Archives for May 2014

Supply Chain Network Optimization: Part 2 - Creating and Running the Model

By Ian Hobkirk | 05/28/2014 | 1:29 PM

Blue world map

This post is the second in a series of three blogs on supply chain network optimization. The first discussed ways to properly prepare for a network optimization to drive a faster project timeline and more accurate outputs. In this post, I will focus on concepts to consider and mistakes to avoid as your company develops and runs your model. The next installment will cover ongoing use of your model for continuous optimization. 


  1. Spend time with future demand projections:  The biggest variable in any supply chain network optimization is usually the demand volume. Using a single demand projection by product, channel and region mix is often a gross oversimplification, as is using next year’s annual operating plan. In reality there are usually too many variables to estimate, and because each of these variables can influence the overall cost in a big way, ranges of volume should be tested within the product/channel subsets. Optimizing using demand ranges provides a clearer picture of cost curves and the levers that influence costs.
  2. Validate the data assumptions that the modelers have to make:  Every analysis requires filling in some missing data gaps. The goal is to have all of these assumptions be benign and directionally correct. The project’s executive sponsors should be aware of all assumptions which have been incorporated into the model.
  3. Get real world inputs:  Many times a study requires key cost and location inputs in new service areas. Understanding the flow of goods, and the cost of real estate, labor, taxes, incentives and other factors when looking to expand into new regions is integral to making a good long-term decision.
  4. Avoid only ‘optimizing’ a portion of the supply chain network:  Any study that doesn’t look at the full flow of goods and total costs might be adding costs or service time when it is intended to achieve the opposite. A total cost perspective is vital.
  5. Ensure that customer service time is a central part of the discussion:  When deep in the trenches of a data exercise, it can be easy to forget that the reason your company needs distribution centers at all is because customers want products faster than they can be produced to order. If this isn’t one of the first discussion points with the modeling team then this point can get lost in the effort to reduce costs.
  6. Take a hard look at cost sensitivity of the ‘best’ network:  There should be two primary concerns with sensitivity: testing different demand sets and running sensitivity analysis against a given demand set. Some tools are particularly good at taking advantage of the embedded sensitivity capability which allows users to easily perform sensitivity analysis as a standard process step.
  7. Don’t include non-activity-based fixed costs in the model:  As the model is constructed, often the real costs that are meaningful to the optimization are activity-based costs. For this reason many standard fixed costs are correctly left out of the model and added back only when comparing the total costs of each potential scenario.
  8. Do not ignore seasonal effects:  The most accurate way to handle seasonality is to model each season separately, which results in a network plan that best matches seasonal demand throughout the year.

Stay tuned to read about ways to ensure your supply chain network model can be used for ongoing optimization. For a more in-depth view of these points, read the whitepaper: Supply Chain Network Optimization - Three Ways To Avoid a Project Mishap.

Supply Chain Network Optimization: Part 1 - Preparation is Half the Battle

By Ian Hobkirk | 05/08/2014 | 5:38 AM


With all the change the past six years have brought, it seems as though many companies have prioritized supply chain network optimization as one of their top strategic initiatives this year. I’ve talked with dozens of companies who are seeking the “right” answer for where to strategically place their distribution centers in relation to their product sources and customers. As retailers see high growth in e-commerce and further solidify what omni-channel commerce means to their companies, they are restructuring their networks to efficiently support concepts like store fulfillment and faster direct-to-consumer deliveries, etc. Other companies in different industries are simply looking for ways to impact risk, transportation costs and service. Regardless of what is driving a particular company’s need to re-evaluate the network, a supply chain network optimization, when executed properly, can set the stage for a company’s operations strategy for years to come, revealing the optimal locations for manufacturing and distribution points, as well as the best way to leverage inventory and transportation to support growth.  

This blog will be the first in a series of three parts. In this post, I’ve highlighted some things to think about as you prepare for your network optimization project. Subsequent posts will cover tips for project execution, and ongoing optimization. For a more in-depth view of these points, read the whitepaper: Supply Chain Network Optimization - Three Ways To Avoid a Project Mishap.


If supply chain network optimization is in your company’s future, here are some things you can start doing NOW to prepare for a smooth study:

  1. Improve transportation data capture: Make sure your company’s systems are capturing waybill information with each order shipped. This information will allow an accurate view of cost-to-serve for a given customer and can help identify short-term cost saving opportunities.
  2. Improve your data integrity:  Improving your data integrity and getting your data into a position to be extracted accurately is possibly the biggest way you can speed up your network optimization process. Data collection, clean up, and validation are the most common culprits of delayed project timelines.  Invest time upfront in improving the data connections and analytical databases.
  3. Form the right team - Strategic supply chain network optimization projects need to be supported across functional areas. The team must know the targeted performance goals (the “why”) and the importance to the business of the task they are assisting with, and be accountable for the changes in their functional area.
  4. Develop a process to act quickly on improvement recommendations: Windows of opportunity can close quickly. Be ready to implement the recommendation. 

Stay tuned to read tips for executing network optimization studies.






The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About Ian Hobkirk

Ian Hobkirk

Ian Hobkirk is the founder and Managing Director of Commonwealth Supply Chain Advisors. Over his 20-year career, he has helped hundreds of companies reduce their distribution labor costs, improve space utilization, and meet their customer service objectives. He has formed supply chain consulting organizations for two different systems integration firms, and managed the supply chain execution practice at The AberdeenGroup, a leading technology analyst firm.


Popular Tags

Subscribe to DC Velocity

Subscribe to DC Velocity Start your FREE subscription to DC Velocity!

Subscribe to DC Velocity
Go digital