to reserve all air freight during the Holiday season.
By having total control over its supply chain, Apple was able to produce iDevices at precisely the price and quality that was required. This supply chain superiority played a huge role in the company going from an uninspired brand in the mid-nineties into being the most valuable company in the world today.
Now, you are not Apple, and you don’t have the resources to reserve all air freight during the Holiday season. Instead, what you should get out of this story is the importance of having a world-class supply chain and logistics operations and how crucial a role they play in the profitability of your business.
Your Supply Chain as a Profit Vehicle
An efficient supply chain isn’t just a way to get reduce operating costs, improve your margins and get products into your customer’s hands faster; In today’s market, it can be the value proposition that means a thriving life or certain death for a brand.
How Supply Chain Optimization Worked in the Past
Supply chain optimization used to work by looking at the different pieces of the supply chain as separate entities to determine individual cost savings.
When you wanted to save on air freight, you looked at how to best package the merchandise in a way that saves space in an air cargo container so you can get the maximum benefit with minimum costs. The same approach applied to delivery routes from suppliers to your fulfillment centers, and so on.
This approach leads to tangible savings on the surface, but when you dig deeper, the numbers may end up telling a different story
For example, Cardinal Health found that by combining delivery runs to two fulfillment centers, they could make one less delivery per week and save $430,000 on inventory carrying costs while reducing transportation costs by $276,000.
The problem with such an approach is that it only looks at and tries to optimize parts of the process and doesn’t evaluate the supply chain as a whole.
Sure, you can save five cents per product on your air freight when you bundle many shipments together into one mega delivery but when factoring in what that means for your on-the-ground fulfillment centers, you risk losing money because of the need for expanded warehouse space and staff to manage it all.
That is why an increasing number of companies are looking at their supply chains and asking the question: “How can this be used to maximize company profits?”
Supply chains are no longer “set it and forget it.” They are living, breathing organisms that evolve as business strategies, market conditions, product line performance and other variables change. A good supply chain must be able to adapt to whatever happens in the marketplace.
Building a World-Class Supply Chain
Image via SupplyChain247
The first step in optimizing and building a world-class supply chain is to map out your current supply network.
For that, a lot of data gathering and analysis is required. Because you’re trying to get a complete picture, you should not only look at data strictly on a supply chain-related basis but also include things like warehouse workers’ salaries and their hours as they play a significant part in the cost structure of supply chains.
You’ll need data on the following:
- Sourcing locations and flow by SKU
- Outbound flow by SKU to customers
- Merchandise movements between facilities
- Distribution/Fulfillment costs
- Characteristics of your facilities (e.g. size, staff, lease/own, equipment, capacities)
- Inventory by SKU location
- Shipping times (from sourcing, between facilities)
- Fleet characteristics (internal, external)
Gathering this top-level data will enable you to map out your logistics effectively. Also, having this map will give you a better overview of what exactly is going on with your logistics and enable you to see possible pain points that you can investigate further.
High-growth companies may enlist the help of a third-party logistics provider (3PL) to outsource part or all of a business’ distribution and fulfillment services.
Once you have this information, it’s time to dig a bit deeper and document your existing network further. You’ll be looking for per site data on the following things:
- Space utilization
- Layout and equipment
- Operating procedures
- Staffing levels
- Receiving/shipping volumes
- Access to location (road/rail/air)
- Annual operation costs
If you run your own fleet, include that data, along with your operation procedures, costs, delivery requirements and more. With this information on hand, you have effectively finished with documenting your existing network.
By this point, you should have a fairly detailed map of your current logistical network and simply having this high-level overview can already be helpful going forward. Sure, you should have this kind of mapping readily available, but if you don’t, now’s the time to catch up.
So far we haven’t evaluated any cost savings opportunities. Let’s change that.
To start, you’ll need to develop a performance baseline on a per site basis from which alternative scenarios can be benchmarked against. Without this baseline, it’s hard to evaluate the costs and benefits of each new scenario.
Here are the key data points you’ll need to gather on a per site basis:
- Current locations, capacity, throughput, cost, performance, effectiveness and efficiency (data from previous analysis)
- Inbound transportation costs from plants/suppliers
- Outbound shipping costs to customers and intra-company facilities
- Current inventory levels, in-stock percentages plus inventory carrying costs
- Delivery time to customers (crucial!)
- Current supply points for vendors and production facilities
- Distribution of consumer demand
- Manufacturing lead times
- Manufactured goods price in relation to batch size (# of units ordered)
As the result of all of your analysis is to have a truly optimized supply chain that maximizes profits, the last piece required to complete the picture is to look at the real costs associated with moving and/or closing down facilities.
This means looking into the cost of things like:
- Personnel Relocation
- New personnel training and hiring
- Stock and equipment relocation
- Employee severance
- Existing contracts with staff, transportation companies, and vendors
- Income from sale of existing facilities
- Buying/renting/building new facilities
- Total current facility operating costs
After going through all this data gathering and analysis, what you end up with is a comprehensive overview of your entire supply chain backed up by real data.
Only once you have finished the exercise described above can you start to optimize anything.
Time to Optimize!
Image via WikiMedia Commons
After going through the data, you’ve probably noticed some problem areas stand out. Those may be good places to start, but bare in mind that the objective is to optimize the entire network, and a short term gain might mean a long term loss.
By having done this analysis, you can virtually manipulate the data and develop models that will help you visualize various options.
For example, you can model a scenario whereby you have smaller warehouses with lower costs but increased deliveries, and therefore fleet maintenance, increased insurance costs and need for qualified operators.
This was the scenario Cardinal Health found themselves in. The company ultimately saved money by making its delivery routes longer (e.g. more warehouses to cover) and making fewer deliveries overall.
By having the data, you can calculate how much each option will end up costing and how long it would take to get to net zero on the investment.
Later this week, we’ll take a closer look at how warehouses can be used to maximize profits. The same approach can be used to simulate events happening in the future.
A world-class supply chain can evolve with whatever the market throws at it. By using the above blueprint, you’ll be able to have exactly that -- a system that is flexible and can adapt to whatever happens.
Supply chain optimization is not something that you go through once and leave it be. It's an ongoing process that evolves as sourcing adapts to market changes, product line performances vary, and new product lines open as old ones close.
The real value of completing this analysis (and continuing to do it) is the knowledge gained from actually understanding the inner workings of your distribution network and how different parts are all connected.
What looks like a cost cutting measure on one end might end up raising costs. With this optimization process in place, you're now able to play through different scenarios with real data and project results of various measures more accurately.