OVERVIEW
Thereneedstobeanoperationsstrategywhendesigningasupplychainnetwork.There
aremanythingsinvolvedindesigningawelloiled,effective,andprofitablesupplychain.A
businessmustunderstandwhatfunctionalitiesandperformanceisexpectedfromthe
networkdesign.
Thecustomers’expectationsarechangingasnewsalesoutletsarebeingused.Withthe
applicationofsocialmedia,omnichannel,ande‐commercecustomersnowhavemoreprice
options,availableselections,deliverymethods,andshoppingexperiences.Theabilityofa
businesstomakethecustomersatisfiedgreatlydependsonfulfillmentcapabilities.
Progressivebusinesseshaverealizedthecriticalnaturetheoperationsstrategyhason
designingaworkingsupplychain.
WhatisOperationsStrategy,Really?
Thereisnoshortageofliterature,education,training,webinars,andentireconferences
devotedtothedevelopmentandformulationofbusinessstrategy,aswellas,thestrategic
planningthatgoesalongwithit.Itisdifficultifnotimpossibletocomeacrossanybusiness
thatdoesnothavesomeprocessinplacefordeterminingitsproductsanditstarget
markets.
Commonquestionsforallleadershipare:
Whatshouldbeourvisionandmission?Whatshouldwesell?Whoareourcustomers?
Untilrecentlytherehasbeenlittleattentiongiventothestrategiesfor“operationalizing”
thesebusinessstrategies.Severalmeasureshavealteredthisexpectation:

Complexity:Asbusinesseshaveexpanded,regulationshavewidened,andvolumes
haveincreased,sohavecomplications.

Volatility:Asproductsandcustomershaveexpanded,sohavechoices,increasing
risksanduncertainties.

Differentiation:Asmorecompetitorshaveenteredthemarket,sohastheneedfor
differentiation.

SalesandMarketingChannels:TheInternethaschangedeverything.
SpeedtoAct:Asleadtimeshavelengthenedforproductacquisitionandcustomers

demandmorethereisconflictinnearlyallfunctionsofthebusinessprocess.
Theneedforanoperationsstrategyhascomeabouttoaddressthesemeasures.Unless
companieshaveawell‐definedandcomprehensivestrategyforoperations,theywillfailto
achieveaneffectivebusinessstrategy.
Abasicbusinessstrategyisaboutfourdistinctchoices:
ThereNeedstobeanOperationsStrategywhenDesigningaSupplyChain

Whatbusinessshouldwebein?

Whatproductswillwesell?

Whoisourtargetmarket?

Whywilltheybuyourproducts?
Atitsbasicleveloperationsstrategiesareabout:

Whatcapabilitiesareneededtodeliverproductstoallmarketsefficientlyand
effectively,sothatthebusinessobjectiveswillbeachieved?

Theoperationstrategyisdetermininghowacompanywilloperatethesupplychain
andthecustomerserviceinordertoachievethebusinessgoals.Thisinvolves
decisionsaboutassets,locations,processes,people,technologies,andinventory
policies.

