Supply Chain Optimization
What Is Network Optimization? Why Is It the Need of the Hour?
Apr 7, 2021
11 mins read
With the rising customer expectations, delivery businesses find it challenging to budget their logistics operations. Handling customer demand and balancing costs is just a double edged sword that needs more attention. A small glitch in either of these can lead to poor delivery experience, increasing costs and loss of revenue.
The supply chain costs kept increasing every passing year before the COVID-19 pandemic. But this global pandemic has accelerated the growth of supply chain costs due to increased consumer expectations and supply chain complexity and omnichannel supply chains.
The coronavirus pandemic has triggered the attention for cost reduction. Organizations have begun to refocus on reducing logistics costs through network optimization.
What is network optimization?
Network optimization is the process of finding the optimal combination of facilities, factories, suppliers, products, and distribution centers in the supply chain to ensure the highest level of service for customers at a minimal cost.
Network optimization contains tools, techniques, and technologies to establish a comprehensive view of the organization’s entire supply chain. It is the art and science of designing a quantitative, strategic, and holistic view of the organization’s end-to-end supply chain.
Information that network optimization uses:
The network optimization approach uses numerous pieces of information to build a supply chain network design. They are as follows:
- Demand: In order to improve the service level of the logistics network, it is necessary for a logistics provider to understand the customers’ potential demand and their personalized needs.
- Locations of customers, suppliers, existing and potential facilities: The decision on facility location plays an important role in determining the logistics activities of the supply chain. The quality of current service location facilities and the allocation of customer demand to those facilities is the starting point of evaluation of the existing distribution network system.
- Time periods: All tactical, strategic, and operational decisions regarding the supply chain network depend on the time period.
Strategic decisions in the supply chain network are taken in the long term. For example facility location, supplier selection, etc. Tactical decisions are taken for midterm business goals like distribution planning, transport planning, etc. Short-term decisions concerning managerial decisions like demand planning, forecasting, or inventory planning are operational decisions.
- Constraints: The consideration of operational constraints, business constraints, resource constraints, and cost constraints are essential to design a logistics network or optimize it. A proper understanding of constraints comes in handy while optimizing supply chain networks.
- Costs (Fixed and variable transportation costs, Distribution Center costs): In order to meet their key objectives in the supply chain, businesses optimize their logistics operations. Network optimization decisions depend on the end-to-end supply chain costs right from the production center to the customers.
|Supply chain costs that businesses aim to reduce||Key objectives businesses aim from their supply chain performance|
Levels of service
Increased market share
- Transportation flows: The efficiency of moving products is determined by the operation of transportation. An optimal network design ensures effective transportation flows thereby minimizing transportation costs while satisfying customer response-time requirements.
- Inventory storages: Omnichannel logistics has raised the need to keep track of multiple sales channels. Network optimization helps demand-driven supply chains to understand where a product is needed, thereby supporting businesses to maintain their inventory levels.
What determines the need for network optimization?
Companies should know how to handle changes to maintain logistics operations at maximum productivity and profitability to stay ahead of the competition. A wide array of elements determine the need for network optimization. They are:
- Acquisition and mergers: Most companies neglect the supply chain consequences of mergers and acquisitions. The new network structure of the supply chain after mergers and acquisitions heavily impacts the cost and service levels of a company.
- Consolidation and deconsolidation: Businesses explore the best processes that meet the customers’ delivery needs while keeping a seamless workflow for operations. Shippers make consolidation and deconsolidation decisions based on network footprint, production schedules, order volume, and customer flexibility.
- New markets: When businesses are entering a new market, they vary their network design. The entry of new firms into the market leads to redesign or reconfiguration of the supply chain.
- Inventory: The inventory levels determine how successful a company emerges in meeting its customer demand. Maintaining proper inventory levels enables logistics networks to minimize total logistics costs and maximize service-level requirements.
- Operational inefficiencies: As each of the supply chain functions from manufacturing to final product delivery is an integral part of the supply chain, using an application suite for each supply chain function leads to functional silos that hinder operational efficiency. The degree of operational inefficiency determines how network optimization deals with functional silos.
- Uncertainty: Usually, the decision-makers focus on managing probable logistics risks while optimizing their networks. In order to obtain more effective logistics networks with minimal re-planning, uncertain conditions are supposed to be incorporated within the network optimization process.
- Volatile markets: Managing markets with volatile demand adds more logistics costs. If that market is filled with more competitors, the cost pressure further increases. A powerfully-optimized logistics network determines the competitive advantage in a volatile market.
- Fragile supply chain network: The biggest problem in supply chain management is fragility. An organization wants to create a supply chain network that achieves visibility across each level of the supply chain process. Fragile supply chains increase the need for network optimization to reduce the vulnerability of supply chains to supply chain woes driven by COVID-19.
- Carbon footprint reduction: Carbon emissions play a vital role in designing a network optimization model for normal and cold chain logistics. Network optimization that considers carbon emission costs reduces social logistics costs.
- Formation of new customer segments: The formation of new customer segments creates a need to change the supply chain network. Incorporating a new set of customer demand from a new customer population changes network optimization decisions.
- Inability to keep up with diverse customer needs: The inability to keep up with diverse customer needs call for a network optimization process that factors in multiple customer demands. Failing to incorporate diverse customer needs makes the network optimization process unrealistic.
- New product lines: When there is an introduction of new products or new brands, it demands a framework for network optimization. It enables businesses to know whether they have geographical flexibility in the new product line.
- Growth and expansion: Allocating the logistics resources in the best manner ensures that expansion activities are successful. Growth and expansion processes require a firm to rework its existing network optimization and build a robust supply chain network.
