Overview

Itisimportanttorecognizethatacompanysnetworkdeterminesitssupplychainefficiency
andcustomersatisfaction.Designinganoptimalsupplychainnetworkmeansthenetworkmust
beabletomeetthelongtermstrategicobjectivesofthecompany.Mostbusinessunitsor
functionalareaswithinacompanyareimpactedbyanetworkdesignproject.Whendesigning
asupplychainthefollowingstepsmustbefollowed:1)Definethebusinessobjectives,2)The
projectscopemustbedefined,3)Theformofanalysestobedonemustbedetermined,4)
Determinewhattoolswillbeused,5)Finally,Projectcompletion,thebestdesign.Oncethe
pathforwardisdeterminedandthedesignapproachhasbeencompletedcorrectly,the
businesswillreapmanysignificantbenefits.

WhatCreatesRealEconomicValue?

Business and operations strategythe formulation of strategies that drive investment,

operations, and competitive positioningis where all value begins. There are five strategic
questions that need to be answered:
1.
2.
3.
4.
5.

Whatbusinessisthecompanyinandwhy?
Howshouldvaluebeaddedtothebusiness?
Whatarethetargetmarkets?
Whataretheproductsandwhywillcustomersbuyfromthiscompany?
Whatcapabilitiesareneededtoassurethatthecompanyaddsvalueanddifferentiates?

Most companies develop strategies for target markets and products #3 and #4. Some at least
consider #1 and #2. Few companies resolve #5 effectively. This is generally because operations
strategies are not developed or implemented with the same scenario plan or rigor that is given to
the more often seemingly interesting issues of markets and products. The alignment of business
and operations strategies is often weak or non-existent.

The fact is that 90% of

business strategies are not
implemented through
operations as intended.

Mission and vision statements, plans, goals, objectives,

and performance measures while important for driving
execution, most often do not ensure that capabilities will
be built for scenarios from the business strategies.
Therefore, companies do not always have carefully
developed alternatives for customer demand, new
channels, competition, supply risks, and product
development.

Achieving clear and sustained alignment between

operations execution and the plans derived from business strategies is challenging. Leadership
understands the complexities involved, but are concerned that 90% of business strategies are not
implemented as intended. They are beginning to understand that supply chains are about more
than logistics regarding the buying and selling of goods, they are about competitive
differentiation and profitable business growth.

WhatIsSupplyChainNetworkDesignandWhyIsItImportant?

Leadership is concerned with alignment and how execution can best be used as an enabler of
business strategies rather than an inhibitor. Common questions asked by leadership are:

Ouroperationsandsupplychainsarenotdynamicorflexibleenoughtochangewith
ournewstrategies.Whatshouldwedo?
Weoftensettargetsformarginimprovementsthatoursupplychainscannotmeet,
howcanwemeetthesetargets?
Ourbusinessstrategiesarefocusedbetterthaneveronourmarketsandour
products.Ouroperationsdonotdifferentiateusfromcompetitor.Arethereways
tocompetethoughoperationfunctions?
Ourorganizationalstructurehindersourstrategies.Howdowegetallunitstowork
togethermoreefficiently?
Whyisitthatourinventoriesareeithertoohighorofteninthewrongstocking
locations,andweincurhighcostsjusttomeetdemand?Cantwebetteralignour
salesandoperationsprocesses?Howdowebecomemoredemanddriven?
Weneedtobemorecompetitive.Howcanoursupplychaingiveusacompetitive
advantage?

StrategyBeforeStructure:Smartcompaniesarerealizingthatthefirststeptoanynetwork
designistodeveloptherightoperationsstrategythatsupportsthebusinessstrategy.Thereis
nosubstituteorshortcut.Theoperationsstrategyspecifieshowoperationswillmeetthe
serviceneedsoftargetmarkets,whichcapabilitiesdistinguishthebusiness,anddeliversthe
operationalrequirementsofthedefinedvalueproposition.Theoperationsstrategydefinesthe
networkcapabilitiesthatarenecessarytorealizethebusinessstrategy.Thecapabilitiesarethe
operationalelementsofinfrastructure,businessprocesses,organization,technologies,and
solutionsthatcandeliverthespecifiedservices.Theoperationsstrategyisthestartingplace.
Withthesenewlyestablishedcapabilitiesthenetworkdesignwillevolve.Ifthereisnotaclearly
definedoperationsstrategythenavalidnetworkdesignprocesscannotbepursued.

