In my previous blog post I discussed middle mile optimization from a very high level and underscored the importance of looking at the problem from a strategic, tactical, and operational level. In this post, I delve into the strategic aspect focusing on supply chain design (SCD, also called network design or network optimization).
SCD is about determining the optimal physical footprint of a supply chain network. In the case of a distribution network, this would include the quantity, location, size, and role of the various facilities used to fulfill orders. For a retail network that is embracing the middle mile, this can include national DCs, regional DCs, local DCs, cross-docks, micro-fulfilment centers, and potentially even stores acting as eCommerce shipping points.
The underlying technology of SCD software such as AIMMS’s Network Design, 3TO’s Supply Chain Architect, Coupa’s Supply Chain Guru, and BlueYonder’s Strategist is a mixed-integer programming (MIP) solver. These are mathematical algorithms that can find an optimal value given a set of constraints. An overly simplified example would be finding the maximum profit for a product given a sale price of $10, a production cost of $5 and an available quantity of 100 units (100 units x ($10 – $5) = $500). Things get complicated quickly when you add thousands of SKUs, demand points and suppliers in addition to transportation and warehousing costs.
The reason I bring up the underlying mathematical optimization is that SCD by itself does not solve for the middle mile. In effect, the optimal flow for a product to get from a supplier to a consumer is, in most cases, a direct one. The more tiers you add to a network, the more touches and transportation legs you’ll get and the more costs will go up. When SCD software optimizes a network, it will choose the most direct route and will most likely skip the lower tiers (e.g., local DCs and micro-fulfillment centers) that simply add handling and transportation costs to the total landed cost of a product. Another way to look at things is to say that SCD will not consider all the inherent stock transfers that are part of a retail network trying to re-balance inventory and provide optimal customer service.
SCD is not the sole tool needed when designing a retail network. It is just one of the components needed in conjunction with others. The successful design of a retail network will have to also consider optimization of inventory allocation, safety stock and transportation. There is a path forward! I will dive deeper into those aspects in subsequent blogs.
Bricz, a leading global supply chain solutions provider, emphasizes connectivity while providing compelling results and minimizing potential issues. We are focused on helping retailers and other consumer-centric industries optimize their supply chain. Interested in learning more about our services and how we can help elevate your supply chain? Reach out today at firstname.lastname@example.org to connect with one of our subject matter experts to get started.
Contributor: Louis Bourassa, Director, Supply Chain Strategy at Bricz