Itisimportanttoseparatethenecessitiesfromthedifferentiators.Acompanyneeds
thesebasiccapabilitiestobeabletocompetewithinitsindustry.Themega
processesofsupplychainsillustratethispointwell.Whenacompanydealswith
productsitmusthaveaPLAN–BUY–MAKE–MOVE–DISTRIBUTE–SELLstrategy.
Otherformsofbasiccapabilitiesareneededforsupportincluding,information
technology,back‐officefunctions,humanresources,sales,andmarketing.
Whenthecompanyseeksdifferentiatingcapabilitiesinordertooutperformcompetitors
theoperationsstrategybecomesevenmoreimportant.Determininghowbesttooperateis
amatterofstrategicchoice.Developingtherightoperationsstrategyforabusinessisa
challengethatmustaddressthefollowingpointswithrespecttonetworkdesign:
1.
Focusontotalvalueandprofitmaximization,notcostoptimization:
Anincreasingnumberofbusinessesareaskingthequestion,“howcanmysupplychainbe
usedtocreateastrategicadvantagethatwillprovideprofitablegrowthandmaximize
businessvalue?”Maximizingprofitandvalueisatotallydifferentobjectivethantraditional
networkoptimizationprojects,whichdefinestheobjectivesasoptimizingcostswhile
maintainingcustomerservicelevels.Todaywithafocusonprofitmaximization,cost
optimizationisnotthedominantdriverformanynetworkdesignprojects.Howacompany
meetsitscustomerserviceexpectationshaschangedandwillcontinuallychange.In
additiontogreatpricescustomersnowrequirebest‐in‐classconvenience,betterproduct
selection,andpersonalizedexperience.Costoptimizationisimportant.Creating
capabilitiesthatwilldriveprofitablegrowthandmaximizeprofitsaremoreimportantand
requireatotallydifferentapproachtonetworkdesign.Currentlycombinationsofoperating
scenariosarerequiredtodrivealternativenetworkmodels.Sensitivityanalysisis
performedtoevaluateimpactsonhowacompanyisworkingtoimprovetheparametersit
usestodriveshareholdervalue,examplesinclude:EBIDTA,capitalemployed,working
capital,operatingexpenses,taxeffectiveness,margins,andcash‐to‐cashconversion.
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ThereNeedstobeanOperationsStrategywhenDesigningaSupplyChain
Figure1
2.
Networkstructureandcapabilitiesimpactdemand:
Morethanevercompaniesarerealizingthatthenetworkstructureeffectscustomer
service.Agoodnetworkdesigndrivesdemandgrowth.Thetraditionalwayofnetwork
designconsidereddemandasindependentofthenetworkstructureanditscapabilitiesto
provideservice.Thisisanobsoletewhyofthinking.Ifaretailercanprovideproductsto
customersfasterforthesameorlowercostscustomerswillbuymore.Theabilityof
fulfillmentcapabilitiestoincreasecustomerdemandisagamechangerfornetworkdesign.
Predictiveanalysisisneededtodetermineandevaluatethetradeoffsofdemandlevels
associatedwithdifferentnetworkconfigurationsandservicelevels.
Figure 2: Traditional Network Design Figure 3: Network Design Drives Revenue 3.
ARobustAnalysisofDC,FCorwarehouseoperationsisneeded:
Conventionalnetworkdesignfocusesprimarilyontransportation,numberoffacilities,and
theirlocations.Thisdoesnotaddressmaterialhandlingequipmentandsystemswithinthe
fourwallsoftheDC,FC,orwarehouse.Akeyconsiderationfornetworkdesignistheability
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ThereNeedstobeanOperationsStrategywhenDesigningaSupplyChain
ofthewarehousetofulfillordersinaquickandcosteffectivemanner.Theabilityto
determinetheviableoptionswillenablethemostaccurateanalysisofcapitalandoperating
costsandtheservicelevelsthatcanbeachieved.Anin‐depthanalysisofallaspectsof
materialhandlingequipmentandsystemswithinthefacilitiesprovidesaviewofthe
solutionsnotusuallyincludedinnetworkdesigns.
4.
Globaldoesmatter:
Thescopeofnetworkprojectsbeginswiththesuppliers.Whenthestartingscopeofa
networkprojectistheportofentryitmaylimitveryviableoptionssuchasconsolidation
centers/DCsinChina(orothersourcingcountries)ordifferentportsofentry.Italsodoes
notcapturethecompletesupplychaindeliveredcosts.
5.
Omnichannelande‐commercehaschangedeverything:
Itisnosecretthatthesurgeofe‐commerce,omnichannel,multichannel,andsocialmedia
alongwiththeofferingsofAmazon,eBay,Wal‐Mart,otherlargeonlineretailersand
manufacturerswhoaresellingonlinehavesignificantlyraisedcustomerexpectations.The
customerdemandsrapiddelivery,freeshipping,andfreereturns.Throughsocialmedia,
increasedcustomization,andfasterdeliverycustomersareclearlysignalingthata
company’ssuccessandfailurerestonhighexpectationsofprice,selection,convenience,