DefiningtheProjectScope

Mostbusinessunitswithinacompanyareimpactedbyatypicalnetworkdesignproject.
Leadershipmustunderstandandsupportwhichdirectiontheprojectwilltakeinorderforitto
besuccessful.Thisiswhereacleardefinitionofprojectscopebasedontheoperationsstrategy
becomescritical.Whatquestionsneedtobeanswered?Whatfactorsneedtobeincluded?

Allsupplychainnetworkshavethesekeycomponents:customers,sources,facilities,
transportation,inventory,customerservice,andinformationtechnologysystemstonamea
few.Whereandhowthesearelocatedandmanagedwillbedeterminedfromanetwork
design.Someofthenumerousfactorsthatinfluencenetworkdesigndecisionsare:

NetworkStructure,Policies,Practices,andCosts

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WhatIsSupplyChainNetworkDesignandWhyIsItImportant?

Facilitiesnumbers,locations,roles,capacities,expansioncapabilities,constraints,
andcosts
DistributionCenters(DC),FulfillmentCenters(FC),StoreOperationshandling,
storage,capabilities,productivity,constraints,andcosts
ManufacturingOperationscapacities,leadtimes,andcosts
Transportationpolicies,practices,modes,servicetimes,andcosts
Sourcesimpactofsourcingfromvarioussuppliers,leadtimes,productflow,
inventory,andcosts
ExecutionSystemssuchasOMS,WMS,TMS,andLMS
Portredundancyandtransportationcontingency
RealEstateAvailabilityoffacilitiesandsites,closenesstotransportation(seaports,rail,
airports),availabilityoflabor,andlocalutilities
Inventorydeploymentpolicieswhereisinventorystocked,thequantity,andthecost
TESCMtaxes,tariffs,duties,dutydrawbacks,exchangerates,andtransferpricing
Incentivesandgrants
Securityimpactofsecurityinitiativessuchas,CTPATandCSI.
Governmentregulations
CustomerServiceratesandlevels
Politicalstability,clearlegalsystem,andsigninginternationaltreatments
Competitivefactorslocatingtocapturethemarketcustomerresponsetimeandlocal
presence
Sustainabilityminimizingcarbonfootprint
FinancialImpacts
Capitalrequiredfornetworkchangestothecompanysfaculties
CostsandP&Limpacts
Cashflowandtiming
BusinesscaseROI

Figure 1
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WhatIsSupplyChainNetworkDesignandWhyIsItImportant?

Figure1depictsthecomplexitythatanendtoendsupplychainanalysisshouldincorporate.
Networkdesignthatisfoundedonafactbasedquantitativeanalysisshouldbecoupledwitha
reviewofprocesses,technology,andpeoplethat:

1. Ensurealignmentwiththeoverallbusinessenvironmentandgrowthstrategyto
minimizecostsandachievedesiredservicelevels
2. Utilizesthebestanalyticaltoolfortheindividualprojectobjectives
3. Analyzealternativeprocessestomaximizereturnoninvestmentwhiledelivering
improvedoperationalmetricsforcustomerservice,inventorycontrol,and
transportationperformance
4. Modelthedesignwiththeintenttoberefreshedwithchangeininventorypolicies
transportationroutes,costs,andservicelevelchanges,newproductlaunches,orsupply
changes
TypesofNetworkDesignAnalyses

Whenacompanydecidestoevaluateitsnetwork,leadershipmustfirstaddressthetypeof
effortthatshouldbeperformed.Networkdesignsfallintothreebasiccategories:

1. StrategicNetworkDesign:HowdoIredesignmynetworkoffacilities,sources,
transportation,inventory,productflow,policies,andpracticesinawaythatbestmeets
theoperationsstrategiesandthecompanysoverallgoals?Strategicnetworkdesign
oftenfollows:

Amajorbusinessexpansion,suchasanacquisition
Achangeinbusinessstrategy,suchastargetingnewmarketopportunities
Thechangeofthebusinesswiththepassageoftime
Respondingtocompetitivepressures

