Balancing Speed and Cost

 SPEED VS COST 01There’s a lot to keep in mind when optimizing your network.

By Tony Donofrio, Stephen Francis, Shawl Liu

It’s clear from the name alone that “network optimization” is a desirable goal, but how should we pursue it? Most of the time, we’re just trying to make things work, let alone “optimize” them. The fact is, for the typical supply chain professional, day-to-day reality is balancing the tradeoffs between speed and cost, combined with an overwhelming number of options in other areas.

Among the things that we can’t change are the locations of big, “static” assets such as buildings and the heavy equipment built into them. These assets were put where they are for good reasons, but the world changed around them. Perhaps we had a big, important customer in Houston, so we built our plant there. Our customer moved to Oregon, but our plant is stubbornly still very much in Texas; there’s nothing we can do to change that for now.

Of course, it’s not just big tangible assets that defy our will. Market conditions are also at least somewhat beyond our control, as are the weather and supplier lead times – there’s no shortage of constraints.

On the other hand, when it comes time to move goods to another location, we are faced with a dizzying array of modes and choices — barges, trains, trucks, overnight, etc. — and all going over an effectively infinite number of routes. Precisely because we have options here, it’s a good place to start looking for ways to optimize; we think the most important thing to hold in mind as we conduct our search is the basic tradeoff in all supply chains: speed vs. cost.

Going the Distance 

When it comes to this tradeoff, one size definitely does not fit all — a nickel mine may obsess over every dime per ton of freight, while organ transplant conveyors shave seconds to save lives. No enterprise is exempt; we must decide very carefully where we lie on the cost/speed continuum. The wrong decision squeezes our margins or drives away customers.

Interestingly, wherever we fall on the cost/speed spectrum, one factor always has an impact: distance. Both cost and time increase in lockstep with distance; surprisingly, the same is not true of volume.

Assuming that you can’t magically move your manufacturing or distribution centers, where should you look to save some miles? A good place to start is with backhaul. Let’s face it, every foot covered by an empty vehicle is a waste of time and money, no matter how valuable its outbound journey.

Transportation management systems (TMS) are invaluable for reducing wasted backhaul; they effectively share the carrying capacity of the vehicle with other players within (or even outside) your firm. They can also reduce outbound cost by reducing the number of less than load (LTL) i.e., partially empty trucks.

Optimal Locations 

If you’re in the fortunate position of building (or rebuilding) your supply chain from scratch, you get to ask the big questions: given our customer’s location, where should we build our manufacturing plant? Given where our plants are, where should we put our distribution centers? Where are our suppliers located? Do we need to be closer to suppliers or customers?

You can run simulations, find the optimal answers – given current market conditions – then build accordingly. However, missing a key question such as import mix or service requirement can result in a flawed network optimization model.

By now, you might be thinking, “I thought you always stress ‘simplicity’ — this doesn’t sound ‘simple’ at all.” And you’d be on to something: network optimization is fairly complex (the math can be downright dizzying). Frankly though, the better TMS suites make all of this possible for just about anyone willing to put the effort in — and the payoffs are considerable.

The “Internet of Things” will soon revolutionize this space. Cheap sensors embedded in vehicles (and even the freight itself) will enable assets to talk to each other directly and “work things out” among themselves in real time. This will save a tremendous net amount of time and money across all supply chains, sparing the environment and lowering the cost of goods sold everywhere.

On the other hand, firms that aren’t ready for the revolution will be left behind. We recommend that you roll up your sleeves: the best prep work you can do to get ready for the IoT revolution is the hard work of simplifying and optimizing your freight network — and the best time to do it is right now.

Tony Donofrio, head of Argo Consulting’s supply chain practice, has more than 30 years of supply chain experience. He has a reputation for taking on tough challenges, creating growth opportunities and outperforming the competition. Stephen Francis, senior consultant, co-created the Argo Integrated Management System (AIMS). He develops and implements tools that drive deep and rapid change for Argo’s clients. Shawl Liu, a consultant within Argo’s Supply Chain Practice, leads manufacturing process development and transportation optimization projects. For more information, visit www.argoconsulting.com.

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