Network Optimization

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Overview of Supply Chain Network Design

Network Optimization

  1. 1. Supply Chain Network Design An Overview
  2. 2. Supply Chain Network DesignWhat is it? Supply Chain Network Design is a strategic exercise undertaken to evaluate and recommend changes to the physical supply chain of a company consisting of 1. Inbound RM Movement from suppliers 2. Inbound RM Storage locations 3. Manufacturing locations and capacities 4. Outbound FG movement to customers 5. Outbound FG storage locations To Impact 1. Asset Utilizations 2. Total Landed cost incurred to service customer demand 3. While maintaining desired service levels 4. To improve operating margins
  3. 3. Supply Chain Network DesignWhy is it important? Key Points 1. Physical Network Decisions impact fixed costs of the supply chain network 2. These decisions, once taken and implemented, require effort and costs to change . So a detailed analysis of outcomes and scenarios is important 3. Multiple changes to the network – new products, new markets to serve, alternate modes of transport may make the existing network sub optimal. Hence a network design study becomes important.
  4. 4. Supply Chain Network DesignKey Triggers for this Study- A mix of external and internal factors 1. External Factors a) Changes in government regulations( eg: Introduction of GST in India, Changes in Manufacturing incentives given by government) which impact supply chain networks b) Changes in business environment which may force a relook at supply chain network 1. Internal Factors a) Aggressive growth plans/investment plans of companies and hence a need to check the suitability of network to support the plans b) Introduction of new revenue streams – new products, new markets and the need to design networks to support them c) Mergers/Acquisitions and need to rationalize and design supply chain network for new entity d) Need of companies to periodically revalidate and rationalize the existing supply chain network
  5. 5. Supply Chain Network DesignSome Questions which can be Answered 1. What is the most profitable supplier-plant-warehouse-market mapping for material flows? 2. How many warehouses are needed in the network ? Where should they be located? What is the estimated size of warehouses ? 3. What is the desirable mode mix for servicing demand? 4. What is the best location for setting up a new plant? What should be the capacity expansion rollout plan – where, how much, when? 5. Should capacity be ramped up in existing plant or should a new plant be setup? 6. Own/Rent Decisions( eg: Subcontract v/s Own Build Up) 7. On/Off Decisions: At what level of demand should a new warehouse be activated? Or a new manufacturing line be setup? 8. Is the current network geared to support the company’s growth plans? 9. How do government incentives and tax policies impact the supply chain network?
  6. 6. Supply Chain Network DesignThe Approach1. Analyze business strategy for the medium/long term (2 to 6. Build Baseline scenario 6 years) a) Ensure data accuracy and completeness.2. Identify supply chain objectives required to meet business b) To validate the model for strategy. representativeness to current network.3. Identify most likely business scenarios related to c) Get incremental improvements in current a. Marketplace – competition, demand, pricing, new operations products/markets 7. Simulate scenarios b. Operational – capacity usage, costs, logistics, a) Check the current network’s ability to warehouse consolidation. handle them c. Strategy – outsourcing, contract manufacturing, M&A, b) Determine network changes required to expansion. handle marketplace scenarios.4. Validate the scenarios. Build a final list. 8. Develop management reports and evaluate5. Finalize the evaluation criteria for the scenario simulation scenario results. a. Service level a) Compare against baseline scenarios – b. Revenues (sales volumes) costs, profits, utilization. c. Total Landed Cost b) Supply chain robustness assessment d. Asset utilization (percentage usage of supply chain 9. Select suitable network strategy to meet resources) supply chain objectives. 10. (Optional) Build implementation plan for the selected strategy 11. (Optional) Undertake implementation/execution of implementation plan.