2. TacticalOptimizationofanExistingNetwork:GivenafixednetworkoffacilitieshowdoI
findbetterwaystosupportneartermplanningdecisions(facilityuse,inventory
deployment,transportationoptimization,sourceselection,productflow,andpolicies)in
ordertoleverageexistingnetworksformoreimmediategains?Theprimarypurposeof
tacticalplanningistoplanpoliciesandprogramsandtosettargetstoaccomplishthe
companyslongtermstrategicobjectives.Tacticalplanningmustanticipatethefacility
workloadstopreventoverloadingtheprimaryresourcetheworkforceduringpeak
demand.Inaddition,thetacticalplandefineshowtodeveloptheresourcesneededto
achievethegoalsinthestrategicplan.Forexample,ifafirmdecidesinitsstrategicplan
thatitrequiresanewwarehouselocationtoenhancecustomersatisfaction,thenthe
tacticalplanshouldallocateresourcesfortheneededfacility.

3. ContingencyPlanning:Howdoesmynetworkhandleunexpectedemergenciessuchasa
fireordisruptiontosupply?Contingencyplanningisoneofthemostoverlookedtools
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WhatIsSupplyChainNetworkDesignandWhyIsItImportant?

forsoundnetworkdesign.Thisisadefensivetoolusedtoguardagainstfailureresulting
fromunpredictablechangesinoperations.Contingencyplanningshouldaskwhatif
questions.Forexample:Whatifamajorsupplierisonstrikeorwhatifwehada
recallorwhatifmyprimarysupplierlocationisdestroyedduetoamajorweather
event?Apreparedmanagerwilllooktocontingencyplanningtocounterthe
potentiallydevastatingimpactsofthemanyemergencysituationsthatmaydirectly
affectdistribution.Contingencyplanningistheoppositeofcrisismanagement(putting
outfires).Theideabehindcontingencyplanningistosignificantlyreducetheleadtime
requiredtoimplementaplanofaction.

Eventsthatcanadverselyaffectadistributionsysteminclude:

energyshortages
strikes
naturaldisasters
productrecalls
actsofviolence
Toolstoconsider

Whilethereareanumberofwaystoapproachthenetworkplanningprocesses.Itisusually
donewithquantitativemodelingandoptimizationtools.Theadvantageofthesetoolsisthat
theycanevaluatethecomplexrelationshipsandtradeoffsoftheoverallsystembytying
togetherlargenumbersofvariablesinaconceptualframeworkthatmakesitmucheasierfor
theusertodefinerelationships.Thisprovidesthecapabilitytoexaminedozensorhundredsof
optionsthataredifficulttodosootherwise.

Therearetwomaintypesofplanningtools.

1. OptimizationToolsincludingthefollowing:
NetworkDesign:usedtodesignthebestnetworkoffacilitiesbybalancingthe
tradeoffsbetween,demand,revenue,costs,andcustomerservice
InventoryOptimization:usedtoidentifyoptimalinventorydeploymentpolicies
andquantitiesbyfacilityforagivennetworkoffacilities
TransportationOptimization:usedtodeterminethebestuseoftransportation
resourcesforagivennetworkoffacilities

2. SimulationTools:usedtoevaluatehowrealtimevariabilitycanimpactsupply
chainperformanceandrisk
AlternativeModeling/AnalysisTools:Ingeneral,thetradeoffsbetweenthesedifferent
approaches/toolsinvolvespeedversuscomplexityandtheneedtoachievegoodversus
optimalsolutions.

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WhatIsSupplyChainNetworkDesignandWhyIsItImportant?

