4 minute read 7 Jun 2019
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How digital disruption impacts supply network flow

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EY Americas

Multidisciplinary professional services organization

4 minute read 7 Jun 2019

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In order to introduce logistics networks optimization, companies need to think big but start small.

In fulfilment, digital is not the solution, but the driver — for considerations such as shipping quantities, routes, where to locate distributions hubs and whether to manufacture somewhere else or not at all when we have 3D printing or even 4D printing as an option.

Network and flow optimization: what’s that?

Network optimization is something a lot of companies are looking at right now. At one end, it’s about whether sources are optimal for destinations — for example, is my factory in the right place? And, at the other end, it’s about finding the fastest, cost-optimized routes from manufacturing plants to customers.

Digital is a major driver. The availability of ever-shorter delivery options from online retailers raises customer expectations across the board. People want their products in just two days, or even tomorrow. And same-day delivery is increasingly available from larger companies in key urban areas.

But there are other drivers too. Mergers and acquisitions can raise the question of whether some sites are redundant. For example, it could be that an organization finds itself with 11 warehouses in one geography, whereas it could probably have managed with 2 to achieve the same level of service. In this example, it would be a matter of whether customers really demanded faster delivery or whether they were happy with less speed at lower cost.

Geopolitical changes are really shaking things up as well. Tax impacts driven by Brexit could make it challenging to ship certain goods across the UK/EU border. And in the US, tax reforms are threatening to make importing goods more expensive — which, for some companies, is prompting questions about whether warehouses should be located elsewhere or whether they should use a different port of entry.

Then there are advances in manufacturing like personalization, postponement and customization at the point of sale that have a completely different supply chain to serve a customer of one. And there are booming new markets in Asia causing companies to refocus their priorities.

Strategic vs. tactical flow optimization

The above considerations can be classified as strategic network design and flow optimization. But companies can also leverage tactical optimization. Tactical optimization decisions are ones taken on the fly, often based on insights from operational data.

It could mean a company deciding not to do any logistics themselves any longer: plenty of companies could decide that logistics is not a core competency, and so it can be outsourced.

Instead, they could analyze data to identify cost-saving activities, as one of my clients did, for example, by assessing whether one carrier should handle deliveries only up to a certain threshold only and then use a less expensive provider for larger volumes.

Doing it right: what does good network flow and optimization look like?

Asking a pure logistics service provider could seem like an obvious option. But such a company will likely only consider transportation costs and neglect (or not even be aware of) factors like local or national tax incentives to locate warehouses, or the availability of lower-cost labor to work in them versus the difficulty of finding more qualified people to manage the warehouses.

The trick is to think big but start small: identify three to five network optimization opportunities, but then initiate one project to review a part of your network and identify inefficiencies. Use the gains from your first project as a springboard to harvesting value in others.

With consumer expectations rising in terms of faster delivery options, network flow and optimization is bubbling up to the top of chief supply chain officer agendas. Done right, your customers will receive their goods and services faster, and you will likely find opportunities to trim costs and improve your bottom line.

Summary

Network optimization is something a lot of companies are looking at right now. There are many drivers, such as digital, geopolitics and mergers and acquisitions. However, the trick is to think big but start small. 

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By

EY Americas

Multidisciplinary professional services organization