Simchi-Levi Says:

The ability to optimize both the network design and the inventory positioning provides the most cost-effective solution to network planning. What do you say? Send us your comments here

This article was originally publshed in The Supply Chain Digest Letter, our hardcopy newsletter focused on a single topic each month (February, 2007 issue). To subscribe to the SCDigest Letter (free for qualified professionals), click here. To view of Network Planning and Optimization Resurce page, click here.

As off-shoring and globalization of manufacturing operations continues to grow, supply chain complexity and risks have significantly increased. This, together with rising energy costs and the acceleration of merger and acquisition activities, has motivated many companies to reevaluate their supply chain network strategies in order to better utilize existing resources and infrastructure. 

The challenges are daunting. How should the firm change its network to support business growth?  How much redundancy should the network incorporate in order to deal with unexpected events? How can it leverage network structure to reduce transportation costs and better utilize capacities? What should be the sourcing strategy? How much inventory should the firm carry and where should inventory be positioned? How can the firm reduce the amount of expedited shipments and provide the appropriate level of service without increasing inventory?

In the last few years, many companies have applied the Network Planning solutions offered by LogicTools to address these challenges. Network planning is the process by which companies structure and manage the supply chain in order to:

• Find the right balance among inventory, transportation and manufacturing costs;
• Match supply and demand by positioning and managing inventory effectively; and
• Use resources effectively in a dynamic and changing environment.

Network planning is typically a two-step process:

• Optimize the structure of the network taking into account available capacities, seasonality, complex production constraints and the flow of products across the network. This also includes multi-site production planning and sourcing, focusing on where to produce different products. This also involves deciding between flexibility and specialization, that is between a flexible strategy in which each product is produced at multiple locations thus reducing transportation cost due to shorter distance to clients, or a strategy where each facility specializes in a small number of products, thus reducing production costs due to economies of scale.
• Once the network is defined, determine where to place inventory; how much safety stock to keep; what is the right inventory mix at different locations; what are the key inventory drivers and how to increase service levels and decrease order fulfillment lead-times; also analyze postponement strategies; and which portion of the supply chain should be managed based on push and which should be managed based on pull.

The ability to optimize both the network design and the inventory positioning provides the most cost-effective solution to network planning. Many companies are currently incorporating LogicTools Network Planning technology into their roadmap alongside ERP and SCM implementations, and the results are impressive. Typical reduction in total logistics costs of 5-15% and significant increase in service levels, e.g., 20-25%, depending on the company and the implementation.

Agree or disgree with our expert's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the web site. Upon request, comments will be posted with the respondents name or company withheld.