ProjectCompletion,TheBestDesign

Onceleadershipunderstandsthecomponentsofthenetworkthenthescopeofaprojectneeds
tobedefined.Thetypicalapproachis:

1. ProjectLaunch:Thefirststepistoorganizetheprojectteamandgainalignmentonthe
businessandoperationsstrategies.Theprimaryfocusatthispointistodevelopalistof
criticalissuesandidentifyhoweachofthesemaychangeovertime.Agoodstartingpoint
fordiscussionstartswithareviewofthecurrentmarkettrends,competitiveandfinancial
pressures,andtheoperatingenvironment.Next,developavisionofthefuturemarket
needsandtheoperatingenvironmentnecessarytomeetthoseneeds.Thenetworkstrategy
mustclosethegapbetweencurrentandfutureoperatingenvironments.Oncethe
businessandoperatingstrategiesarefullyunderstoodthedetailednetworkplanning
processcanbegin.
Thesecondpartoftheprojectlaunchistodeveloptheoverallprojectmanagementprocess
includingtheprojectplan,expectedoutcomes,teamrolesandresponsibilities,project
reviewprocess,aschedule,andacommunicationsplan.Whenkickingoffanetworkdesign,
teammembersoftenforgetthatoneofthemostimportanttasksiscommunication.
Withoutcommunicationaplungeintotheretrievalofinformationanddirectiontoperform
anetworkdesignwillsurelyexperiencegapsandanintensivereworking.

CurrentAsIsAssessment:Nexttheteamneedstodocumentthecurrentnetworkin
ordertogainthenecessaryunderstandingofthecurrentnetworkstrategies,products,
customers,suppliers,facilities,operations,planningprocesses,ITsystems,andcurrentkey
performancemetrics.Theassessmentoftheasiscurrentstatewillproduceadetailed
descriptionofwhat,why,who,when,where,andhowthecurrentstateofthebusiness.
Itisagoodideatointerviewallinvolvedstaff.Tourallrelevantfacilitiesandassessthemin
termsofequipment,systems,configuration,capacity,andtheircapabilitytoabsorb
volume.Thisisalsoagoodtimetomapthecurrentsupplychainandtoconfirmthe
businesssituationandproblemdefinition.Otherinformationthatisusefulistogainan
understandingofcustomerrequirementsandexpectationsregardingservicetimes,order
placement,anddelivery.

TheFinalpartofassessingthecurrentstateistoconductabestpracticesGAPanalysisofall
operationstoidentifyGAPinperformance.

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WhatIsSupplyChainNetworkDesignandWhyIsItImportant?

2. DataCollection:Networkdesignprojectsrequireasignificantamountofdata.Typicaldata
requiredincludesoperationalandhistoricaldata:

Sites
Productsandcustomerinformation
Productflowsandvolumesincludingseasonality
Inventory
Products
Policies
Customerorderfiles
Inboundandoutboundshipments
Intranetworkfacilityshipmentsand
routings
Sourcing
Transportationrouting,modes,rates,service
Demand
Policies
levels,policies,andcosts
SupplyChain
Facilityinformationincludingassets,operations,
Trans.
Model
Policies
capacities,andcosts
Inventorypolicies,levels,andrequirements
Customerservicerequirements
Figure 6
Policies(sourcing,transportation,inventory,andcustomerservice)
P&Lforsupplychainoperations

3. DataValidationandAnalysis:Asdataiscollecteditneedstobevalidatedtoensurethatit
isnotpolluted.Itmustaccuratelyrepresentthecurrentbusinessandnetwork
performance.Thisisdonetoensureentiretyandvalidityofdatarequiredforthebaseline
modelandtoaggregatetheproductandcustomerdemanddatatotheappropriatelevel.

Oftentimesthisbecomesaverychallengingstep.Thecompanymustunderstandthat
networkdesignprojectsrequiresignificantresourcesthatrecognizeasenseofurgencybut
alsoaneedtoensurethattheinformationcollectedisaccurate.Therearecostsand
impactstotheaccuracyofthenetworkanalysisifthebeginninginformationisinpoor
condition.

4. BaselineModel:Create,configure,calibrate,andvalidateabaselinemodelthataccurately
replicatestheexistingasisnetwork.Reachamutualconsensusfortheanalyticalbaseline
thatwillbeusedtocomparethepredictedcostandserviceimprovementswithalternative
networkscenarios.Runbaselinescenarioanalysesandvalidatemodeloutputforhistorical
volumesandperformance.Ifrequiredreturntothebaselinemodelandrecalibrateuntil
consensusisachievedonbaselineresults.EstablishevaluationcriteriaandKPIsforall
networkscenarios.