  7. 7. Supply Chain Network DesignKey Activities SCENARIO RESULT, BUILD, ANALYZE & BASELINE UNDERSTAND STRATEGY SCENARIO PREPARATION, SENSITIVITY PREP PHASE CURRENT NETWORK and OBJECTIVES MODELING and ANALYSIS ANALYSIS,FINAL MODEL STRATEGY Step 1 Step 2 Step 3 Step 4 Activities: Activities: Activities: Activities: 1. Understand 1. Baseline current 1. Identify and finalize 1. Comparison of business strategy physical network business scenarios – scenario results for short/mid/long 2. Baseline current Scenario identification with baseline term linkages, service workshops 2. Interpret & 2. Identify supply levels and costs 2. Finalize evaluation validate solutions chain objectives 3. Validate baseline criteria 3. Sensitivity analysis required to meet model results 3. Detail new set of date to measure business strategy 4. Validation of the inputs & constraints robustness costing models and 4. Simulate scenarios 4. Network strategy assumptions used to 5. Perform network recommendations construct the model analysis for scenarios 5. Value potential summary Required data identification, aggregation, extraction and validation Deliverable: Deliverable: Deliverable: 1. Validated baseline 1. Final scenario list 1. Sensitivity report model 2. Evaluation criteria 2. Network strategy 3. Scenario results recommendation and value potential
  8. 8. Supply Chain Network DesignKey Inputs LOGISTICS PRODUCTION 1. Current Hubs & Warehouses(WH) 1. Plants (Own & Sub Contracted) 2. Current Plant Locations 2. Line production capabilities (product mix) 3. Product specific Plant-WH linkages 3. Line-Product production capacities. 4. Product specific Hub-WH linkages 4. RM , PM & Conversion costs at plant 5. Linkages -WH and Towns/Markets locations 6. Weight Volume definitions -SKU’s and 5. Capacity Ramp up plans, if any Transport Modes 6. Applicable Taxes 7. Dispatches for year/time period 7. Applicable incentives at plants considered in baseline 8. Sub-Contracted purchases, Inter WH flows, BOH & EOH stocks OTHERS 9. Applicable Taxes on movement of goods 1. Product aggregation approach 10. Primary freight costs 2. Discontinued products 11. Secondary freight costs 3. New launched products 12. WH Fixed and Variable (handling) costs 4. Markets-Products that are directly served from Plants SALES & MARKETING 5. Net realization price of products 1. Validated Sales data 2. Sales Projections/Forecasts for years under study SCENARIO DATA 3. Market Definitions(Districts/Towns) 1. Cost and Capacity data, as required , depending on scenarios
  9. 9. Supply Chain Network DesignKey Assumptions for Analysis Model Design Elements Time Horizon for Study Product Representation for Analysis( SKU or Brand Pack etc.) Geographical Representation( Town/Market/ State) Transportation Modes to be included( Road, Rail, Air, Sea) Service Assumptions, if any including predefined linkages for material flow Demand Assumptions Scenario Assumptions Channel Assumption - Channels to be considered for analysis Cost Assumptions( for example, analysis to be done based on operational costs etc.)
  10. 10. Supply Chain Network DesignRepresentative Model of Supply Chain – An Illustration Objective: Build a analytical model to represent the supply chain structure, key processes, constraints and cost that is representative of the actual operations. Once built and validated, this will be used for running simulations to evaluate future state network structure.1. RM & PM Costs2. CC Cost3. Capacities Company Network Markets4. Line Capability WH5. Excise, IT Benefit Plant Contract Manf. 1. Demand projections by 1. Valid O-D pairs, by product: Market & Product a. Plant-WH 1. WH handling costs Distributors 2. For Time Horizon b. WH-WH 2. WH Market linkages under study 2. Freight cost 3. Delivery charges
  11. 11. Supply Chain Network DesignIllustration of an Approach Network Model Network Model Design Build As-Is Understanding Current Network & Validation Projections Data Collection Baseline on Current Network Location/Mode Mix Short Listing (Build Model & for Evaluation Validate Results) New Network(WH/Hub) New Plant Location Current Capacity Assessment Assessment Assessment Scenario Result Set & Identification Reports New Network Potential Plants Validation Validation Workshops Data Collection Data Collection
  12. 12. Supply Chain Network DesignAnalysis Tool A. Analysis use Operational Research tools which are based on industry standard solvers B. Tools: 1. Linear Program + Integer Program based 2. Used for evaluation of all scenarios (Plants, WH, Capacity etc.)
