What is a Supply Chain Network Design?

A network design is the end-to-end modeled optimization of an organization’s supply chain network, including manufacturers, vendors, ports, distribution centers (DC), stores and customers. The goal of a supply chain network design is to analyze all aspects of the supply chain and develop a strategy to bring cost and customer service levels in alignment with the organization’s strategic and operational goals.

When to Complete a Network Design

High performing companies evaluate their network every two to three years or after a key business event, such as a major acquisition or new product line; however, the most effective supply chain network design is more of an evergreen process. Many supply chain leaders begin to consider a network design as their current network reaches capacity and they must determine where to place a new DC. While DC placement is a key aspect of a supply chain network design, many supply chain leaders at the distribution center and executive levels are surprised to learn the many other areas of the business they could optimize for significant cost savings and increased efficiency.

1. Improved Intra-Organization Alignment

Supply chain strategy and implementation alignment can provide a net cost benefit across the organization by leveraging input into the model from all key functions.

Many companies are unintentionally, and often unknowingly, operating in silos with limited interaction between departments. As a network design begins to uncover data across all key functions, including every business unit and each current course strategic decision, many supply chain leadersget their first comprehensive view of their operations and upcoming key decisions. A network design will determine the total impact of key decisions such as adding SKUs, customers, acquisitions or changing distribution channels. Only a detailed network model will quantify these complicated decisions.

When combatting silos, a coordinated approach for both strategy and implementation may initially increase costs in one or two areas of the business but create a much larger net benefit for the organization. For example, switching to store-ready pallets improves service levels and reduces more in-store labor than it adds to the DC. Depending on the size of the original silos, organizations can leave millions of dollars in savings on the table if they don’t adopt a holistic approach.

2. Execution of Resources and Strategy

Improved visibility across the business can reduce your gap between expected and actual costs to 2 percent.

Given your existing network, rates and business strategy, a network analysis will measure how efficiently your team is executing. Top-performing operators are usually within two percent of expected costs. However, many supply chains are operating with larger gaps that highlight opportunities for improvement, such as increasing customer service levels. Often, supply chain leaders are not aware of their efficiency gaps until they see the hard data during a network design.

3. Lead Time Visibility and Improvement

Lead time is a huge hidden cost in both dollars and service levels. A good network project will identify lead time improvements and quantify the benefits of cycle time reduction.

A customer has only one lead time: when they place their order to when they receive the product. You as the provider have multiple lead times: product forecast, procurement, inbound delivery, DC operations and outbound transportation. Generally, the provider’s teams can estimate each lead time separately. When all combined together, the overarching lead time is typically at least one to two days longer than what the team expects.Supply chain leaders are typically surprised to hear that a well-designed supply chain network can reduce lead times across multiple areas, increasing speed to delivery.

4. Inventory Positioning and Service Level Improvement

Split orders, which can more than triple transportation cost per shipment, can be nearly eliminated with intentional inventory placement.

Determining the locations and quantities of inventory across your network is a complex decision requiring strong analytics. Ideally, a customer ordering multiple products receives a single box shipped from the closest DC. However, if the closest DC does not have all of the items to fulfill an order, most systems split the order. Multiple DCs fulfill the same order, and the farther DCs ship packages Express or Overnight to match delivery time of the closer DCs. This process can more than triple transportation cost per shipment.

You can easily avoid this with a network design. Simply having the right product in the right DC captures consolidation and transportation savings. It is likely that a significant percentage of your shipments are eligible for this optimization.

5. Inventory Rebalancing

Unbalanced inventory levels can increase your on-hand inventory investment by at least 10 percent.

Few companies regularly assort their SKUs to evaluate important inventory purchasing decisions. As a network design goes about strategizing the best placement of inventory to increase sales and reduce working capital, it is often revealed that inventory needs to be rebalanced.  Rebalancing your inventory can reduce your on-hand requirements by at least 10 percent, significantly increasing your service levels and sales to customers, while reducing network operating expenses. 

6. Reduced Operational Cost

You could save 10-20 percent of your DC operational costs by focusing DCs on key functions and ensuring each DC operates within effective capacity.

As distribution centers fill up, processes become less efficient and require more touches. Many facility leaders think they are saving money by avoiding the cost of adding off-site storage, which can range from $20K to over $1M. However, duplicate movements in a facility can cost a similar amount in variable labor. When a DC surpasses the 85 percent recommended utilization level, operational costs increase significantly. A network design can enable a cost-benefit analysis of leveraging off-site storage to optimize utilization in your DC.

