Daily Archives: June 27, 2007

What’s Involved in SCNO (Supply Chain Network Optimization)? Part I

Reading a recent white-paper by ESYNC entitled Strategic Assessments (registration required), I realized that even though I blog regularly about the different aspects of supply chain optimization, including supply chain network optimization (SCNO, or SNO, but either way us northerners will think you’re talking about the cold wet white stuff [different from The White Stuff] if you say it and don’t spell it), I have’t really tackled it end-to-end all in one series. So, in this post, I’m going to try and outline what’s involved in end-to-end supply network optimization.

Whereas sourcing optimization, the topic I tend to blog about the most, tends to focus on product or service award optimization from a total value perspective, where the transportation costs are assumed relatively fixed based upon supplier or third party carrier bids (or historical costs with adjustments to account for inflation and expected financial outlooks), supply network optimization tends to focus on optimization of the distribution network, and the relatively fixed transportation costs it entails.

As I discussed previously in my CombineNet series [you know, the guys who can Optimize Anything], the costs associated with transporting your goods from a supplier’s plant to an end customer depend on more than just where you’re sourcing from and where you’re sourcing to, but depend on the routes you’re using, the number of times your product needs to be on-loaded and off-loaded, the number of different carriers you are using, and the amount of time you have to pay for your product to sit in a (temporary) warehousing facility.

The costs involved in that average price of approximately $1.00 / kg per lane that you use in your decision optimization to determine a supplier award for a category can be quite numerous, especially when sourcing from China. There’s the transportation costs associated with the carrier that takes your cargo to a warehouse on the docks, the storage costs while you wait for shipments to consolidate from your various suppliers, the loading costs onto the barge, the export tariffs and duties to get the product out, the port fees, the ocean freight shipping costs, the port fees on the other side, the import tariffs and duties, the costs associated with loading and shipping the product with your local carrier to your primary distribution center, the cost of maintaining the local distribution center, and the costs of finally shipping the product to the retailer or end consumer, to name a few.

But Supply Network Optimization is about more than just optimizing these costs, it’s optimizing your network to allow for these costs to be optimized to a new global minimum, which is dependent on your network, while controlling risk. Should you have five central distribution centers in the US or ten? Should you use air or rail? Should you ship to one coast or both? Should you use one port or two? Should you ship by truck or rail? Should you handle your own logistics or outsource it to a 3PL? What’s the optimal number of carriers? And so on.

Not an easy problem, and not one any single vendor or consultancy is necessarily capable of advising on across the board (but I’m sure we’ll be hearing from Paul Martyn shortly about how CombineNet’s optimizer, in the right hands, can handle this and so much more), but not one you can ignore – and not one you should tackle in a sourcing project.