Download White Paper: Quantitative Supply Chain Decisions Driving Your Business
Supply Chain Management
Supply chain management involves the flow of products, information and money from suppliers (and their suppliers) through a company to its customers (and their customers) with the purpose of serving customers and maximizing profit.
Decisions driving supply chain management can be separated into internal and external decisions. Internally, your business is making decisions around the logistics of producing, transporting and storing your product. Externally, your business is making decisions on how it will interact with others (suppliers, customers, partners, service providers, etc.) to support the business. This paper will focus on the internal quantitative supply chain decisions.
Key Internal Supply Chain Decisions
Internal supply chain management decisions revolve around how you produce, transport and store your product. These are your internal logistics decisions and often involve significant quantitative analysis to optimize. Often organizations do not perform the required analysis as their business evolves rather, they continue with their processes as they have always been done.
There are eight key internal logistics decisions that are made by any business which creates a product and moves their product to their customers. We will review the information required to make the best choice for each of these decisions.
Production
- Location and number of facilities
An organization must decide where to produce and in how many locations. This is a costly and strategic decision, and is based on the location and distance from both your customers and your suppliers, the cost of labor and utilities in different locations, economies of scale and risks that come from having multiple locations or selecting specific locations.
Each of these variables need to be analyzed an understood. As organizations grow often these decisions are initially made without significant review. For example, if an organization grows through acquisition, new facilities are incorporated into the existing network. To optimize, you need to analyze each facility of the network and determine the correct number of locations and where they should be located, including existing locations or considering new, candidate locations.
- Product Design
In addition to location, an important logistical decision is production strategy. The way a company decides how to manufacture their products has important implications for location, transportation and inventory storage. The production strategy is largely realized at the product design and development stage. Possible strategies include:
- Highly standardized products – high volume, low variation
- Mass customization – customized products on standardized modules
- Postponement – standard products, customized later in the supply chain closer to the customer
- Push/pull – Push items are inventory items often with long lead times, pull items are sub-assemblies built from inventory items that are pulled as production is required
- Mix model production – allows for production of various products on one production line
- Job shop – ultimate flexibility, each product is different and may follow a different flow through the plant
Each strategy has positive and negative impacts, often trading flexibility for cost.
Transportation
Transportation costs are by far the largest of all supply chain costs. Facility location will have a significant impact on transportation costs, but even once the locations are determined, we can still look to minimize transportation cost by minimizing the distance products are moved via optimal routing.
- Routing Vehicles
Vehicle routing at its core is minimizing the cost, time or distance to serve your customers. Depending on the business, you might need one vehicle per customer because your product or customer orders are large and require a full truck. In this situation, finding the optimal (minimum cost) route per customer is relatively simple.
If your average customer order size is smaller and multiple orders are grouped together, then the optimal routing becomes more complicated. You are still trying to minimize the cost, time or distance to serve your customers, but there are additional variables and constraints to consider: capacity of vehicles, time windows for customers to receive orders, and backhaul – is there anything the vehicle can pick up and bring back to the factory or warehouse. Once incorporated an optimization model can determine the lowest cost route that meets all of the business constraints.
- Transportation Mode
There are different modes of transportation (ship, rail, tractor-trailer (full truck or less-than-truckload), box-truck, van, plane) that come with different tradeoffs. Each mode has a level of speed and flexibility. As speed and flexibility increases, so does the cost of the transportation.
It is important to analyze your business and the transportation needs – cheaper isn’t always better in this situation. If your product has a high inventory value and obsolescence happens relatively quickly, then you likely would not want to use slow modes of transportation but could consider flying your goods. Rail is often a very affordable mode of transportation, but again if you need to have flexibility or multiple stops for your products this might not be the best choice.
Storage
- Location and number of facilities
This decision is similar to the decision around production locations and number of facilities. The main difference is that storage is not adding value to the product, so the key things to balance are cost and customer service. Additional storage locations typically increase both cost and customer service.
Defining customer service expectations is key to determining the correct storage network. For example, if you can deliver to a customer ins 3 or 4 days and meet their expectations, your storage needs will vary significantly from a business whose customers expect their product in one day. Below is a summary of potential storage locations (each diamond is a potential site) with their cost and service level. The locations above the line are less efficient – either costing more or providing a lower service levels than the locations on the line.
Ultimately the decision is choosing between cost and customer service. Any location on the line could be a good choice, but how you balance the tradeoff will vary depending on your business.
- Type of facility
When building or buying a inventory storage site it is important to plan its purpose. The purpose will impact location select, layout, and racking or shelving design.