- Sourcing: Beyond facility location and facility size, long-term sourcing decisions also play a pivotal role in network optimization. It ensures buyers make informed holistic choices on awarding business to suppliers based on numerous sourcing costs and constraints.
- Divestment: Divestment or investment choices determine the number of scenarios that a business uses due to complexity. These options help companies to create strategic supply chain networks with a limited number of scenarios.
Why is network optimization the need of the hour?
Network optimization is a process of strategic importance to all businesses. It demands in-depth analysis and crucial decisions on various aspects such as:
- Outsourcing activities like distribution
- Defining physical flows and distribution flows in the supply chain
- Specializing factory production lines
- Sizing and siting the right number of platforms, warehouses or factories, etc
With rising competitive pressure, market volatility, and increasing raw material costs today, network optimization has become more important. Here are the reasons that emphasize the need for network optimization.
Minimize supply chain costs
Supply chain networks with inefficient designs can eat up all logistics costs of the organization. The success of a supply chain is determined by how well multiple people and procedures work together.
Network optimization creates savings on all levels from small regional connections, national systems, to global, international supply chains. This enables a company to minimize the cost of operations drastically. The decrease in supply chain costs leads to increased profits.
Enhance customer service level
Organizations that have attained peak efficiency in their logistics operations maintain an improved service level. The biggest concern for businesses today is to meet unexpected changes in customer demand.
Network optimization enables businesses to lower their delivery times that is directly correlated with better customer service. A well-optimized network with warehouses and production sites helps a company efficiently communicate with its clients. It offers them more flexibility to fine-tune their supply chain operations and meet unexpected changes in the market.
Facilitates what-if scenario analysis
An organization needs complete visibility of its logistics performance to know how its supply chain network functions. This helps businesses to have a comprehensive view of their operations for the present and past time period. When it comes to planning supply chain networks for the future what-if scenario analysis becomes crucial.
A proper network optimization tool enables businesses to undertake what-if scenario analysis effectively. It helps them understand the impact of removing, adding, or expanding the manufacturing centers, warehouses, and distribution centers. It supports them to do a large set of geospatial visual simulations of supply chain networks and configure them.
What if scenario analysis takes in multiple business factors and constraints that may affect the goods flow of the supply chain in the future. These what-if simulations aid businesses to improve their service quality and gain on the logistics budget. Also, they help in developing concise, strategic plans and goals based on sound metrics.
- What will happen if transportation costs increase by 3%?
- What will happen to revenue if we minimize inventory size by 20%?
- What will happen to costs if we increase capacity by 10%?
Make effective contingency plans
Unexpected events heavily impact the cost, service levels, profits, and revenues of the supply chain. Without effective contingency plans, the supply chain becomes fragile. A business prepared with contingency planning can easily counter the potential impacts of devastating emergency situations.
In crisis management, immediate remedial actions are taken to implement an action plan. But contingency planning helps businesses to significantly minimize the lead time involved to implement an action plan. It is one of the most overlooked tools for sound network design.
Network optimization helps companies guard against the failure arising from unpredictable changes in logistics operations. Its what-if analysis helps them analyze all risks and their impacts on logistics operations, financial results, and service levels. Overall, they enable businesses to develop their supply chain resilience.
Helps to lay strategies for company growth
Every organization wants to know its growth potential to lay out its expansion plans. It requires rigorous analysis and detailed insights to find out these future growth opportunities.
A network optimization tool helps businesses understand the growth potential of the organization based on various business factors. It enables them to identify potential growth and offers hard data to prepare for expansion plans. It also helps them have backup plans when the existing plans do not go their way.
Deal with acquisitions and mergers
Mergers and acquisitions activities have become a daily life happening in the global business setup. During these acquisitions and mergers companies struggle to smoothly and quickly add new resources and acquired sites into their systems. It results in ineffective transition periods, slower return on investment, and waste of company resources.
An effective network optimization tool helps companies develop a well-functioning supply chain network design for smooth operations. It enables businesses to quickly consolidate manufacturing and distribution networks after mergers and acquisitions. It helps them to quickly realize Return on Investment (ROI) and minimizes the waste of company resources.
Optimize production sourcing decisions
Businesses stress the effective sourcing process when they make important sourcing decisions. They face numerous questions while making this effective sourcing decision like:
- Does the potential sourcing company have raw materials or components of products readily available?
- Is there a proper infrastructure set up for a company to execute sourcing orders that are being placed?
- Does the company hold the cost-effective logistical ability to transport goods?
Network optimization helps businesses source products based on total supply chain cost analysis. It minimizes inventory costs and reduces the supply chain surplus for the products leading to better economies of scale. It makes way for effective risk-sharing apart from increased forecasting and planning efficiency for goods.
The biggest challenge for companies today is to achieve an efficient supply chain that is flexible enough to respond to constantly changing market requirements. The COVID-19 pandemic showed that transport flexibility matters a lot for logistics operations.
Businesses that do not optimize their supply chain network for current requirements increase total supply chain costs; for transportation, inventory and warehousing.
Locus NodeIQ with its powerful digital twin technology helps businesses visualize and optimize their supply chain beyond just excel sheets. It helps companies develop a sound network design and supports them in strategically planning supply chain operations keeping both short-term and long-term business goals in mind.
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ABOUT THE AUTHOR
Lakshmi Narashimman is one of the senior writers at Locus. He is a voracious reader and a passionate writer who loves making complex aspects sound simple.Read other blogs by this author
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What Is Network Optimization? Why Is It the Need of the Hour?