andexperience.Customersexpectgoodvaluefortheirmoneyandhaveastrongawareness
ofthetotalprice(itemprice+shippingcost+salestax)oftheitemtheywanttobuy.
Customerswillcurrentlyacceptthreetofourdaydelivery.Goingforwardmorerapid
deliverywillbethenormformostitemssoldonline.Certainlyretailhasbeentheindustry
mosteffectedbuttherisingcustomerdemandsarespillingovertoallindustries.Many
non‐retailersarefindingthemselvesbeingforcedintoofferingonlineorderingand
fulfillmentofe‐commerceorders.Asaconsequence,companiesarestrugglingtodefine
theirnewrole.Aretheyareretailer?Awholesaler?Ane‐retailer?Amanufacturer?
Theomnichannelande‐commerceworldmakesnetworkdesignmuchmoredifficult.Itis
nolongerastraightforwardcomputer‐basedexerciseofmodelingDCs,FCs,and
transportationusedtominimizetotalcosts.Ahugechallengethatmustbeaddressedis
howthisnetworkshouldbestmeetcustomers’expectations‐rapiddelivery,freeshipping,
andfreereturns.Rapiddeliverycanbeachievedviaexpeditedfreightorbyplacing
inventoryinthelocalmarkets.Certainlytheadditionalhighcostofexpeditedfreightisnot
aviablelong‐termsolution.Insteadcompaniesneedtoanalyzethebestwaytoplace
inventoryinlocalmarkets.Thereareatleastfivefulfillmentscenariosfore‐commerce
fulfillmentthatneedtobeconsidered.
1.
DistributionCenters(DC’s)andFulfillmentCenters(FC’s):
TheDC’sandFC’shaveallSKUsthattheretailerwishestostock,fulfillscustomerorders,
andshipsdirectlytothecustomer.OftenthesenetworksonlyhaveoneortwoDC’sand
FC’s–dependingonthesizeofthecompany.AnetworkofDC’sandFC’sisoftenthelowest
costnetwork.Resultinginasignificantnumberofcustomersreceivingthreetofiveday
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ThereNeedstobeanOperationsStrategywhenDesigningaSupplyChain
shipping.RegionalFulfillmentCenters(RFC):RFC’sarefacilitiesthatusuallycarrya
subsetofthetotalSKUsthatacompanywishestocarry.Usuallythissubsetishighvolume
SKUsorSKUsthatmayberegionalinnature.EachRFCwouldfulfillordersforcustomersin
itsserviceregion.OrdersforSKUsthatarenotstockedintheRFCwouldbefulfilledbythe
FC(orfromavendorforendlessaisleSKUs)andshippeddirectlytothecustomeror
shippedtotheRFCforconsolidationwithotherSKUsforaparticularcustomer.Addinga
RFCtothenetworkwillrequiremoreinventorybutmanymorecustomerscanhavetheir
ordersdeliveredinonetothreedaysandoutboundtransportationcostswillbeless.
2.
LocalFulfillmentCenters(LFC):
LFC’staketheregionalconcepttothelocallevel.LFC’swouldhaveanevensmallersubset
ofhighvolumeSKUs.OrdersforlocalacustomerwouldbefulfilledbytheLFCand
deliveredtothecustomerbylocalcouriers.IfacustomerordersSKUsthatarenotstocked
intheLFC,thentheFC,RFC,orvendorwouldfulfillthoseSKUsandshipdirectlytothe
customerortotheLFCforconsolidationwiththerestoftheorder.UsingLFC’sprovides
significantlyfastercustomerdeliveryformuchofthecustomer’sdemand,usuallynextday
andoutboundcostswillbeless.Unfortunatelywiththisstrategytheoverallfixedcostsand
operatingcostsarehigher.
3.
LocalFulfillmentCenterwithPickup(LFC‐P):
TheLFC‐PconceptexpandstheLFCtoincludecustomerpickup.Allowingcustomersto
pickuporderswillrequireadditionalcapabilitiessuchasparking,afrontcounter,and
paymentprocessing.ConsiderationshouldbegiventolocatingLFC‐Pnearorinshopping
areasinordertooptimizecustomerconvenience.
4.
Stores:
Manyprogressiveretailershavebeguntousetheirstorestofulfille‐commerceorders.
Therearemanyvariationstothisprocessincludingfulfillingfromtheretailshelvesand/
orfromthebackroom,shippingtocustomersbyparcelcarrierorcourier,andcustomer
pickup.Usingstoresforfulfillmentoftenresultsinthefastestcustomerdelivery.Thismay
requiremodificationstothestoresanditwillrequireadditionalsystemsandpeopleto
handlefulfillment.Thebiggestnetworkissuetoaddressiswhatvolumeofe‐commerce
ordersastorecanfulfillwithoutnegativelyimpactingretailoperations.
CombiningaDCandFC:
AkeynetworkdesignquestionforomnichannelretailersisshouldtheDCandFCbe
separateorcombinedtoleveragesharedinventoriesinamultichannelfulfillment
environmentprovidingbrick‐and‐mortarstorefulfillmentande‐commercefulfillmentout
ofthesamefacility?Shouldtherebeonefacilityormultiplefacilities?Fartoomanysupply
chainshavebeendesignedwiththeDCandFCseparated.Givenwheretheretailindustryis
todayandwhereitisheadedmostDC’sandFC’sshouldnowbecombined.Combiningthe
DCandFCoffersmanyadvantages:
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ThereNeedstobeanOperationsStrategywhenDesigningaSupplyChain