- Direct-to-Consumer – order-fulfillment facilities, high volume of small single item pick orders
- B2B warehouse – large multiple pallet orders
- Crossdock Warehouse – breakdown pallets from suppliers into boxes for individual stores
- Value Added Provider – final customization or packaging provided at storage location just prior to shipping
- Retail Store – not always considered a storage location, but it does hold inventory
When considering your network on storage locations, it is important to note that each location may not just serve one purpose. You could have a warehouse that is both direct-to-consumer, but also fills B2B orders.
We worked with an organization whose business grew to support exactly these two different situations. They had large national accounts buying pallets of specifics items. These same items were being sold in single unit direct-to-consumer orders, which had to be fulfilled from the same warehouse. To support this, we created multiple locations in their warehouse for these same items. On one side of the warehouse was the national accounts section which held pallets of these products. On the other side of the warehouse were narrow-aisle racks which held smaller volume of these products but supported a quick and easy picking process to enable fast fulfillment of small customer orders.
- Inventory levels
Similar to number and location of storage facility, inventory levels require the decision of cost versus customer service. Holding more inventory will support higher service levels. The more inventory that you hold, the more likely you will be to have the product in stock when a customer wants it. But there is a cost to holding inventory. The cost is more than just the financial holding cost of having a product which you have already paid for sitting in your warehouse. The more inventory you hold, the higher your chance for that product to turn obsolete, break, or be lost before you are able to sell it.
There are mathematical formulas to determine the correct level of inventory to hold, when to reorder and how much to order. The key inputs for determining your optimal inventory are:
- Forecasted demand (and forecast error)
- Lead Time
- Inventory holding cost –the cost of handling or warehousing, and the cost of damage or obsolescence
- Cost of Product
- Order or Setup Cost – machine set up or ordering cost (inclusive of shipping)
- Target Service Level – what percentage of the time do you want the product in stock when a customer orders Target service level is the decision that needs to be balanced with cost. A higher service level will result in a higher level of inventory.
- Packaging
The final consideration is packaging. Packaging can dramatically reduce storage and product costs, but must be weighed against consumer perception. Examples of interesting storage involve wine and deodorant. A connoisseur of wine would never consider buying boxed wine. However, the bag and box design stores more wine in a smaller space, keeps the wine fresh because it does not let air in (which oxidizes the wine ruining the flavor), and is less expensive to ship (cardboard weighs less than glass). However, glass bottles still are preferred in most countries. Therefore, we need to balance cost with consumer perception. Even the most dedicated supply chain manager would likely not show up to a party with a box of wine!
Another famous packaging story involves one of the great supply chain companies in the world, Wal-mart. A buyer at Wal-mart realized that deodorant, which was packaged in the plastic container and then in small printed boxes, was unnecessarily double-packaged. She demanded that the cardboard boxes be eliminated, and all product information be printed directly on the plastic container. This buyer may be responsible for saving more trees than any human in our entire history.
Summary
There are several key decisions driving the internal logistics of your supply chain through production, transportation and storage. These decisions are quantitative in nature and require significant data an analysis to get right. Ensure your business is actively making these decisions, especially as your business and the markets evolve rather than continuing with the status quo.
Stacy Sifleet
Supply Velocity, Inc.
stacy@supplyvelocity.com
(773) 367-6677
April 2020
Ask us your Lean, Six Sigma, or Supply Chain question.
We’re the experts! We’ll get back within 48 hrs. with a valuable response.
"*" indicates required fields
“Supply Velocity has helped Clean succeed in a number of ways. First, they provided the education that kicked off our Lean Process Improvement journey. They also facilitated a number of large supply chain and process improvement projects including: 1) building quality into our direct-labor productivity incentive program, 2) designing the layout of our garment warehouse, and 3) streamlining our route service process.We have integrated the methods that Supply Velocity taught us into our management and strategic planning. In the process our quality measurement has improved 22% from 2013 to 2015, we have reduced required annual labor by 2200 hours from the garment facility layout project and we’ve seen 50% decrease in error rate. Obviously the numbers speak for themselves, but just as important, Supply Velocity has been fun to work and have become true partners. They have “taught us how to fish” so our internal teams are able to implement change on their own, with the skills we learned from Supply Velocity. This relationship has been invaluable.”
“Closure Medical recently completed a major reorganization in order to enhance our ability to rapidly create innovative medical devices. We hired Supply Velocity to help us map out the process and service flows of the new organization that would maximize our product development process (PDP). In four weeks, Supply Velocity helped us envision a new PDP structure, develop measures and accountability for each step, and gain consensus within the organization. Supply Velocity’s focus on speed and accountability helped us complete a critical project in a timely fashion.”
“Supply Velocity created visibility within our Assurance Services Group… visibility of performance, Client-service, employee satisfaction and processing time. Using the Supply Velocity System, Audit Report Cycle time is down over 50%. We are using his strategies to create greater Client loyalty.”
