Found Money: Using Supply Chain

Modeling to Find Hidden Cost Savings

Like nding unexpected money in a coat pocket, modeling technology can reveal numerous
cost savings opportunities hiding just beneath the surface.
Theres nothing better than putting on an old coat and nding money in the pocket. The money
was right there, but hidden just below the surface of that coat pocket.
This found money has three attributes that make it so great:
Its Fast You just reached into your pocket and there it was
in your hand.
Its Easy You didnt work long hours, toiling and sweating
to earn that money.
Its Unexpected You hadnt planned on having that extra
cash when you started the day.
Much like that money in your coat, there are numerous supply chain cost saving opportuni-
ties that are hidden just below the surface at most companies, and todays savvy profession-
als are using supply chain modeling technology to uncover that money.
This white paper will use real-life examples to explore four modeling techniques used by
industry leaders to nd money in the supply chain. These techniques include:
1. Product ow-path optimization
2. Demand segmentation and inventory right-sizing
3. Production footprint analysis
4. Transportation route optimization
Each of these techniques can deliver the same fast, easy and unexpected benets. They are
fast in that they do not require years to implement. They are easy because they do not require
major structural changes to the supply chain. Finally, they are unexpected because modeling
technology often uncovers solutions that contradict intuition or legacy business practice.
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Before After
Modeling analysis
showed that it was more
cost effective overall to
purchase product from
a single plant rather than
across all ve, despite
the additional transporta-
tion cost.
The process of moving your products from supply through production and even-
tually distributing them out to customers or stores presents a myriad of choices.
The collective set of these choices make up a products ow-path through the
supply chain. Modeling these ows can provide you with a total landed cost or
total cost-to-serve for each product. Modeling all the alternative ow options and
using smart algorithms to determine the best choice is called product ow-path optimization.
Case Example: Inbound Consolidation
A consumer goods manufacturer operated ve production plants across the eastern half of
the country. A modeling analysis showed that there were nearly 400 items from 25 unique
suppliers that were sourced across all ve production plants. In an effort to reduce the total
supply chain costs including sourcing, production, warehousing and transportation, the
company analyzed the effects of using one or more plants as an inbound consolidation center.
The results showed that for 12 suppliers and nearly 300 items, it was more cost effective to
purchase product from a single plant to receive higher piece-price discounts, even though
there were added handling costs and extra transportation runs. These minor product ow
changes resulted in millions of dollars in yearly cost savings.
1. Product Flow-Path Optimization
Case Example: Port Selection & Rebalancing
A retailer with 260 store locations and a strong e-commerce business was owing products
into their market through two ports, one on the east coast and one on the west coast. From
the ports, they utilized a combination of rail, LTL and FTL for delivery to four main DCs, 71
hubs, company stores and consumers. Using data including store demand, store sites, DC
and hub locations, supplier and port information and average shipment weights and cubes,
the company modeled the ow of each product to determine which product should ow
through which port and in what quantity. The optimization project recommended a shift of 20
percent product volume to the east coast port which netted annual total supply chain savings
of seven percent and simultaneously improved DC, store, hub and consumer delivery times.
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Image: Seven service-level cat-
egories with historical inventory
stocking level (depicted by the
orange bar), the newly-calculated
and optimized stocking level
(depicted by the green bar), and
the differenceeither positive
or negative (depicted by the
blue bar). Blue bars extending
below the line imply a reduction
in inventory and those extending
above the line imply an increase
in inventory level is optimum.
The length of the bars depicts
the inventory level in millions of
dollars.
One of the biggest sources of variability in the supply chain is demand, and
demand can be highly unpredictable. Despite the fact that there are many widely-
varying demand patterns, most inventory optimization tools assume that all
demand is normal, leading to either too much inventory or stock-outs and lost
sales. Multi-echelon inventory optimization determines how much inventory must be kept at
each level and location in the supply chain to deliver the desired service level at the lowest
cost. This analysis includes the inherent supply chain variability on both the demand side and
the supply side to identify the lowest total cost inventory stocking solution that meets the
service requirements for each product/site combination.
Case Example: Demand Segmentation
An automotive manufacturer has over 20 regional DCs to supply service parts to their dealer
and repair part network of over 2,000 locations. The number of parts supplied throughout
this network was over 120,000, with widely varying demand behaviors. The company used
demand segmentation technology to analyze and automatically classify the demand patterns
into 10 unique categories such as smooth, erratic, lumpy, unit-sized, etc. They then applied
the proper inventory policies to recommend the appropriate stocking levels required to
achieve their service level targets. The result was a total on-hand inventory reduction of nearly
20 percent, and better-tting policies for the items with irregular demand.
