Supply Chain Network Design:
9 Crucial Factors to Consider
A supply chain naturally develops in an ad hoc fashion as new products are
introduced or when changes are made to existing products. While supply chain
managers are aware of this and endeavor to consolidate sourcing, a degree
of complexity and fragmentation is almost always inevitable.
Managing the supply chain requires significant effort, and it's not unusual for
organizations to experience delays, short deliveries and quality issues that
disrupt production and the supply of goods to customers. This is why many
companies are turning to more frequent supply chain network design to optimize
and strengthen their supply chains
What Is Supply Chain Network Design?
Supply chain network design (SCND) can be described as the process that
determines the best mix of suppliers, locations, logistics and production facilities
for optimizing product manufacture and distribution. SCND entails answering
questions such as where to source raw materials, how to transport products,
what's the optimal location for production lines, product storage warehousing,
and the best methods for delivering goods to customers. It refers to a process
whereby a mathematical model of the supply network is created and optimized
using various types of optimization software such as algorithms, heuristics, and
linear programming.
Key Factors to Consider in Supply Chain Network Design
It's clear that supply chain network design represents a major departure from
convention supply chain planning which usually focuses on factors such as the
lowest product cost and just-in-time delivery. Because it analyzes and impacts
the organization's entire supply chain, from start to finish, SCND should be
tackled in a professional and organized manner. Many factors need to be
considered, such as goals, objectives, costs, buy-in and the best way to model
the organization to closely reflect actual performance. There are at least nine
crucial factors to consider.
1. Determine Goals and Objectives and Create Buy-In
It's essential to have a clear idea of what the organization hopes to achieve as
well as an honest assessment of the time, effort and cost. Supply chain network
design is not an exercise that can be conducted in isolation; it must involve every
function involved in the procurement, manufacture, sales and delivery of goods.
It's absolutely essential for there to be high-level commitment from the CEO as
well as the board. As part of this process, a pilot project that considers an
element or part of the organization may be needed to demonstrate the benefits
of supply chain network design.
2. Putting Together a Competent Supply Chain Network
Design Team
Apart from high-level support, the success of SCND depends on appointing a
team that has the requisite knowledge, skills and determination to see the project
through. At the very least, there needs to be a full-time project leader and a small
project team composed of individuals who, collectively, thoroughly understand
the supply chain, the organization and a vision of what they want to achieve. Key
executives and supply chain personnel must also be involved as and when
required.
3. Selecting the Appropriate Modeling Tool and Vendor
As relatively few organizations have in-house experts with requisite modeling
skills, it's likely they will need external consultants or modeling software vendors.
Various modeling software solutions exist, including packages and platforms.
Packages usually run in the cloud. Some are industry specific and can be used
with relatively little preparation, but they may not effectively model all supply
chains. Modeling platforms are powerful and flexible but generally require
advanced coding skills. Some use drag-and-drop modeling, which is easier to
configure and simplifies mathematical modeling.
4. Formally Defining the Existing Supply Chain Network
The first task is to define the existing supply chain network in some detail. This is
an important, if relatively time-consuming, process. The level of detail required
varies depending upon the type of analysis, but it's better to work with the
greatest level of detail possible, as this means there are fewer errors. Typical
information includes item, supplier, location, cost, distance, shipping method and
constraints such as capacity, lead time and flexibility. Start with the bill of
materials. A great deal of the required information will be available in the
organization's MRP and ERP systems.
5. Modeling the Supply Chain
This information is fed into the optimization modeling software, creating a
detailed mathematical model of the organization's supply chain. It is here that
the benefits of drag-and-drop modeling are seen, as it takes less time to build the
model and much of the work can be performed by employees without formal OR
training. A team approach helps expedite model preparation.
6. Populating the Supply Chain Network Model
The third major task after defining and modeling the supply chain is data
preparation. In most organizations, there's a wealth of data. However, additional
sources of data may need to be identified and acquired, especially relating to
forecasts and future market trends. These data streams need to be cleaned and
prepared for use via various filtering techniques. Missing data is as important as
faulty data. Once the data is prepared, it can be loaded into the model.
7. Model Validation
The model needs to validated. Irrespective of how it is prepared, certain aspects
of the model will not be easily visible, so it's best to apply historical scenarios
and compare the model output with a known result. There are two important
aspects to model validations. For a known set of inputs, the model must be able
to predict what will happen. Additionally, it needs to be calibrated to arrive at
similar values in terms of financial figures and volumes. This important step
generates confidence and credibility in the model.