“We are pleased that Essex selected Supply Velocity, Inc. as our Lean Implementation Partner. At one facility, we have saved over $350,000 in work-in-process inventory, reduced throughput time from 2 weeks to minutes and increased inventory turns 3 to 8 times per year. All these results are in just 6 months. Our return of investment is very high.”
“In the spring of 2003, the St. Louis Area Chapter of the American Red Cross engaged Supply Velocity, Inc. to perform a study and make recommendations to streamline office processes, maximize cash flow in purchasing and warehousing and restructure and enhance our maintenance department. Supply Velocity, Inc.’s process was methodical, flexible, staff-oriented, inclusive and, above all, trackable.In the last six months, our Chapter has realized expense savings of over $380,000 annually, and significant improvement in intra-company service levels has been attained. Supply Velocity, Inc. will return to the Chapter periodically throughout the next 18 months to audit our newly implemented processes. We have been pleased with our results and Supply Velocity, Inc.’s professionalism.”
“Mitch Millstein and his team helped guide our shop fabrication division in the re-layout of our custom pipe and steel fabrication facility when we moved into a new building. It is not only the results but how he helped. We were involved in every step. I personally did time studies and was able to see the non-value added steps required to manufacture in our old layout. When we created our new layout, everyone was involved, from the executive team to our direct labor force. With Mitch’s help we increased our throughput by a 3x multiple, while providing more competitive prices to our clients as a result of the efficiency improvements.This has enabled us to not only make more money but also to expand our commercial reach and serve more, and larger customers. I would recommend Supply Velocity to any company that wants to make improvement in supply chain and operations.”
“For several years we have worked with Supply Velocity to support us with their expertise on Lean Operations and Supply Chain Management. Supply Velocity has helped us implement Lean, improve our inventory systems, and educate our people. They are professionals who are always available to help us as needed.”
“In thirty years of hiring consultants, Supply Velocity, Inc. was the first to tell me what they were going to do, set a price they stuck to and substantially exceed my expectations. I have recommended them to friends and acquaintances. They were true partners in assisting with the turnaround of an acquisition we had been struggling with for two years.Their math-based technology, solid down-to-earth facilitation skills, and positive, patient and enthusiastic attitude combined to make our implementation of Lean a very rewarding experience.
We increased our production by 50% in the first month of implementation and continue to see improvements. Improvements have not only been realized in productivity, but also in quality and morale. We have increased profitability by $2M on flat sales of $10M.
Based on Supply Velocity, Inc.’s integrity and our results, I will continue to refer them to others and utilize them in the future as we expand our company through acquisitions.”
“Supply Velocity is driving instrumental change in our inventory management processes. This is critical for us to be competitive in a supply chain environment with numerous disruptions. They are making change happen, which can be challenging in a 182 year old organization.”
“Supply Velocity’s Lean Six Sigma System has given us new tools to help improve our sales performance. We have learned new ways to analyze our business which makes problem solving more accurate and has made us better leaders.”
“We used Supply Velocity to rethink our sales process. By analyzing the entire process we found wasted time in our Sales, Admin and Operations departments. Streamlining this process created extra time for each Sales Rep, allowing them to spend more time with Customers and increase the value we add. Gross profit margins are up 40%!We are now using Supply Velocity to help us rethink our entire Strategic Plan.”
“In a time of volatile supply chain disruption, Supply Velocity is helping us develop Demand and Supply Planning processes to proactively tackle these new challenges. They are genuine partners, working with our team, facilitating and teaching.”
“I am thrilled to provide this testimonial for Supply Velocity and their outstanding work in implementing Lean Warehouses and processes at Crescent Parts & Equipment through the COVID pandemic. With their data-first focus and Mitch’s exceptional coaching and experience, they transformed our business into a more supply chain-oriented organization, enabling us to grow while prioritizing employee safety and creating a better work environment. Supply Velocity’s expertise in Lean methodologies and their comprehensive evaluation of our customers have been instrumental in optimizing our operations and increasing customer satisfaction. We highly recommend Supply Velocity to any company seeking to implement Lean processes and enhance their supply chain efficiency.”
“Supply Velocity has provided the technical expertise and political capital to move our project forward. They have just the right amount of push and the right amount of support. Supply Velocity has helped us make real changes to improve efficiencies in logistics without jeopardizing our performance. We’re happy and our customers are happy.”
“Our experience with Supply Velocity was one of the best values we have ever had from a consulting project. Cyril Narishkin brought a structured lean methodology, invaluable experience and engaging facilitation skills to help us streamline a very complex and disjointed sales order process. Just as importantly, our team now has the knowledge and process competencies to address other business improvement opportunities going forward.”