Case Example: Inventory Optimization
A grocery store chain has seven regional distribution centers that stock product for, and
deliver to, over 500 stores throughout the country. The top 2,500 SKUs are stocked at all
DCs. These represent more than 70 percent of the overall sales volume. The company
established seven service-level categories between 85 percent and 99 percent, based on
product characteristics. Multi-echelon inventory optimization analyzed the demand and
lead-time variability for each product/site combination and recommended a $5M reduction
in overall inventory, even though numerous locations required a higher level of inventory. In
specic cases, inventory for a product was increased in three or four sites and decreased in
others. The result was the right-size inventory for the organization. Savings are achieved by
actualizing the lowest total landed-costs and not incurring excessive supply chain costs due
to buying improper quantities.
2. Demand Segmentation & Inventory Right-Sizing
Put simply, the footprint represents the physical facility and quantity in which
each product is manufactured, along with the capacity required to make it happen.
Oftentimes demand for products shifts over time to new regions or different
quantities, and suppliers and cost structures change as well. As these changes
occur, the production footprint should also change to keep in-sync. This may
mean investing in additional capacity in certain locations or perhaps completely moving pro-
3. Production Footprint Analysis
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duction capacity to other facilities within the network. Modeling the production footprint and
analyzing varying scenarios helps a company balance existing capacity with the investment
required to add additional production.
Case Example: Product Placement and Balancing
A large food manufacturer had already made investment decisions around facility locations
and production footprint. The next question was how best to utilize that footprint. Over
time, demand for its product evolved and migrated to different geographical regions and
the company wanted to evaluate the impact of shifting locations from which raw materials
were source in order to provide a lower total cost. For example, if the company has 10 plants
where a certain kind of product is made, where and in what quantities should the product
be made, based on current raw material sourcing costs, transportation and facility costs? By
utilizing production modeling to simply balance variables and capacity, the company uncov-
ered over $50 million in cost savings in just one year, without any changes to the physical
production footprint.
Case Example: Distribution Capacity Planning
A global apparel manufacturer has a multi-million square foot warehouse in northern Europe
utilizing automated conveyors and high-bay storage systems. Even with all their sophisticated
automation equipment, the company was experiencing signicant capacity shortages and
throughput issues. To address the issue, they created a multi-time period model to identify
capacity bottlenecks within the DC and to determine the right stafng levels. Optimization
was used to propose actions to level the workload by bringing shipments forward, delaying
or re-routing them to direct delivery. A short-term version of the system considers require-
ments week by week, while a long-term version looks forward over two years. The new
system replaced a host of spread sheets and enabled more accurate matching of capacity to
requirements, thereby reducing costs.
Before
A multi-time period
model identies
capacity bottlenecks
and proposes actions
to level the workload
Before
After
After
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Transportation route optimization can be done alone or in conjunction with either
supply chain optimization or simulation. Using advanced algorithms, transporta-
tion routes are dened to minimize the cost of inbound or outbound shipments,
while considering realistic cost and constraint structures. This helps answer
the questions, Whats going to happen to our transportation routes when the
network design is changed? or Could there be a more efcient way to get our product from
the manufacturer to the customer?
Case Example: Vehicle Route Optimization
A global convenience store chain with 300 locations in a major metropolitan area had been
using a legacy spreadsheet tool for route design. By graduating to modern transportation
route design technology, the company was able optimize its routes to minimize route costs.
Testing a series of truck options and varying service levels, it found an optimal combination
that reduced the number or routes, trucks used and miles driven but maintained target
service levels. The new routes would generate cost savings of 8.9 percent of total outbound
transportation cost, as well as reduce emissions in a high-smog area of the U.S.
4. Transportation Route Optimization
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Case Example: Multi-Stop Route Design
A major provider of fresh and frozen seafood products was considering changes to its distri-
bution strategy, which previously was managed completely by their 3PL. Using transportation
network design technology, the company developed optimal multi-stop outbound distribution
routes to deliver frozen seafood from 20+ regional warehouses to more than 1,800 customers
throughout the US. They used a less-than-truckload comparison capability to determine the
optimal proportion of multi-stop routes and less-than-truckload shipments (for small and/or
far-ung shipments) for the companys revised strategy. Identied savings from the project
were nearly 20 percent of outbound transportation cost.
Uncovering Your Own Found Money
Modeling technology can uncover millions of dollars in supply chain savings just by optimizing
existing assets and processes. Oftentimes, simply visualizing existing supply chain structure
and ows can reveal hidden inefciencies and present opportunities for further analysis and
optimization.
Many of the worlds largest and most successful companies are continuously redesigning
and improving their supply chains. They often begin by uncovering cost-saving quick win
projects, and then examining how their supply chain will perform under a wide range of
market conditions and assumptions, analyzing the trade-offs between cost, service and risk.
So the question is: how much hidden money might be found in your companys supply chain?
For more information on how LLamasoft can help your business establish quick wins or
support a growing internal supply chain design competency, email us or call 866-598-8931.
2013 LLamasoft, Inc. All rights reserved. v.11122013
LLamasoft, Inc.
201 South Main Street, Suite 400
Ann Arbor, Michigan 48104, USA
Phone: +1 866.598.9831
LLamasoft.com
Info@LLamasoft.com