Optimization technologies are powerful tools for improving supply chain performance. However, most companies leave lots of money on the table when they deploy them. Getting the most from them requires that companies spend time thinking about how they are going to be applied, how they will measure the results and the definition of success. The following points hold true whether you are optimizing inventory, transportation, labor, etc. in our supply chain.
Don’t just optimize what you do today. The typical question I hear when discussion optimization technology “How much will it save me?” In all cases, the answer I give is a range of costs (say 5% - 15%). The biggest reason for the range is the degree of change associated with use of optimization technology. The low side comes from optimizing the current processes and taking into account the current supply chain restrictions. The high side of the range is based upon looking at the business processes and restrictions and asking what could be done differently to take best advantage of the optimization technology. Deploying optimization technology provides an excellent opportunity to reexamine your supply strategies, tactics, etc. If you haven’t had a refresh of your supply chain in the last 5 years, there is a good chance that what you are doing today could be improved and many of the decisions that are being made are suboptimal or simplified because you didn’t have the tools to look either more broadly or deeply at the business.
Fix the overall definition of success with key metrics prior to deployment. When this doesn’t happen, deploying these tools becomes a subjective and painful journey. For example, in the world of route optimization it is not uncommon to hear from the existing planners that they don’t like the way the optimized routes “look”. What does “look” mean? If the goal was reducing total miles and vehicles, then they may not look like the nice “petal” routes that the planner put together in the past. However they may have taken out 15% of the miles driven and 10% of the fleet that used to make the same number of deliveries. That’s the definition of success. If you get that definition up front, you will be amazed how quickly you can get the value you are expecting from optimization technologies.
The more variables and fewer restrictions the better the results. Optimization technologies work best when they have more flexibility to make as many trade-offs as possible. It’s why they can produce results that cannot be achieved by the human mind. In the world of logistics, there are lots of variables that can be traded off. For example, in a VMI environment, delivery quantity and frequency can be traded off to reduce transportation costs. As long as the end customer doesn’t run out of your goods, you can make all the transportation decisions you want and there is no reason to fix a transportation delivery schedule. Another extremely simple example of this came from a company that want to save money by consolidating its inbound transportation, but wasn’t hitting their savings targets because they had arbitrarily restricted the number of stops in a multi-stop run and weren’t eliminating as many LTL charges as they could.
Use optimization technology to help determine improvement opportunities. They really can be continuous improvement tools. It’s amazing how many opinions there are in an organization when it comes to where there may be savings. One of the ways to move from opinion to fact is to use optimization technologies to show the value of making changes to the business. If your optimization technology was “base-lined” to model your operational performance, then evaluating changes to its configuration can help identify where the big opportunities exist. Don’t underestimate this approach as optimization technologies are very good at finding counterintuitive answers. With all the “urban legend” in supply operations, sometimes the only way to make significant change that challenges the norm is to be able to compare the “what if” to the current performance. The great part of this approach is that you have a “sand box” that allow you to be creative without touching the actual operations. From there, all the doubters can dig into the results and verify the validity of the proposed solution.
Supply chain optimization technologies provide tremendous opportunities to improve productivity and customer service. However, their effectiveness can be severely limited by the deployment and success measurement strategies. How are you getting the most out of your optimization technology investments? Let me know.