Overview of Supply Chain Network Design

1. Supply Chain Network Design
An Overview

2. Supply Chain Network Design
What is it?
Supply Chain Network Design is a strategic exercise undertaken to evaluate and
recommend changes to the physical supply chain of a company consisting of
1. Inbound RM Movement from suppliers
2. Inbound RM Storage locations
3. Manufacturing locations and capacities
4. Outbound FG movement to customers
5. Outbound FG storage locations
To Impact
1. Asset Utilizations
2. Total Landed cost incurred to service customer demand
3. While maintaining desired service levels
4. To improve operating margins

3. Supply Chain Network Design
Why is it important?
Key Points
1. Physical Network Decisions impact fixed costs of the supply
chain network
2. These decisions, once taken and implemented, require effort
and costs to change . So a detailed analysis of outcomes and
scenarios is important
3. Multiple changes to the network – new products, new markets
to serve, alternate modes of transport may make the existing
network sub optimal. Hence a network design study becomes
important.

4. Supply Chain Network Design
Key Triggers for this Study- A mix of external and internal factors
1. External Factors
a) Changes in government regulations( eg: Introduction of GST in India,
Changes in Manufacturing incentives given by government) which
impact supply chain networks
b) Changes in business environment which may force a relook at supply
chain network
1. Internal Factors
a) Aggressive growth plans/investment plans of companies and hence a
need to check the suitability of network to support the plans
b) Introduction of new revenue streams – new products, new markets and
the need to design networks to support them
c) Mergers/Acquisitions and need to rationalize and design supply chain
network for new entity
d) Need of companies to periodically revalidate and rationalize the
existing supply chain network

5. Supply Chain Network Design
Some Questions which can be Answered
1. What is the most profitable supplier-plant-warehouse-market mapping for
material flows?
2. How many warehouses are needed in the network ? Where should they be
located? What is the estimated size of warehouses ?
3. What is the desirable mode mix for servicing demand?
4. What is the best location for setting up a new plant? What should be the
capacity expansion rollout plan – where, how much, when?
5. Should capacity be ramped up in existing plant or should a new plant be
setup?
6. Own/Rent Decisions( eg: Subcontract v/s Own Build Up)
7. On/Off Decisions: At what level of demand should a new warehouse be
activated? Or a new manufacturing line be setup?
8. Is the current network geared to support the company’s growth plans?
9. How do government incentives and tax policies impact the supply chain
network?

6. Supply Chain Network Design
The Approach
1. Analyze business strategy for the medium/long term (2 to 6. Build Baseline scenario
6 years) a) Ensure data accuracy and completeness.
2. Identify supply chain objectives required to meet business b) To validate the model for
strategy. representativeness to current network.
3. Identify most likely business scenarios related to c) Get incremental improvements in current
a. Marketplace – competition, demand, pricing, new operations
products/markets 7. Simulate scenarios
b. Operational – capacity usage, costs, logistics, a) Check the current network’s ability to
warehouse consolidation. handle them
c. Strategy – outsourcing, contract manufacturing, M&A, b) Determine network changes required to
expansion. handle marketplace scenarios.
4. Validate the scenarios. Build a final list. 8. Develop management reports and evaluate
5. Finalize the evaluation criteria for the scenario simulation scenario results.
a. Service level a) Compare against baseline scenarios –
b. Revenues (sales volumes) costs, profits, utilization.
c. Total Landed Cost b) Supply chain robustness assessment
d. Asset utilization (percentage usage of supply chain 9. Select suitable network strategy to meet
resources) supply chain objectives.
10. (Optional) Build implementation plan for the
selected strategy
11. (Optional) Undertake
implementation/execution of implementation
plan.