“We engaged with Supply Velocity to help us embed process improvement at all levels of the business. Our team learned from Mitch to let the data drive decisions, to use Lean tools to help us see our processes critically and objectively, and to create a control plan to manage all of the tasks that were the outcome of the data study.The project turned out to be very significant to the company and most importantly, our customers. We reduced our customer wait times by 40%, and cut in half the labor cost to fulfill customer orders.
Some results are not able to be measured. However, as a result of this project, we have started to build a Lean mindset and culture, which is part of our strategic mission to save our customers money. Supply Velocity has been a valued partner in this mission.”
“Supply Velocity gave us the tools to analyze our business and processes based on the facts and numbers versus our perceptions. Our common quote was “Let the numbers lead us”. The key for our organization was how quickly we moved from classroom to actual project initiation. We were able to jump in, start using the tools and see a difference right away.
The get-into-action approach was good for our culture.”
“C&R was struggling with labor productivity. The construction crews were often missing materials that they needed to do their work. This caused significant idle time. Supply Velocity, Inc. and C&R used value stream mapping and visual management tools to make dramatic improvements in operations. Most importantly, two years later C&R is sustaining and improving on the implementation. C&R’s return on investment was 11:1. C&R had a record year last year in both sales and profits and would not have been able to pull it off without the changes Supply Velocity, Inc. helped us make.”
“We used Supply Velocity on our Warehouse optimization project. One of the key characteristics of Supply Velocity is that they listened to our requirements and provided a clear path for our Warehouse processes using lean tools and our future sales growth as objectives.”
“Your process encourages this group to work together, better communicate and have fun doing it.”
“Many thanks to all three Supply Velocity presenters. I think you guys took a very difficult time for learning and capitalized on everyone’s time and training needs. I truly hope this helps your business as this was a considerable undertaking on the part of Supply Velocity. Outstanding!!”
“Isolating a problem, finding short, and long term solutions with measurable results is what was promised and results is what was delivered by Supply Velocity. Upon launch of the Lean Six Sigma Selling System, we knew more about our customers, our products, and were able to create a solid plan to increase sales of our most profitable products. Within months of implementation, our booked sales jumped 60% and our most valued customers were getting direct, active, and calculable attention.”
“In 2015 we began working with Dr. Mitch Millstein to optimize our inventory locations supporting e-commerce and in-store inventory needs. From this work we developed a new omni-channel warehousing and inventory plan that entirely redefined our approach to warehousing, inventory management, store distribution and fulfillment. As a result of the analyses by Dr. Millstein we have begun the move to an improved omni-channel design by reassigning MSAs to new warehouses, greater leveraging of in-store inventories to satisfy e-commerce demands, and exploring acquisitions of new warehousing space in strategic locations. We have already seen an improvement of $300,000 from both more efficient shipping strategies due to better inventory management.”
“The role of the Erie Insurance Marketing Department has been evolving over the past several years – from a support role to a more critical role of driving growth in our organization. Because of our increased workload and desire to prioritize the most critical projects, we hired Supply Velocity to teach us the skills of Lean Six Sigma.Participants included the Promotions, Market Research and Agency Licensing sections of the Marketing Department.
We learned valuable tools to help us to prioritize based on the voice of the customer.
I firmly believe these skills made a difference in how we work every day. We are moving new projects forward, eliminating or changing ineffective processes, and we are a much stronger department. We continue to use the tools to help us with our highly-complex and time-consuming projects. Supply Velocity helped us to accomplish our goals.”
“Anheuser-Busch Precision Printing had been implementing Lean Operations on our own for the past two years. We needed to move faster and partnered with Supply Velocity, Inc. Through Supply Velocity, Inc.’s mathematical workflow balancing and visual management tools, dramatic improvements were achieved. The entire converting operation was rearranged based on Lean principles. The result is a 20.6% productivity improvement, enabling us to operate with 23 fewer people in production.”
“Myerson engaged Supply Velocity, specifically Ray Davis to visit our plant in Trinidad to conduct a two day assessment of our production procedures and provide us feedback on areas for improvement and where applicable, areas for future analysis.Put simply, we got everything we paid for and in addition to more in depth analysis, we got specific tasks that were immediately actionable. Our local management team found Ray to be engaging, highly credible and insightful based on his wide experience. In other words the cultural differences and lack of specific industry knowledge weren’t impediments to things we could implement immediately and on our own. In a nutshell it was money well spent and will pay itself back many times over.”
“We are using Supply Velocity’s Lean Six Sigma methods to analyze a variety of processes including rationalizing SKUs (stock-keeping-units). By using math to evaluate SKUs we took some of the emotion out of our decisions. We expect significant increases in sales and productivity from reducing poor performing SKUs.”