5. ScenarioModelingandAnalysis:Identifyalternativenetworkdesignsthatmeetthe
businessstrategies.Testandanalyzethealternativedesignsusingthemodelandanalysis
outsidethemodelinordertogaininsightintothecomparativepotentialbenefitsofthe
variousnetworkdesigns.Scenariomodelingiswherethecompanyneedstoidentifythe
impacttocustomerservicedelivery.Includingdemandaspartoftheanalysisofascenario

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WhatIsSupplyChainNetworkDesignandWhyIsItImportant?

focusesontherevenuesideoftheequationandnotjustthecostside.Thedesignobjective
becomesprofitablegrowthandnotjustcostoptimization.
CompaniesalsoneedtopayattentiontoALLofthecostsassociatedwithfulfillment
including:capital,expense,andoperatingcostsforallfulfillmentfacilitiesDC,FC,RFC,
LFC,LFCP,andstores.Forexample,ifstoresareusedforfulfillmentofecommerceorders
thenthecostofarrangingthestore,settingupthesystems,hiringanyadditionallabor,and
trainingneedstobeincludedintheinitialcapitalandexpense.Theimpactthestore
fulfillmenthasonproductflowandorderfulfillmentattheFCorDCneedstobe
considered.
Executingthemodelforeachnetworkscenariowillidentifythe:

Networkconfigurationincludingthenumberoffacilities,locations,roles,sizes,
capacities,andcosts
Facilityhighleveldesignconcepts,capital,operatingcosts,andperformance
Transportationrouting,modes,rates,servicelevels,andcosts
Reverselogisticsandcustomerreturns
Inventorylevelsanddeploymentcosts
Networkperformanceincluding:
Projectedimpacttodemand
Totalcoststoserve(facilities,labor,transportation,andinventory)
Customerservicelevelsbychanneland/orlocation
Overallvaluepropositioncoststobenefits
Formostpromisingnetworkscenariosrunsensitivityanalysisaroundservicelevels
andkeydrivessuchas,transportationrates,fuelprices,laborcosts,andorder
volumes
Finalizeeconomicanalysis
Determinetransitioncoststoimplementeachalternative
Capital
Expense
Offsetsforgrantsandincentives
Developfinancialmodeltoprovidethecompletecashflowstorybyscenarioto
includetotaloperatingcosts(facilities,labor,transportation,inventoryholdings,
andcosts)capitalexpenditurerequirements,inventoryassets,andonetime
expenses
Finalizefinancialanalysisaccordingtopreferredmethods

Itisalsoabestpracticetoperformaqualitativeanalysisthatlooksatriskoffactorssuchas,
customerservice,personnel,easeofimplementation,culturalconsiderations,profitability,
supplychainrisks,andcashimpact.Theseshouldberatedandpresentedaspartofthe
overallrecommendations.
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WhatIsSupplyChainNetworkDesignandWhyIsItImportant?

6. NetworkStrategyFormulationandPathForward:Thelaststepistofinalizethenetwork
designanddevelopapathforwardforimplementation.Thenetworkstrategyneedstobeclear
toleadershowtogofromtheexistingnetworkinfrastructureandoperationstothe
recommendednetwork.Thesestepsinclude:numberoffacilities,conceptualdesigns,their
roles,sizes,andlocations.Productflowsinclude:operationalprocesses,implementationplans
detailingworkblocks,sequencedtimeline,resources,capitalrequirements,andoperating
costs.Marketimpactassessmentandfinancialanalysisincludes:capitalinvestment,operating
costs,andcashflow.LastaROIneedstobemeasuredalongwiththebusinesscaseforthenew
networkdesign.

InConclusion

Howacompanymustpreparetoevolveasupplychainnetworkdesign:definethebusiness
objectives,definingthescopeoftheproject,whattypeofnetworkdesignanalyseswillbeused,
toolsconsidered,andprojectcompletion,thebestdesign.Oncetheseareaddressedasupply
chainnetworkwillbeoptimalforhelpingacompanytomeetestablishedgoals.

Aworldclasstransformationalsupplychainbeginswithanetworkthatutilizesanall
encompassingviewofthevariousbusinessoperationsthatmanagethedeliveryofproductsto
customers.Theresultissignificantcapital,operational,andtaxsavingshelpingtoachieving
optimalcustomersatisfaction.

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