7. Supply Chain Network Design
Key Activities
SCENARIO RESULT,
BUILD, ANALYZE & BASELINE
UNDERSTAND STRATEGY SCENARIO PREPARATION, SENSITIVITY
PREP PHASE CURRENT NETWORK
and OBJECTIVES MODELING and ANALYSIS ANALYSIS,FINAL
MODEL
STRATEGY
Step 1 Step 2 Step 3 Step 4
Activities: Activities: Activities: Activities:
1. Understand 1. Baseline current 1. Identify and finalize 1. Comparison of
business strategy physical network business scenarios – scenario results
for short/mid/long 2. Baseline current Scenario identification with baseline
term linkages, service workshops 2. Interpret &
2. Identify supply levels and costs 2. Finalize evaluation validate solutions
chain objectives 3. Validate baseline criteria 3. Sensitivity analysis
required to meet model results 3. Detail new set of date to measure
business strategy 4. Validation of the inputs & constraints robustness
costing models and 4. Simulate scenarios 4. Network strategy
assumptions used to 5. Perform network recommendations
construct the model analysis for scenarios 5. Value potential
summary
Required data identification, aggregation, extraction and validation
Deliverable: Deliverable: Deliverable:
1. Validated baseline 1. Final scenario list 1. Sensitivity report
model 2. Evaluation criteria 2. Network strategy
3. Scenario results recommendation
and value
potential

8. Supply Chain Network Design
Key Inputs
LOGISTICS PRODUCTION
1. Current Hubs & Warehouses(WH) 1. Plants (Own & Sub Contracted)
2. Current Plant Locations 2. Line production capabilities (product mix)
3. Product specific Plant-WH linkages 3. Line-Product production capacities.
4. Product specific Hub-WH linkages 4. RM , PM & Conversion costs at plant
5. Linkages -WH and Towns/Markets locations
6. Weight Volume definitions -SKU’s and 5. Capacity Ramp up plans, if any
Transport Modes 6. Applicable Taxes
7. Dispatches for year/time period 7. Applicable incentives at plants
considered in baseline
8. Sub-Contracted purchases, Inter WH flows,
BOH & EOH stocks OTHERS
9. Applicable Taxes on movement of goods 1. Product aggregation approach
10. Primary freight costs 2. Discontinued products
11. Secondary freight costs 3. New launched products
12. WH Fixed and Variable (handling) costs 4. Markets-Products that are directly served
from Plants
SALES & MARKETING 5. Net realization price of products
1. Validated Sales data
2. Sales Projections/Forecasts for years under
study SCENARIO DATA
3. Market Definitions(Districts/Towns) 1. Cost and Capacity data, as required ,
depending on scenarios

9. Supply Chain Network Design
Key Assumptions for Analysis
Model Design Elements
Time Horizon for Study
Product Representation for Analysis( SKU or Brand Pack etc.)
Geographical Representation( Town/Market/ State)
Transportation Modes to be included( Road, Rail, Air, Sea)
Service Assumptions, if any including predefined linkages for material flow
Demand Assumptions
Scenario Assumptions
Channel Assumption - Channels to be considered for analysis
Cost Assumptions( for example, analysis to be done based on operational costs etc.)

10. Supply Chain Network Design
Representative Model of Supply Chain – An Illustration
Objective: Build a analytical model to represent the supply chain structure, key processes,
constraints and cost that is representative of the actual operations.
Once built and validated, this will be used for running simulations to evaluate
future state network structure.
1. RM & PM Costs
2. CC Cost
3. Capacities Company Network Markets
4. Line Capability
WH
5. Excise, IT Benefit
Plant
Contract Manf. 1. Demand
projections by
1. Valid O-D pairs, by product: Market & Product
a. Plant-WH 1. WH handling costs Distributors
2. For Time Horizon
b. WH-WH 2. WH Market linkages under study
2. Freight cost 3. Delivery charges

11. Supply Chain Network Design
Illustration of an Approach
Network Model Network Model
Design Build
As-Is
Understanding Current Network &
Validation
Projections Data Collection
Baseline on
Current Network Location/Mode
Mix Short Listing
(Build Model & for Evaluation
Validate Results)
New
Network(WH/Hub) New Plant Location Current Capacity
Assessment Assessment Assessment Scenario
Result Set &
Identification
Reports New Network Potential Plants
Validation Validation Workshops
Data Collection Data Collection

12. Supply Chain Network Design
Analysis Tool
A. Analysis use Operational Research tools which are based on industry
standard solvers
B. Tools:
1. Linear Program + Integer Program based
2. Used for evaluation of all scenarios (Plants, WH, Capacity etc.)

