Network Design: the 5 good questions to ask

A lot of our clients reflect upon the relevance of their network design and wish to challenge their flow organization in order to address the stakes of reactivity and efficiency imposed by the market. This reflection is even more necessary that most retailers (more than 80% according to recent polls) and an increasing number of industrials tackle the omnichannel battle. Being closest to the consumer, providing quick and customized service at the lowest cost… many challenges that put high pressure on logistics networks and force players to rethink their organization. How many warehouses and where to place them? What storage strategy to associate? What delivery method to choose?

Oftentimes, the evolutions of logistics networks are done under constraint, for instance to compensate deficits of storage surface. In France, more than 8 million square meters of additional storage surface have been put out on the market in 2018 by 40 logistics players. This approach is pushed by a global trend of regionalization of just-in-time production.

Yet, to be efficient, the flow master plan cannot be apprehended opportunistically, link by link, but rather in a holistic way. The network design is part of a mid/long term logic and aims at supporting the company’s business plan implementation. This requires the top management’s implication in order to have a transversal reading of the challenges and opportunities faced by the company. The evolution of supply and demand will have to be integrated upstream in the different scenario modeling, implying a reflection in the break.

In the most mature organizations, the network design will even be used to draw change management in other corporate functions because it moves the set of corporate functions.

benchmark 2018In a recent benchmark among players of the retail sector (brand with a network of at least 100 stores in France), the declared costs of their Supply Chain fluctuate between 8 and 15%. These cost gaps are partly due to specific services offered by the different brands. For instance, the fact of offering to customers and/or stores, a per unit preparation requiring an unpacking operation, increases structurally the picking costs by 2 to 3%. Without mentioning the costs implied by a customer promise to D+1, allowing a craftsman to place his/her orders at 5pm in order to be delivered the day after on his site before 7am…This creates additional costs that need to be precisely estimated on the field to let the decision maker pick the right choices in terms of service offerings.

Mind the popular misconception that outsourcing logistics is THE solution to optimize the couple cost/service. Indeed, it will increase the business expertise and bring flexibility but it can also be disappointing. The markup operated by providers represents on average between 5 to 15% of increase compared to an internal production. Furthermore, if the handled products present strong specificities for instance in terms of congestion or fragility, it is more than likely that your current logistics team have an expertise that will be very difficult or expensive to find amongst the market players.

 

Once you’ve had this operational understanding of your costs, you will have all elements in hand to define the right level of service that you want to offer. For instance, the linear improvement of delivery times can be very expensive and sometimes completely unnecessary compared to your customers’ or prospects’ real expectations.

In addition to an interpretation per product type, the reflection should also relate to the customer segmentation according to their attractiveness. This attractiveness can be assessed according to the margin or market growth level or to the customer’s turnover potential increase.

Example of Matrix

Product types-costing

The definition of customer promise requires a very good knowledge of the market. For example, we have been recently asked by a cosmetics subcontractor to reduce its lead time from 14 to 10 weeks on the market. Collaborative workshops allowed us to find out that the current lead time was perfectly acceptable by the contractors. However, the latter is completely uncompromising on the respect of this commitment. We have reworked the flow organization in order to secure this lead time, without applying additional constraints on the flow scheme.

In the various modelized scenarios, a robust sensitivity analysis must be realized in order to check the impact of hypotheses on the cost, quality and lead time results. A wrong anticipation of risks leads to important additional costs, whether they are indirect through dispute processing in 60% of cases or direct with the application of penalties in more than half cases. They can even result in customer loss in 30% of cases. Some risks are relatively well apprehended by industrials, like supplier risk which appears now almost systematically in the model’s evaluation grids, or country risks which lead to a world known and shared ranking, created by FM Global, an American damage insurance company.

However, other parameters are much more difficult to model because they’re often unknown.

In the first place, there is the regulatory risk. For example, the customs charge evolutions represent a confusing factor for Supply Chains in our global economic paradigm. Closer and more concrete, the taxation threat which constrains refrigerated freight is like a sword of Damocles above logistics flow schemes with per kilometer costs which could triple. The multicriteria analyses and the workshops conducted within the network design study allow to choose the scenario that will optimize benefits while limiting risks. The most resilient organizations use “what if” scenarios in order to build a continuous activity plan and secure quick backup plans’ implementation.

The transition plan generally falls within a period of 2 to 3 years to let all players of the value chain adjust their job to this new scheme. It is essential that the identified projects involve the entire organization, as the project’s success isn’t only the Supply Chain’s responsibility. The crucial role of IS in these projects is obvious and requires the right level of technical competencies (internal or external). One of the key success factors through the network design evolution lies on the good evaluation of necessary resources and an agile driving of potential threatening bottlenecks. The savings and benefits planning will systematically be linked to a resource plan in order to have a realistic understanding of P&L impacts on a short and mid-term.

The entire organization and its partners must be aligned on the target flow scheme which will let either the organization follow new dynamics, or accelerate its decline, in case of failure. Priorities and projects phasing are an integral part of the network design. All industrials agree on the fact that one of the key success factors of such a large project is to make all the impacted employees share responsibility, be it operational people in Supply Chain, marketing, procurement or finance positions. All must be convinced by the approach in order to support the project both internally and among clients. Indeed, with the digitization of the purchasing act, there is no doubt that the network design, is more than ever, a differentiating strategic element for the company.

 

In a nutshell…

All of these questions are necessary if one wants to define an optimal flow scheme. Numerous network design solutions exist to support this strategic reflection but beware of the shortcut that implies that the tool will answer the questions. Its utilization is, on one hand, often limited by the level and the size distribution of the available data and will not be able to replace collaborative workshops among jobs. Once defined, the network design should then be regularly challenged, as many internal and external parameters influence this equilibrium.