Eight Signs Your Network Should be Optimized

Jan 23, 2008 10:18 PM  By

It’s true: A network optimization study can be time consuming and involved. It can also result in fundamental changes to your supply chain. And if you are in a multichannel environment, network optimization might be even more critical to your future competitive viability.

So is it worth undertaking the effort? If you can identify with some (or all) of the following factors affecting your business today, then yes, network optimization is for you.

1. Rising distribution costs
Energy costs are on the rise, be they fuel cost spikes affecting transportation costs, or the electricity required to operate, heat, and cool distribution centers. Labor is costly, with overtime and additional shifts adding expense. Shipping costs also continue to escalate, with more expensive expedited deliveries growing in demand. Finally, with the rise of e-commerce, more companies are struggling with a dramatic spike in reverse logistics and subsequent reshipping, all detractors from the bottom line.

Outbound freight is of special interest to multichannel merchants with the wide spread use of dimensional weight charges by carriers. With dim-weight, merchants wind up paying for occupying too much space on a truck for a “lightweight” shipment.

Many invoices are showing up with recalculated higher shipping charges when the cartons are dynamically scanned for dimensions as they go over a scale in the carrier’s facility. There are a number of ways to reduce these surcharges, but two are factors driven by location selection: travel distance to zones and zone skipping strategies.

Finally, by engaging in a network optimization study you are sending a subtle but succinct message to your current parcel carriers that you are serious about making changes. This is an often-overlooked by-product and can lead to more aggressive pricing arrangements.

2. Outsourced manufacturing and distribution
While moving manufacturing overseas may cut costs, it also adds miles to a supply chain, requiring additional lead-time and inventory expansion to accommodate lulls and delays at customs. For some companies, it could also mean adding coastal vicinity DCs to the domestic supply chain infrastructure in order to more quickly bring inventory under control.

Meanwhile, many companies’ existing distribution networks weren’t designed to integrate with foreign-based manufacturing operations, and can’t efficiently handle the crunch. Third-party logistics providers (3PLs) may play a role in the network as well, but may not be leveraged appropriately.

3. Service as a key selling point
Faster, better, cheaper deliveries—this is a market leader’s mantra. To stand out from their competition, companies feel compelled to offer stellar service at rock-bottom pricing, but can’t necessarily deliver with their current supply chain setup.
The reality of e-commerce marketing is that many customers expect same-day shipping, and to compound your internal cost challenges, free shipping (or heavily subsidized) is rapidly becoming the expected norm. Shipping times have become a major driver of sales so maximizing your one- and two-day service level coverage is essential; network optimization will lead to solutions that achieve this goal.

4. Leveraging current technology
Many multichannel merchants recognize that their original or current handling practices were designed for manual, less automated processes, and could benefit from an upgrade. Nonetheless, they may be reluctant to invest capital in the latest technologies and equipment without hard data to justify long-term use. Nobody wants to install an expensive warehouse management system (WMS) or automation system in a DC that’s later determined to be redundant and subsequently closed. Network optimization should therefore precede these initiatives.

5. Mergers and acquisitions
Has your company bought out a competitor or merged with a complimentary business? Are there plans to do so? While mergers and acquisitions are a quick way to gain market share, they’re also messy—yielding more DCs that likely run on different technologies in the same general geographic regions, servicing the same customer base.

This kind of growth also means more SKUs, more workers, more suppliers, and more customers to contend with than ever before. A network optimization should be done before you make investments in modifying administrative relationships, call center strategies, transportation contract negotiations, or investing in changes to have business units on a common ERP or WMS platform.

6. Change in demand
Change happens. Whether it’s growth in the form of new markets, clients, and products—or reductions due to closing markets, lost customers, and retired products—a change in customer demand equates to added pressure on the supply chain.

In the multichannel environment, these changes are compounded in complexity, since they may affect one business segment but not another. A network optimization broken out by channels might suggest disparate facilities for differing channels.

7. Struggles with ongoing costs
Are accumulating daily costs undermining your profits? Federal, state, or local taxes, charge backs for late or non-compliant order fulfillment, and offsite inventory storage can all severely impact the bottom line. A thorough network optimization can identify the best alternate locations to reduce a variety of costs, plus some locations offer aggressive abatements and investment credits that are not generally available at a current site.

8. Potential natural disasters and security regulations

A hurricane, tornado, earthquake, fire, or other natural (or unnatural) disaster could wipe out one of your DCs. If that happened, could your other DCs’ inventories and personnel handle the need for reserve emergency stock? And are your warehouses and inventory in compliance with the increased number of government mandated environmental/security measures as applicable per region?


Charlie Rizzo is director of client services improvement for Cincinnati-based Forte Industries (www.forte-industries.com), a supply chain consulting engineering firm specializing in distribution best practices and technology integration.