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Your Guide to Logistics / Supply Chain.
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Logistics Network Design Principles

A Logistics Network Design initiative is a strategic analysis of your entire supply chain. Some of the strategic questions that are asked are:

• Do we have enough facilities to ensure we can meet future capacity requirements?
  
• Which facilities should be closed and/or consolidated?
  
• Is there an opportunity to make changes to the network to reduce logistics costs?
  

In order to answer these complex questions, it is necessary to set a project timeline. The duration of this project may range from six months to one year, depending on one key driver: the quality and availability of data from your systems. Here is a list of other milestones that need to be factored into the project plan:

• Develop the Current Financial Model
  

  Before you can make sensible decisions on what changes to make to your network, a ‘base case’ financial model needs to be developed. It should include the costs of all logistical activities such as Warehouse costs, Transportation costs, Inventory costs and Order Processing costs. You may need to link with your Finance department to obtain this information. At the end of this exercise, you should have a good idea of what the total logistics costs are for the year.

• Software Selection
  

  Due to the complexity of this analysis, a network optimization software package is in order. The software selection phase may be completed concurrently with the financial model-building phase above. One person on the project team should be responsible for sourcing the right software to meet the projects modeling needs.

• Data Gathering & Validation
  

  This is one of the key drivers to a successful project. It is imperative that the data from your current data warehouse (transactional data) be accurate. For example, when an item is received into the warehouse, are the correct product characteristics captured accurately? Some characteristics of interest would be cube, weight, carton dimension, hazardous materials, etc. One of the activities further into the project will be to create a summary of the product flows. This is accomplished by creating family groupings of products. For example, one product grouping may be “Conveyable cartons from an Asian supplier that are shipped to an Eastern destination in North America”. If the data is not ‘clean’ the flows will be misrepresented and this will affect the accuracy of the model.

• Create the Growth Plan
  

  Typically, a strategic analysis should meet the objectives of the network for a 5 year period. Although it is difficult to project the future with absolute certainty, growth rates should be estimated over the next 5 years. For example, a retailer may anticipate growth in cosmetics sales, however a decline in shoe sales. This will affect the types of products that will be handled in the future. Ensure that representatives from other major areas such as Sales & Marketing provide their input into the future growth plans.

• Analyze Current State of Operations
  

  A throughput and capacity analysis should be completed for the existing operations. This will help determine if there is additional capacity in the existing facilities or if there is excess capacity available. This will help develop the ‘scenarios’ later on. For example, if two facilities are half full, one strategic option would be to consolidate both facilities to save on fixed costs. The impact to the other logistical operations may then be identified.

• Greenfield Costs
  

  One of the reasons for undergoing this type of strategic study is to evaluate new location options. Greenfield costs are costs that are put into the model for new sites. Costs such as lease costs, property taxes and utilities should be researched. In addition, labor availability and average wages need to be inputted into the model afterwards. If the potential relocation means that you will have to fire your existing workforce, severance costs must be estimated and taken into account as well.

• Model Validation
  

  Once the project team has gathered all of the pertinent data it is time to create and validate the model on the network optimization software. This is crucial as if the model does not reflect reality, there is a slim chance that the ‘scenarios’ will be accurate as well. For example, if the current logistics costs (warehouse and transportation) are $1.0 M per year, the model should also reflect that.

• Develop Scenarios
  

  Once the ‘base case’ has been validated, then the scenarios may be modeled. At this point it is easy to ‘turn off’ the existing facilities and model volume being processed at a ‘Greenfield’ facility. The results will show whether or not it is more economically feasible to do so. Once the scenarios have been run (this may take the software a few hours as there are thousands of calculations involved), the results should be analyzed for accuracy and feasibility.

  At this point, the project team can present its results to management. If the above processes were completed with a high degree of accuracy, management will buy –in to the recommendations and make their strategic decisions.