13. Supply Chain Network Design
The Baseline Network Model
1. To Ensure accuracy of supply chain network model to correctly reflect the
company supply chain structure, constraints and costs. All future state scenario
WHY results are compared against the baseline model results to understand extent
of possible improvement
2. To understand opportunities for improvement in the current existing network
 Input past 1 year or 6 months shipment/dispatches as demand data
 Input the production and material flow constraints. Input the costs in the
HOW model
 Publish the optimized model( from analysis tool) material flows and costs for
comparison against actual data
 Material flows should be along feasible lanes and representative of actual
flows. Differences need to be analyzed
 Costs suggested by optimized model should be representative of actual costs.
VALIDATION
The difference needs to be analyzed as possible improvements in current
POINTS
network
 Demand satisfaction suggested by optimized model should be in line with
actual

14. Supply Chain Network Design
Identification of Scenario Options
1. Based on business plan priorities and future strategy of the company.
a) Eg: The need to service focus markets with better service levels. Hence the supply chain
network options need to be considered accordingly
b) Eg: Decision to acquire another company and hence arriving at network rationalization
scenarios
2. Based on competitive benchmarks of supply chain network
3. Based on supply chain networks of companies in other industries with similar characteristics
4. Based on state of and development of logistics infrastructure
5. Based on perceived market trends of freight rates etc.
6. Based on clean slate approach
a) Eg: If the complete supply chain network needs to be redrawn again, what would be the
new network
b) The approach for this involves taking the demand distribution into consideration and
selecting a series of inventory points or supply points on a clean slate, so that goods travel
least distance. Objective is to minimize MT(weight)*KM(distance) index
Scenario Results are compared to baseline results on multiple objectives/metrics
1. Overall Profit as given by the optimized network models
2. Service levels defined in terms of lead time required to reach markets
3. Total landed cost to markets

15. Supply Chain Network Design
Sensitivity Tests
1. To check the robustness of proposed network( current network or based on
scenario analysis results). A set of simulation studies done by varying the key
inputs
Typical Tests:
1. Based on varying demand
a) Eg: If demand projection is increased by 20% then which capacities become
constrained
b) Eg: If demand projection is decreased by 20% then do all proposed warehouse
still remain active or some of them get deactivated
2. Based on varying freights
a) Eg: If road freights increase by 20% in comparison to freights of other modes
what is the impact on the network
3. Based on Activation/Deactivation of Options and its impact
a) Activation/Deactivation of warehouses
b) Activation/Deactivation of modes available for material movement
c) Activation/Deactivation of alternate lines of production or alternate plants

16. Supply Chain Network Design
Analysis Output – Illustration1
2012 Curr N/W(Baseline) Scenario1
COST_TYPE VALUE VALUE Difference
Inter WH FREIGHT COST
WH HANDLING COST
INCENTIVE COST
PACKAGING COST
PRIMARY FREIGHT COST
PRIMARY HANDLING COST
PRODUCTION COST
RAW MATERIAL COST
SECONDARY FREIGHT COST
SECONDARY HANDLING COST
WH FIXED COST
TOTAL SYSTEM COST
If Total System Cost(Scenario1) < Total System Cost(Baseline) then Scenario1
recommendations can be considered.

17. Supply Chain Network Design
Analysis Output – Illustration2
With 2 Plants Opportunity Size %age
Proposed New WH (in million
Current Network New Network
Structure Results INR)
2010-11
2011-12
2012-13
Opportunity
With 2 Plant %age
If WH5 Size
is closed New
(in million
Current Network Network+Close
INR)
WH5
2010-11
2011-12
2012-13
Opportunity
With 2 Plants Size %age
If HUB1 is closed (in million New Network+Close
INR) Current Network HUB1
2010-11
2011-12
2012-13

18. Supply Chain Network Design
Analysis Output
Current Network New Network
(Baseline)
1. Recommendations
Scenario Results 2. Opportunity Size
3. Reasons for
Sensitivity Tests Opportunity Size

19. Supply Chain Network Design
Success Factors for Study
1. Data Availability
 Timely
 Accurate
 Comprehensive
 Right Format
2. Robust business scenarios identification and analysis
3. Engagement Ownership & Involvement
 Active participation & involvement from company personnel across departments
 Championing the project objectives within company’s internal organization by
PMO and Business champions

20. Thank You