How to Develop a Supply Chain-Friendly Network

Scenario planning considerations can be just as important as location.

How's this for a perfect storm? Thanks to the recession and 2008's fuel price spikes, companies are reacting by repositioning their logistics locations closer to their end users, but they're not taking the time for a network optimization analysis. So in effect, they have no idea as to the effectiveness of aligning their facility locations with their transportation corridors and modes. On top of that, companies are increasing their inventory levels to maximize how often they can ship products out via truckload (the least expensive mode of motor carriage), which puts even more pressure on warehouses to become more efficient while concurrently boosting safety stocks. As a result, overhead costs are climbing to unacceptable levels and product obsolescence becomes an even greater risk than before.

Before you get completely discouraged, though, Scott Pribula and John Hill with supply chain consulting firm TranSystems have this basic suggestion: There's simply no substitute for real estate scenario planning that includes all possible and likely results of adding to or changing your location sites. "Understanding how networks can accommodate a variety of desired outcomes requires scenario planning and modeling," they explain. "Key drivers of network decisions focus on moving goods shorter distances in a cost-effective, efficient and environmentally friendly manner to consumer clusters."

Pribula, president, management & supply chain consulting, and Hill, vice president, point out that scenario planning should look at such areas as labor availability and rates, government incentives, inventory levels, transportation modes and rates, warehouse operating costs and service level goals for the forecast period. "Once this is completed, then and only then should current and potential real estate holdings -- including the cost of closing and/or opening facilities, start-up costs, etc. -- be added to the model to analyze, develop, evaluate and compare alternative performance and costs. This approach ensures objective determination of whether and how long current facilities will continue to meet business needs or if (and when) new locations will be required to meet them."

Contrary to popular belief, real estate costs are a relatively minor factor when it comes to supply chain costs, amounting to between 4% to 7% of overall supply chain costs. Even so, "understanding how deal structures can impact both cash flow and book status, though, is paramount," Pribula and Hill emphasize. "Factors such as the required financial commitment, methods and forms of control, cost of capital both indicated and implied, balance sheet and P&L impacts, the long term need for the facility and total exposure all need to be considered." The best strategy, they say, is the one that provides "the widest range of desirable outcomes, but still provides an exit strategy if projections and expectations miss the mark."

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