You might have noticed that “optimisation” is becoming quite the supply chain buzzword of late, especially amid any discussions about supply chain network design. In case you’re thinking it’s just another nice conceptual idea though, and that supply chain network optimisation is only applicable in certain cases, it might be time to think again.
Every company can benefit from network design optimisation, especially in terms of inventory costs. So in this post, I thought I’d highlight how your supply chain network can impact inventory levels, simply because this is where optimisation often delivers substantial cost savings.
Sub-optimal Network Design Breeds Inventory
When a supply chain network is less-than-optimal for meeting the needs of customers, it can easily turn into an inventory farm—a place where, instead of moving smoothly through the network, inventory starts to grow, becoming pooled in warehouses as a safeguard against bottlenecks.
Just as a livestock farm holds onto beasts until they reach a certain age, the oldest products in an inventory farm moves out to customers only after an obligatory period of aging in storage bays or racks.
Unlike the livestock farm though, there is no value to be yielded by holding onto inventory. It’s nothing more than a “just in case” measure. What’s more, once a company starts relying on buffer inventory, the levels tend to continue growing over time, tying up ever greater amounts of working capital.
Two Ways Your Supply Chain Network Design Can “Breed” Inventory
1. Too Many Stock Locations
If you have more warehouses than are really necessary to meet customer demand, your inventory levels will be higher than they need to be, since you will hold some inventory in each facility.
Of course you might decide not to stock all SKUs in all locations, but this probably means you will need to transfer goods from one warehouse to another, implement cross-docking, or deliver to customers from multiple warehouses.
Any of these solutions might enable a reduction in inventory, but can also reduce supply chain efficiency, for example by increasing the number of times inventory is touched between manufacture/purchase and delivery to end customers.
The most desirable solution of all though, is to have just the right amount of warehouses, in just the right locations to service customers at the highest level of cost-effectiveness. That’s a key objective of supply chain network design optimisation.
2. Supplier Proximity and Reliability
Your supply chain network design must take suppliers, as well as customers into consideration. The further your suppliers are from your distribution centre/s, the longer it takes for inbound inventory to arrive. The problem is compounded when issues arise with supplier reliability.
The natural response to long lead times and unreliable inbound supply is to increase the amount of inventory held in your warehouses.
However in some cases, inventory-carrying costs can be saved by relocating one or more warehouse operations to be closer to key suppliers. This can improve inbound supply reliability, reduce the amount of inventory your company needs to hold and over time, pay back more than the amount invested in relocation.
Optimisation Through Collaboration
Closing, opening, and relocating warehouses can become expensive, regardless of whether you are trying to get closer to your customers or your suppliers. When reaching the ideal is beyond your company’s means, you may need to start thinking about alternative measures. These might include:
- Asking a supplier to maintain a storage facility closer to your own distribution centre
- Moving to a vendor-managed inventory program
- Strategically outsourcing warehouse operations to 3PL providers.
So as you can see, supply chain network design optimisation doesn’t always have to involve the expense of relocating your own facilities, but it does require a high degree of collaboration with your suppliers and other partners (which can also mean your customers). It’s probable after all, that the part of the supply chain which you control is smaller than that controlled by other agencies.
Get More Supply Chain Network Secrets
Improved inventory costs are just one of the benefits of optimal supply chain network design. You can learn about some others, and the keys to realising them, in The 7 Supply Chain Keys, a guide to attaining outstanding supply chain performance.
To find out more about The 7 Supply Chain Keys, along with my other books on logistics and supply chain management, just pay a visit to the store page here at Supply Chain Secrets Books. Why not download a copy as an early Christmas present to yourself … or to someone else with a thirst for supply chain knowledge?