Inventoryoptimization
Fewerchallengesininventoryallocationbychannel
Growingnumberofchannelsandevolutionofchannelvolumes
Enhancedjustificationofautomation
Reductionoftheimpactsofoverallpeakvolumes,whichcansmoothoutstaffingand
facilitatecross‐trainingoffull‐timewarehouseemployees
6.
RealEstate:
Whenconsideringmajorinvestmentsanunderstandingoftheavailabilityandcostofreal
estatecanbeverymeaningful.Unfortunatelyavailablegovernmentorotherdatabasesdo
notaccuratelyreflectcurrentmarketconditions.Companiesneedtoformrelationships
withnationalrealestatecompaniesthatcanidentifytheactualmarketandcostdriversto
betterclarifythealternatives.
7.
Don’tForgetIncentivescanbeSignificant:
Oftenmissedbutsubstantialelementsofnetworkanalysisaregrantsandincentivesthat
canbeprovidedbystateandlocalgovernments.Timingiseverythingandcommittingtoa
locationbeforeidentifyingtherelativeopportunitieswhenbringingnewjobstoanareaor
evensavingjobsfromrelocatingcanoftenbesignificant.
8.
ChangeManagementisCritical:
Changemanagementprovidesthebridgefromnetworkdesigntosuccessful
implementationandtransitiontoanewnetwork.Inadequatechangemanagementisthe
primereasonwhyredesignednetworksdonotoperateatthelevelsprojectedduring
networkdesign.Despiteitscriticalnature,changemanagementisoftenoverlookedduring
thenetworkdesignprocess.Changemanagementbeginswithanassessmentofthechange
readinessoftheorganization.Itmayincluderedesignoftheorganization,theprocesses
andsupportingtechnology.Theresultmaybeachangeleadershipstrategy,organization,
jobrole,governancestrategy,communicationsstrategy,and/ortrainingstrategy.
Organizational Design & Change management
Figure4
Process
Process Centric
Organization & People
Organization
Centric
Design
Organization
Design
Process
Organization
Change Info Driven Org.
I/T
Enabled
Processes
Technology
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ThereNeedstobeanOperationsStrategywhenDesigningaSupplyChain
INCONCLUSION
Supplychainnetworkperformanceisverysensitivetochangesinbusinessstrategyand
operatingenvironments.Someofthesechangesinclude,marketorsourcingchanges,
acquisitions,newproducts,newsaleschannels,andgrowth.Tomaintainacompetitive
advantage,thebestcompanieshavemadenetworkdesignanongoingprocessasthe
companyevolves.Thesecompaniesareconstantlytweakingandreinventingtheir
networksandbydoingthisarerealizingsignificantbenefits.Designinganeffectiveprofit
producingsupplychainisanongoingprocessthatneedstochangewiththetimes.
AboutTompkinsInternational
Asupplychainconsultingandimplementationfirmthatmaximizessupplychain
performanceandvaluecreation.Weenableclientstobemoreprofitableandvaluable,
whilealsobecomingmoreagile,flexible,andadaptivetothemarketplace.Tompkins
collaborateswithclientteamstodevelopimprovedoperationsstrategies,supplychain
planning,andexecutionacrossalltheMegaProcessesofsupplychains(PLAN‐BUY‐MAKE‐
MOVE‐DISTRIBUTE‐SELL).TompkinsisheadquarteredinRaleigh,NCandhasoffices
throughoutNorthAmericaandinEuropeandAsia.Formoreinformation,visit:
www.tompkinsinc.com. Registerforthe2015TompkinsSupplyChainLeadershipForum
Meettheexpert!LearnmoreaboutthistopicandmeetthereportauthorBruceTompkins
attheTompkinsSupplyChainLeadershipForuminSanAntonio,TexasfromAugust31–
September2,2015.
Fordetailsandregistrationinformation,clickhere.Toregister,contactPattyTrocchioat
events@supplychainconsortium.com.
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