8. Running Scenarios and Identifying Decisions
It's at this point that the model can be used to guide decision-making and
to answer what-if scenarios. The model itself should simply replicate what
happens in the real world. The next step is to use solver and optimization
programs that can run multiple scenarios to determine the best options and
decisions. For example, it would be possible to determine the best facility for
manufacturing a certain product. External data streams, together with in-house
forecasts, can help determine future strategic directions. An example would be
whether to source products from countries in the Far East or alternatively to
source similar products from closer but possibly more expensive suppliers.
9. Transferring Skills and Expertise
Supply Chain Network Design should be ongoing; it's not a static once-off exercise
but rather one that is in continuous use. For this reason, it's absolutely essential
organizations internalize the skills and knowledge to further develop and
manipulate supply chain network models. This applies equally, irrespective of the
type of model. If models are hard coded using a modeling language, competence
needs to be transferred and institutionalized so the organization isn't dependent
on one or two individuals who may (and will at some time) move on. In the same
way, ongoing reliance on vendor support is expensive.
Key Takeaways for Supply Chain Network Design
Supply chain network design is an excellent technique for optimizing and
managing an organization's supply chain. The modeling approach allows the
analysis of different scenarios as well as helping determine the best supply chain
decisions. While SCND is relatively costly, the benefits far outweigh the initial
expense. Mathematical coding models are powerful, but they depend on highlevel OR skills while drag-and-drop modeling offers greater visibility that's more
easily internalized. OR and IT support is essential, as is the involvement of line
managers and personnel involved in supply chain decisions.
How COVID-19 is reshaping supply chains
November 23, 2021 | McKinsey & Co.
Companies have only partly addressed the weaknesses in global
supply chains exposed by the coronavirus pandemic. In the face
of new challenges, finishing the job is even more urgent.
In May 2020, much of the world was still in the grip of the first wave of the
COVID-19 pandemic. Lockdowns, shelter-in-place orders, and travel
restrictions were disrupting activity in every part of the economy. Demand
evaporated in some categories and skyrocketed in others. As they struggled
to keep their businesses running, companies were planning significant
strategic changes to the configuration and operation of their supply chains.
When we surveyed senior supply-chain executives from across industries
and geographies, 93 percent of respondents told us that they intended to
make their supply chains far more flexible, agile, and resilient.
Twelve months later, in the second quarter of 2021, we repeated our survey
with a similarly diverse group of supply-chain leaders. This time, we asked
respondents to describe the steps they had taken to shore up their supply
chains over the past year, how those changes compared with the plans they
drew up earlier in the crisis, and how they expect their supply chains to
further evolve in the coming months and years.
It’s quicker to build inventories than factories
In our 2020 survey, just over three-quarters of respondents told us they
planned to improve resilience through physical changes to their supply-chain
footprints. By this year, an overwhelming majority (92 percent) said that they
had done so.
But our survey revealed significant shifts in footprint strategy. Last year, most
companies planned to pull multiple levers in their efforts to improve supplychain resilience, combining increases in the inventory of critical products,
components, and materials with efforts to diversify supply bases while
localizing or regionalizing supply and production networks. In practice,
companies were much more likely than expected to increase inventories, and
much less likely either to diversify supply bases (with raw-material supply
being a notable exception) or to implement nearshoring or regionalization
strategies (Exhibit 1).
Exhibit 1
Different industries have responded to the resilience challenge in markedly
different ways. Healthcare players stand out as resilience leaders. They
applied the broadest range of measures, with 60 percent of healthcare
respondents saying they had regionalized their supply chains and 33 percent
having moved production closer to end markets. By contrast, only 22 percent
of automotive, aerospace, and defense players had regionalized production,
even though more than three-quarters of them prioritized this approach in
their answers to the 2020 survey. Chemicals and commodity players made
the smallest overall changes to their supply-chain footprints during the past
year.
Some of these differences among sectors can be attributed to the structural
characteristics of the industries involved: for example, chemicals and metals
are asset-intensive sectors with large, expensive production sites.
Investments in new capacity can take years to complete. Other respondents
told us that they had struggled to find suitable suppliers to support their
localization or near-shoring plans.
Despite these challenges, regionalization remains a priority for most
companies. Almost 90 percent of respondents told us that they expect to
pursue some degree of regionalization during the next three years, and 100
percent of respondents from both the healthcare and the engineering,
construction, and infrastructure sectors said the approach was relevant to
their sector.
Almost 90 percent of respondents told us that they expect
to pursue some degree of regionalization during the next
three years.