When network optimization hit the scene in 2007, it made a big splash. Until that point, the decision to manufacture a product in one location versus another was primarily based on experience, intuition and some rudimentary (by today’s standards) data analysis. But the use of stochastic and deterministic analytics changed the game. For the first time, our supply chain team was able to take decades of experience in manufacturing, tax, trade, logistics and inventory management, and through math, infuse that expertise into a platform.
Seemingly overnight, we were able to connect the disparate parts and pieces of the supply chain and understand exactly how they worked together. We could isolate inefficiencies and spot potential problems. We could find lowest landed cost networks while factoring for service levels and risk. We could optimize across the entire supply chain, and move beyond siloed decision making. And most importantly, we could provide these insights to our customers faster and more efficiently than we ever dreamed possible.
Our customers loved it from day one. The depth of analysis and the precision of the modeling provided them with a level of assurance that they had never seen before. For example, even if manufacturing in Vietnam rather than China felt like the “right move”, prior to 2007, it was very hard to prove it with data. Network optimization changed that forever. Since it’s introduction, network optimization technologies and strategies have grown in terms of sophistication and granularity. Today, we can model everything from the use of different truck sizes in Europe versus Americas, to the impact of country-specific fee structures such as customs fees and VAT leakage. But while supply chains have become exponentially more complex since 2007, the ways in which businesses use this incredible tool hasn’t quite kept up. By increasing the frequency of exercises and expanding the scope of your strategy, your business can unlock even more value from network optimization.
For the most part, businesses tend to engage in network optimization only when a major change has occurred within their business. But a mother lode of value can be unlocked by expanding the variety of business impacting events that necessitate a network optimization refresh. The types of events that should constitute a network optimization session include: changes in demand patterns, product mix, sources of supply and regulatory environments as well as any significant fluctuations in fuel prices and currency valuations.
For example, take shifts in consumption profiles. By running network optimization scenarios at the first sign of significant changes in geographic consumption levels, you may be able to capture serious efficiencies by moving a portion of manufacturing closer to the emerging end-market. Or how about fuel prices, which have seen major volatility in the last few years. On several occasions, we’ve worked with customers to determine if their network was still optimal in light of increasing freight costs. This is particularly interesting at the component level where the benefits of manufacturing in low cost locations can be offset by rising freight costs at the multiple component level. In some cases, customers have moved manufacturing closer to the majority of the component supply to optimize costs.
At the end of the day, building higher frequency into your network optimization strategy is going to yield dividends in lowest landed cost. The question is how often should you do it? While the frequency depends on your industry and the pace of change within your business model, a good rule of thumb is every quarter. This ensures that you are continually aligning your supply chain network to how your business model may be evolving.
Companies typically look to network optimization to solve a specific objective for a specific function. It is not uncommon for a supply chain team to engage in a network optimization exercise for the sole purpose of lowering logistics costs or increasing on-time delivery. The problem with this type of approach is that it doesn’t account for other elements in the supply chain, like planning, sourcing, service level or fulfillment. If you are only optimizing for one element, what adverse effects does your new adjustment propagate across the rest of your supply chain?
The key to valuable network optimization is to clearly define an overall business strategy that your supply chain team can drive towards and align with. Once your strategy is set, the modeling algorithms can factor for the different functions within the supply chain using a “what-if” type of analysis. By analyzing the trade-offs between different elements for each set of scenarios, you can begin to pin-point the optimal scenario that will allow you to achieve your overarching strategic goal. This way, when you have completed your optimization exercise, you can be sure that you have arrived at the optimal solution for all of the different functions within your supply chain — not just one.
When used appropriately, the potential business value from network optimization is off the charts. With the speed of change being what it is in today’s markets, this technology is more critical than ever. This is low hanging fruit — and it’s something your team should be prioritizing in the coming year.
Alan Brown has worked in Asia and Europe within the EMS industry for 20+ years, leading global supply chain teams across various industry sectors including mobile devices, consumer products and enterprise and infrastructure.