BY STEFAN KARLÖF & ROGER LINDAU
The latest issue of SCE (No. 4/2021) focuses, among other things, on the need for and growing interest in Supply Chain Network Design and supply chain optimization. Supply Chain Network Design (SCND)—sometimes also referred to as Strategic Network Design, Strategic Supply Chain Planning, or simply Supply Chain Design—refers to the process by which a supply chain is built, modeled, and analyzed with the aim of understanding and assessing the costs, lead times, opportunities, and risks associated with delivering goods and services to the market through a specific supply chain. Supply Chain Network Design encompasses all movement and storage of raw materials, components, and finished goods from the supplier to the point of use or consumption. The modeling and analysis include suppliers, manufacturing facilities, warehouses, transportation, and distribution, as well as customers and markets—all to gain an understanding of lead times and costs within the modeled network.
The benefit?
A relevant question, of course, is what benefits one can expect to gain from Supply Chain Network Design. According to a consensus among experts, the goal is to use systematic planning, analysis, and development to improve a company’s customer service and customer satisfaction and to balance service and costs as optimally as possible. This is achieved by establishing a number of scenarios that are modeled, evaluated, and adjusted to validate whether the chosen network design is effective. Overall, this contributes to increased competitiveness, which should be reflected in the bottom line.
Its roots lie in SCM
Supply Chain Network Design emerged as a result of the establishment of the concept of Supply Chain Management in the 1980s. A groundbreaking concept that we now take for granted when referring to the flows that begin with a raw material, continue through to the finished product, and end with the product’s consumption. In the wake of this, an increasing number of companies began, during the 1990s, to model and analyze various possible supply chains/networks to gain a well-founded understanding of the best possible design with regard to costs—typically for raw materials, production, distribution, inventory, and transportation—as well as service levels and customer service, all with the aim of gaining unique competitive advantages.
Recurring process
The most advanced companies conduct their supply chain network design on a regular basis. They also develop business processes that capture relevant data, which facilitates a recurring review of the supply network. Ensuring that data is of sufficiently high quality is a challenge that many companies struggle with. Obtaining an accurate picture of the actual costs of raw materials, production, packaging, inventory, capital tied up, and distribution is often difficult because the available data is outdated or otherwise questionable. Collecting, structuring, and validating data is therefore crucial for a sound analysis.
Constant Change
The major challenge in supply chain network design is to take into account all the constantly changing parameters that create uncertainty, such as market shifts, changing demand patterns, shortages of raw materials, supplies, and components, and much more. The most advanced companies continuously collect and analyze detailed data on procedures and costs for various activities in the supply chain—data that is then used in the companies” strategic and tactical optimization of the supply network. The collected data must be accurate and kept constantly up to date to enable rapid ”what-if” scenarios to be run on an ongoing basis. These scenarios typically address issues such as:
- How can we respond in the short term to unexpected events such as strikes or unexpected capacity shortages—for example, the semiconductor shortage that has been affecting the automotive industry, among others, for some time now, or container shipping, which is another current example of a sector facing capacity constraints?.
- How can we capitalize on new, major sales opportunities in the medium term, and how will this affect our overall capabilities throughout the supply chain?.
- How would a strategic acquisition or takeover affect our supply chain, demand, and capacity in the long term?.
Start with the business strategy
As is so often the case, business-critical initiatives should be based on the company’s overall strategy—which, in other words, applies to a great extent to Supply Chain Network Design. With this as a starting point, the strategic processes related to products, materials, and information must be defined, and key customers must be identified and described, along with the importance of various products from the customers’ perspective. As part of this, an assessment is also made of how non-value-adding activities—waste—can be eliminated from the supply network. An important parameter to consider in these analyses is lead time. If you promise delivery within two days to a key customer, but the warehouse is four days away, something needs to be done.
Smart Optimization Tools
The tools used to model and optimize supply networks are constantly evolving, and today it is even possible to analyze and optimize competitors’ supply networks. Using these tools—that is, software—it is now possible to identify and predict which customers, products, and prices will maximize profitability based on large data sets, AI, and ML. Software solutions anticipate and manage events within large, complex ecosystems of suppliers, manufacturers, carriers, and other partners in the supply network. The ability to model and optimize quickly and cost-effectively is becoming increasingly important as the business environment grows more volatile and rapidly changing. With a systematic approach and modern software, companies can achieve greater agility and adaptability by more quickly identifying changes and then analyzing, optimizing, and ultimately acting on those changes. In combination with the modern and often highly advanced software available on the market, it is important to have an organization in place that can create, model, and analyze the supply network. Such an organization should be led by a manager with strategic authority and the ability and understanding of how the network can be proactively redesigned to avoid costly reactive measures. An example of costly action is when a measure needs to be implemented but the lead time for its implementation is longer than the desired lead time. One of the main purposes of a clear and structured process for Supply Chain Network Design is to identify the types of actions that fall outside the longest lead time, thereby avoiding reactive, costly measures.
Fact-Based Decision-Making
For example, if the sales organization wants to increase its sales by 20 percent through a campaign or a new product, it is important to have knowledge of the transportation market in the relevant region, but also to model the increase in warehouse occupancy and the need for increased transportation capacity. Negotiating new volumes, lead times, and costs can be extremely costly and time-consuming in a limited transportation market. By modeling these types of changes, it becomes easier to understand how an increase in sales affects profitability, what level of delivery service can be achieved, and, above all, how the supply network needs to be adjusted so that the increase in sales results in the highest possible margin and as many satisfied customers as possible. Supply Chain Network Design is the tool for gaining insight into these matters.
Roger Lindau is a Senior Supply Chain Advisor at Oracle
Stefan Karlöf is the editor-in-chief of Supply Chain Effect