7. Transportation Spend Visibility

Increasing transportation spend visibility can optimize end-to-end costs across buyers, DC operations, stores and executives.

Because transportation spend crosses over multiple modes, seasons, departments, etc., the transportation lead is typically the only one familiar with the organization’s total spend and top carriers. Other supply chain leaders tend to underestimate the cost and logistics impact this has on procurement, DC operations and delivery speed to stores. For example, container costs can more than triple throughout the year, and some domestic vendors have tight pickup windows that force you to pay a premium to pick up product on time. A network analysis can reveal these gaps and provide visibility into spend across your end-to-end supply chain.

8. Inbound and Returns Optimization

Top operators can cut their inbound transportation spend by more than half with intentional design.

Supply chain leaders often overlook the costs associated with inbound shipments and returns, assuming they are fixed and unchangeable. However, when intentionally designed, optimized inbound shipments and returns can greatly reduce your transportation spend. Leveraging a network design to identify vendors and reverse logistics opportunities can help you take advantage of existing routes to reduce transportation spend. We have seen top operators that leverage domestic vendors and existing routes cut their inbound spend by more than half.

9. Reducing Ocean Freight Costs

Lack of port flexibility could be draining your transportation budget and compromising your lead times.

As ocean freight rates have varied wildly over the last five years, organizations have come to expect higher transportation lead times and costs. The truth is that being locked into one port subjects you to larger movements in rates and lead times. This unpredictability not only leads to higher transportation costs but also decreases service levels unless you also invest in additional inventory. An often underrecognized benefit of a supply chain network design is identifying how the supply chain can add flexibility to switch ports based on business needs, often resulting in a more regular review and better negotiations for container contracts.

10. Third Party Logistics (3PL) vs. Insourcing

Your network should have the right blend of fixed vs. variable capacity and cost based on seasonality and other needs. Leveraging this approach will help you focus your 3PL partnership to maximize value and ROI. 

When leveraging a 3PL, fixed and variable capacity serve different yet equally valuable purposes. It is important to be leveraging both types of capacity to create resilience in your network and maximize the value you are getting from your 3PL partnership. A network design can analyze your network and 3PL partnership and help you determine the right balance of fixed vs. variable capacity that will provide you the most value and ROI.

11. Data Quality

Inaccurate and ineffective data across the supply chain are leaving money on the table and hindering decision making.

Businesses undergo many changes as they develop and grow. New systems are added, SKUs are adjusted and acquisitions occur. Often, over time, data systems have been stitched together by many people using different methods. By the time a network design is needed, the data quality varies drastically from each business area and does not always capture what you would expect, making it more difficult to make quality and timely decisions internally. A key benefit of a network design is that it often reveals disorganized and inaccurate data and begins the path toward data integrity across the entire organization. This can enable supply chain leaders to operate with a future-focused approach and to make sound, data-driven business decisions.

12. Facility Utilization

You may not be getting an accurate picture of your facility utilization.

DC capacity reports very rarely tell the full story of how well-utilized the facility operates. Without clear visibility into DC utilization, labor becomes less efficient, and more offsite space is needed. Network designs analyze capacity across liquid cube, pallet positions, throughput and general efficiency, painting a clear and accurate picture of facility utilization and uncovering areas for optimization. This analysis can recommend improvements including denser storage or improved slotting.

13. Impact of a Modern DC

Your storage density and processes could be draining efficiency in your facility.

Though not always the case, a supply chain network design can often uncover the need for additional space in the network, such as a new distribution center or expansion. In this case, a new DC can leverage industry best practices and will often operate more efficiently than the legacy DC, providing a significant source of future cost savings. Often, supply chain leaders are surprised at the extent to which a newer, purpose-built facility can add storage density and speed up the movement of product. For example, moving from an 18’ clear height to a 30’+ ceiling can double storage in your facility.

enVista’s Network Design Boosts Profitability and Customer Satisfaction

In the end, supply chain leaders are always surprised by the sheer amount of opportunity they can capture with a supply chain network design – both in their current operations and with added capacity. Taking the time and expertise to understand how your supply chain operates can help develop your strategy for ongoing success.

enVista’s experienced supply chain network strategy team designs your network using your data and rates, transforming it into a tactical advantage, not just a cost center. Once we determine your top improvement opportunities, our collaboration with your operations team ensures that you can implement the transition plan. Ready to start capturing efficiency and cost savings with a network design? Contact our supply chain strategy experts today.