  13. 13. Supply Chain Network DesignThe Baseline Network Model 1. To Ensure accuracy of supply chain network model to correctly reflect the company supply chain structure, constraints and costs. All future state scenario WHY results are compared against the baseline model results to understand extent of possible improvement 2. To understand opportunities for improvement in the current existing network  Input past 1 year or 6 months shipment/dispatches as demand data  Input the production and material flow constraints. Input the costs in the HOW model  Publish the optimized model( from analysis tool) material flows and costs for comparison against actual data  Material flows should be along feasible lanes and representative of actual flows. Differences need to be analyzed  Costs suggested by optimized model should be representative of actual costs. VALIDATION The difference needs to be analyzed as possible improvements in current POINTS network  Demand satisfaction suggested by optimized model should be in line with actual
  14. 14. Supply Chain Network DesignIdentification of Scenario Options 1. Based on business plan priorities and future strategy of the company. a) Eg: The need to service focus markets with better service levels. Hence the supply chain network options need to be considered accordingly b) Eg: Decision to acquire another company and hence arriving at network rationalization scenarios 2. Based on competitive benchmarks of supply chain network 3. Based on supply chain networks of companies in other industries with similar characteristics 4. Based on state of and development of logistics infrastructure 5. Based on perceived market trends of freight rates etc. 6. Based on clean slate approach a) Eg: If the complete supply chain network needs to be redrawn again, what would be the new network b) The approach for this involves taking the demand distribution into consideration and selecting a series of inventory points or supply points on a clean slate, so that goods travel least distance. Objective is to minimize MT(weight)*KM(distance) index Scenario Results are compared to baseline results on multiple objectives/metrics 1. Overall Profit as given by the optimized network models 2. Service levels defined in terms of lead time required to reach markets 3. Total landed cost to markets
  15. 15. Supply Chain Network DesignSensitivity Tests 1. To check the robustness of proposed network( current network or based on scenario analysis results). A set of simulation studies done by varying the key inputs Typical Tests: 1. Based on varying demand a) Eg: If demand projection is increased by 20% then which capacities become constrained b) Eg: If demand projection is decreased by 20% then do all proposed warehouse still remain active or some of them get deactivated 2. Based on varying freights a) Eg: If road freights increase by 20% in comparison to freights of other modes what is the impact on the network 3. Based on Activation/Deactivation of Options and its impact a) Activation/Deactivation of warehouses b) Activation/Deactivation of modes available for material movement c) Activation/Deactivation of alternate lines of production or alternate plants
  16. 16. Supply Chain Network DesignAnalysis Output – Illustration1 2012 Curr N/W(Baseline) Scenario1 COST_TYPE VALUE VALUE Difference Inter WH FREIGHT COST WH HANDLING COST INCENTIVE COST PACKAGING COST PRIMARY FREIGHT COST PRIMARY HANDLING COST PRODUCTION COST RAW MATERIAL COST SECONDARY FREIGHT COST SECONDARY HANDLING COST WH FIXED COST TOTAL SYSTEM COST If Total System Cost(Scenario1) < Total System Cost(Baseline) then Scenario1 recommendations can be considered.
  17. 17. Supply Chain Network DesignAnalysis Output – Illustration2 With 2 Plants Opportunity Size %age Proposed New WH (in million Current Network New Network Structure Results INR) 2010-11 2011-12 2012-13 Opportunity With 2 Plant %age If WH5 Size is closed New (in million Current Network Network+Close INR) WH5 2010-11 2011-12 2012-13 Opportunity With 2 Plants Size %age If HUB1 is closed (in million New Network+Close INR) Current Network HUB1 2010-11 2011-12 2012-13
  18. 18. Supply Chain Network DesignAnalysis Output Current Network New Network (Baseline) 1. Recommendations Scenario Results 2. Opportunity Size 3. Reasons for Sensitivity Tests Opportunity Size
  19. 19. Supply Chain Network DesignSuccess Factors for Study 1. Data Availability  Timely  Accurate  Comprehensive  Right Format 2. Robust business scenarios identification and analysis 3. Engagement Ownership & Involvement  Active participation & involvement from company personnel across departments  Championing the project objectives within company’s internal organization by PMO and Business champions
  20. 20. Thank You

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