When companies optimize their Supply Chain they are maximizing their profit via their supply chain activities. Maximizing profit involves balancing the tradeoff of cost and customer service. It is efficient (also known as Pareto Optimal) to have a high-cost / high service, or low-cost / low service supply chain design. However, a high-cost / low service is inefficient and not competitive. To optimize your supply chain you must put all of your cost-drivers and customer service measures through a careful Supply Chain Analysis.
To optimize your supply chain you must put all of your cost-drivers and customer service measures through a careful Supply Chain Analysis.
Transportation Costs are largely a function of distance. A company would minimize transportation costs by putting their factories or warehouses close to their customers. This also has the positive effect of reducing the delivery time to customers, a key aspect of customer service. (As will be discussed below, however, this also increases facility costs.) As Transportation Costs are the greatest percentage of supply chain costs, it is critical that companies carefully choose their facility locations, mode of transportation (boat, barge, rail, full truck, less-than-truckload, delivery vans, and drones) and optimize their routes.
Inventory Costs involve the most obvious tradeoff of cost versus customer service. More inventory is (almost) always better for customer service, but of course inventory consumes cash and has other negative aspects including obsolescence and storage costs. Inventory is therefore a double-edged sword. It is a weapon against competitors in providing better service to customers, and a threat to cash flow. Inventory is the second greatest supply chain cost. Inventory optimization software and methods are available to maximize the profit return on inventory investment.
Facilities Costs include warehouses and factories. The key aspect of optimizing facilities is the tradeoff of location (placing your warehouses and facilities close to customers) versus economies-of-scale (larger facilities spread out overhead costs over more units, reducing per-unit costs). A single large facility (warehouse or factory) requires less management and construction costs per unit of production than smaller facilities. Network optimization will determine the optimum number of facilities and their location to balance these costs with customer service.
Purchasing Costs are best summarized by the term “best cost supplier.” Companies optimize purchasing costs by balancing price, quality and other service aspects including delivery lead time, technology and ease of doing business. These determinations combine subjective and quantitative evaluations. Supply Velocity combines these criteria using Multi-Criteria Decision Making to help choose your best-cost suppliers.
Customer Service in Supply Chain Management is often associated with delivery time. The faster you can get your customers their product, the better they will often reward you with purchases of your products.
Optimization Modeling
Once all of the data are gathered and understood, Supply Velocity will build a custom optimization model. Optimization is a mathematical methodology that quickly evaluates trillions of possible outcomes, usually in minutes. These models provide management with the best possible solution, given the inputs to the model. They are used as decision support systems, helping management make the best-informed decision.
Our founder, Mitch Millstein, Ph.D. is a widely recognized researcher and teacher in the area of Supply Chain Optimization, Supply Chain Analysis and Supply Chain Decisions. His research includes manufacturing cellular production, supply chain network design, supply chain performance measurement and inventory optimization.
Supply Chain Optimization – Outline
- Develop your Supply Chain Strategy
- Goals and Objectives
- Customer service orientation
- High service – high cost
- Low service – low cost
- Gather Supply Chain Cost and Service data
- Create Optimization Model
- Efficient frontier: service versus cost
- Validate model
- Run sensitivity analysis to evaluate multiple possibilities
- Present results and help management make the best decision
