Flow Path Design An Alternative Approach to Distribution Network Design

A Point of View
By Tom Tiede

Flow Path Design An Alternative Approach to Distribution Network Design

Introduction A few years ago you did a complete overhaul of your distribution network. Major investments were made in infrastructure buildings, equipment, systems, etc. By most measures, it was a successful endeavor. Since then, your supply chain organization has focused on optimizing execution activities. You have been diligent about keeping up to date on industry best practices and employing them when practical. You have leveraged your planning systems to improve forecast accuracy, streamline replenishment orders, and balance inventory levels. Further, your transportation planning and warehouse management systems seem to execute flawlessly. So, why is it that your logistics cost are rising, inventory is increasing, and service levels are falling? Well, it could be a number of factors. Could it be due to the new product line Marketing launched two years ago or that major new customer in the Northeast? Perhaps it is because youre now sourcing most of your product from overseas? You may have saved a bundle on product costs but the lead times from your Chinese supplier arent nearly as short or as reliable as those from your former supplier in Milwaukee. Maybe its because of the company you acquired last year? You migrated their inventory into your existing facilities and shut down their operations with minimal disruption. But, did it have a residual impact? Perhaps. Reacting to Changes in Business Requirements All businesses change over time. A distribution network that was optimal just a few years can quickly become an anchor holding you back from meeting todays or tomorrows needs. In spite of the best of intensions, and in spite of the previous investments that have been made, all distributions networks need to be redesigned periodically. So, where do you start? Within logistics circles, the traditional approach is to suggest a distribution network modeling exercise. The intent of the exercise is to determine the appropriate number and location of warehouses within the distribution network needed to meet service delivery lead-time expectations at minimal cost in combined freight and warehousing expense. Reams of freight data are collected, cleansed and summarized into homogeneous freight movement classes. A few network design alternatives are defined. Then, each alternative is analyzed using an optimization algorithm, typically with commercial software. Its an intensive process heavily dependent on accurate data, solid assumptions, skilled modeling, and insightful definition of network design alternatives. Distribution network modeling can be a highly valid approach; particularly if these dependencies are well managed and sufficient time is allowed to digest the results. The scope of a distribution network optimization model is limited in nature. A typical optimization engine struggles to analyze more than a handful of product groups at a time. Further, the impact of merchandising attributes (seasonality, product promotions, etc.) is largely ignored, and the implications on four-wall operations, inventory management, and system requirements must all be analyzed outside of the model. In addition, the outcome is heavily dependent on the time and creativity invested in defining and analyzing alternative product flow paths. That said, distribution network modeling can still be a valid and valuable exercise when expectations are aligned with the capabilities the model.

A Point of View

By Tom Tiede

Flow Path Design An Alternative Approach to Distribution Network Design

A Better Approach A better approach is to begin by taking a strategic view of product flow path design. Before becoming deeply immersed in data and spreadsheets, you must look at where product is coming from, where it is going to, and the attributes that dictate how it should flow through the supply chain. For example, heavy product from a supplier in Ohio will likely be handled much differently than a light product sourced in China. Delivery to your most valuable customer with a warehouse in Memphis will likely be supported differently than an online shopper sitting at home in Seattle. New products for mass introduction during the fall season will likely be staged differently than year-round merchandise. Attributes such as these need to be understood in context with how they impact current flow and what alternatives are possible. Sourcing/Merchandising Considerations Size, weight, volume, seasonality, cost, Seasonality (short, med, long), basic, margin, pick-type (bulk, case, repack), opportunistic, push vs. pull decisions, point special & regulatory requirements of inventory ownership, Flow Path Alternatives From/To Considerations Central distribution, regional distribution, Ports of entry, single and multiple source direct-to-store, direct-to-customer, cross- points by supplier, customer locations, dock, flow-through, pool points, etc. distribution locations Service Considerations Other Considerations Days to deliver, delivery variability, order Transportation economies (e.g., alternative consolidation, store/customer ready modes), handling economies of scale deliveries (justification for automation), flexibility, variability of flow options by time of year, events (e.g., store openings), etc. Cost Considerations Product cost, handling cost, transportation cost, inventory, tax, admin/overhead, capital (e.g., facilities) Further, flow path design requires a form of a crystal ball look into the future. Often, this is best accomplished by learning from the past. Just as product forecasts are heavily derived from historical trends in demand, so too can your future flow path design be heavily derived by historical trends in your supply chain from both a quantitative and qualitative perspective. Whereas a distribution network model utilizes a static data set to derive a result, flow path design is not constrained by a snapshot in time. Trends in your supply chain can and should be considered. In addition, Macro-economic trends such as the rising trade imbalance with China and unstable fuel prices in the U.S. have likely had a major impact on your supply chain, and it would be foolish to ignore trends such as these as you prepare for the future. Flow path design should not be held hostage to data since the goal is to create a design for a future in which the data does not yet exist. However, it still requires a healthy bit of traditional analysis regarding cost (e.g. freight, warehousing), inventory, and service levels. Sensitivity analysis is also required. New demand points, new supply points, fluctuating volumes and changing cost factors will indeed occur. Brainstorming on what may happen and then understanding the potential impact is a worthwhile exercise before committing to a path forward. Product Attribute Considerations

A Point of View

By Tom Tiede

Flow Path Design An Alternative Approach to Distribution Network Design

For example, what would your distribution network look like if you factored fuel costs to be $3.75 per gallon vs. $2.50? How would it look if you sourced 50% of your product from China vs. Mexico? How would it look it if your customer required next day delivery vs. same week delivery? Although, no one can accurately predict the future, ultimately your future design must be flexible enough to accommodate requirements that are certain to change. Deliverables from a Flow Path Design The results of a flow path design strategy are six primary deliverables: 1. The business requirements and assumptions made for your future supply chain (e.g. volumes, service levels, performance targets) 2. The recommended flow of products from your suppliers to your customers to meet these requirements (segmented based on supply chain and merchandising attributes) 3. The operating model required to support the product flow path design, which addresses: Supply Chain Systems (e.g., supply chain planning, transportation management, merchandising) Organization structure Capital equipment Facility operations (stores, warehouses) 4. The anticipated impact on supply chain performance and supporting infrastructure Costs Inventory Service 5. An implementation roadmap Migration timing Required resources Critical business dependencies 6. A business case for moving forward. Cash flow analysis Competitive positioning Once completed, your organization is now strategically armed to address your long-term supply chain requirements. And, near term initiatives to address current shortfalls in performance can be prioritized and aligned within the framework of the future direction. You also have a far better framework in which to conduct more detailed analysis regarding your physical network (e.g. distribution network modeling), your supply chain applications, your internal organizational structure, and your trading partner relationships. The above framework of more detailed analysis must consider the ability for an organization to execute alternative flow path management. This will be a change for most organizations where products flow in consistent or common paths. Likewise, the variability and/or ability to flow the same product via alternative paths will require changes and/or improvements to enabling processes and systems. What is the trigger for changing product flow? How are the decisions made and managed? How can visibility be maintained? What is the impact to inventory allocation? These and many other questions need to be answered, which often require companies to improve supply chain planning, transportation planning and management, merchandise planning, etc.

A Point of View

By Tom Tiede

Flow Path Design An Alternative Approach to Distribution Network Design

Summary The intent of flow path design is to raise the level of both awareness and analysis to a more strategic level in designing your supply chain. By taking a more strategic view than traditional approaches, organizations are better suited to invest more wisely in infrastructure and prevent deteriorating levels of performance in spite of the best of intentions. While not a panacea, flow path design provides a compelling alternative approach to propel your organization to supply chain excellence.

A Point of View

By Tom Tiede