The manufacturing and distribution environment is changing. Is your network model keeping pace?
Deploying and configuring the right assets in the right locations is a major factor in distribution network performance. But the pace of business change means that the network model that worked for your business several years ago may not be the best one for the road ahead. A periodic review of network operations can be beneficial to your business.
If your organization is like many, your distribution network represents a major enterprise cost. On average, companies spend about eight percent of revenues on distribution costs. But it also is—or, better said, could be—a major driver of value, growth and profitability…that is, if you manage it effectively.
A well-developed distribution network model does three things well. It meets customers’ needs, at an acceptable operating cost, and it does both those things while providing an acceptable return on capital facility assets and investments in inventory. In addition, it handles current demand while remaining flexible enough to react to changing customer and market demands.
Many companies’ networks are not as effective or efficient as they could be—often because they become “stale” and don’t keep up with evolving business or market conditions.
No question, the business environment is changing. Customers have more choices for sourcing products than ever before. Distribution costs are increasing, but it is unlikely you can pass these on to customers. Technology is helping organizations deliver things better, faster, cheaper, and smarter. Channel partners are forcing organizations to distribute products more efficiently.
A prime example of the change facing distribution-intensive operations involves offshoring arrangements set up in the past decade, when there was a significant cost gap between operating a facility and the cost of transportation. Since then, rising fuel costs have closed that gap considerably or even negated it—forcing companies to rethink those offshore network models.
There are many other scenarios that might warrant a review of your network model:
- A recent or potential acquisition, merger, or divestiture
- Expansion into new geographies or products
- Changes in customer demand
- Growing use of expedited shipping methods to meet customer delivery needs
- Outdated facilities or lack of space for expansion
- Rising operating costs that are growing faster than sales
If your organization has undergone these or other major changes since you last analyzed and “adjusted” your network model accordingly, it may be time to take another look. Even without significant change in your operations, it is still prudent to review your network regularly.
Optimization—is it the right objective?
In theory, network “optimization” sounds like a worthy objective. But most companies operate in the world of “reality” rather than “theory.” And for most companies, an incremental level of improvement along a continuum is a very practical goal—and one that can produce real value.
An annual or biannual network model analysis can be a powerful tool for identifying incremental improvements that boost supply chain performance and enable other business benefits, such as improving customer service. A network model analysis incorporates facilities, products, transportation, demand, inventory, and other metrics to determine, for example, whether:
- Plants and/or distribution facilities are optimally located to handle current and projected demand
- Current production capacity will be able to meet projected increases in demand
- Proximity to necessary natural resources is sufficient
- Your current network in advantageous from both a service and cost perspective
From this analysis, you can model “what-if” scenarios to evaluate potential alternatives that may support your business objectives better.
You’d be surprised at just how often things change.
The critical part, though, is to perform this type of analysis regularly, either internally or by hiring a third-party specialist.
Regular network analysis can seem daunting but even a cursory review of the basic framework (establish current cost and service, determine logistics scenarios, evaluate appropriate logistics networks, discuss and validate recommendations) can yield substantial dividends.
Have you taken a fresh look at your network lately? Given the pace of change, you may want to consider doing so. And you may be surprised by what you discover.
With deep manufacturing and distribution industry experience, West Monroe Partners can help you identify and pursue strategies to drive revenue growth, control costs, and manage existing assets as efficiently and effectively as possible. For more information, please contact us.