OPTIMIZING THE SUPPLY CHAIN

Logistics Asia, 1/3/2008

CRISTINA GOMBOS and ASHISH PUJARI explain how intelligent software solutions are enabling faster and easier strategic end-to-end optimization of production and logistics networks.

The face of global supply chains is under a complete metamorphosis. The only constant in the development of value-added processes is called “transformation”. Oil prices are shooting through the roof, the outsourcing push continues – although to some new geographies since China and India are getting expensive – mergers and acquisitions are getting more frequent, and then there is the pressure to reduce carbonemissions.

To create a probable scenario: Company X, a brand name producer of apparels headquartered in Europe decides to move part of its manufacturing to China and Vietnam due to cost pressures. But what is the impact of this decision on other production facilities and warehouses, on the sourcing and distribution?

Moving manufacturing to Asia would mean set-up costs, logistics costs, manpower training costs – all that need to be balanced with high level of customer service and getting the right inventory at the right place at the right time at the right cost.

In this context, another question arises: what are the best locations for the new plants – as different constraints and opportunities like taxes, regulation, import duties, free trade zones or duty drawbacks must be taken into account?

This is where innovative supply chain simulation and optimization tools can make the difference between a good and a bad investment, as they allow the company to experiment with different possibilities and justify the move based on well-founded data.

To be able to determine how to redistribute the production quantities among several plants and the stock levels among the distribution centers, a lot of data must be considered and combined. That is, the more sites are involved in the strategic considerations, the more complex the manual calculation becomes – and the more time it requires.

Until the development of such intelligent software solutions the calculation of different business scenarios – so necessary for strategic decision-making – was done manually with the aid of Microsoft Excel.

But manual calculation often leads to alternatives not evaluated as well as to important constraints that have not been taken into consideration. In reality, optimal results turn out not to be feasible. With intelligent software solutions, however, multiple scenarios now can be generated in just a few minutes. And such software is typically 4000 times faster than Excel.

CREATIVE COMPLEXITY
The optimum location process can consider given constraints such as costs, time, distances or capacities. And by allocating product, resource and production quantities, software can automatically take into account both the cost-optimal capacity utilization as well as the equipment assignment in the individual production facilities.

Fast overviews, transparent visualization and significant time savings are the results. The intelligent coordination of production and distribution processes and corresponding inventories is the crucial task of a modern supply chain management. It is difficult to find any company of reasonable size that does not have an ecosystem of suppliers, customers and stakeholders spread out across Americas, Europe and Asia. But often, companies do not realize the opportunities and risks of their supply chain networks. Faced with global markets, companies have to work carefully and proactively on the planning and optimization of their supply chain networks to keep up with worldwide competition in terms of productivity, flexibility and efficiency.

This does not only apply for big organizations. The increasing globalization of the markets means that even the production and logistics networks of medium-sized companies are very complex.

The need for overall planning and optimization of the entire supply chain arises even more in cases where there is a widely spread network of suppliers, production sites and distribution centers. Here, long term strategic calculations become irreplaceable as they, for example, allow the identification of the optimal number as well as the selection of suppliers, and the optimal allocation of inventories and propose efficient distribution strategies.

End-to-end software solutions find a remedy considering all important factors inside the value-added network in an integrated model – including suppliers and distributors, inventories, transport resources, and different sales markets.

FROM BOTH ENDS
Though most companies are able to optimize single parts of their supply chain, they do not include all possible negative effects on other areas of the value-added chain. Very few companies use an integrated approach that consistently takes account into all fields of the production and logistics network.

In this context, the crucial concept of end-to-end optimization of supply chains includes the integrated design and structuring of a stream of goods and values so that customers can take delivery at the right date and in a maximally cost-efficient way.

Optimization of added value inside the network and a simultaneous increase of delivery service and customer value can only be reached if all conflicting objectives are balanced across the entire supply chain.

After visualizing the end-to-end network, and the connections and dependencies between all the locations, the simulation of different scenarios can start:

• What type of product should be produced on which location?
• Which quantity of whichproduct has to be available atwhich location?
• Should there be cross-docklocations for shipmentconsolidation?
• If so, how many and where?
• How to optimize transportation– considering the Asian specificconstraints?

As a strategic issue, the optimization of inventories and batch sizes should always be included in the structure of the network. And intelligent software solutions allow the relevant analysis within the whole production and distribution network.

Procurement costs, as well as production, storage and distribution processes directly influence the inventory level and allocation. As for the determination of batch sizes, these typically depend on a variety of factors such as demand, minimum order quantities for material inventories, packaging units, order quantities, etc. An additional factor to be considered is the exact scheduling of these indicators on a continuous time scale.

Through the use of an integrated [ After visualizing the end-to-end network, the simulation of different scenarios can start. ] network model, end-to-end optimization of business networks can be calculated in a very short time and be implemented – depending on the initial situation – within few weeks. In comparison, the implementation of an operative ERP system is quite laborious and pays off completely only after the realization and utilization of the system.

SCENARIOS IN SOFTWARE
In many fields, structural changes of the supply chain are possible and astonishingly simple. Product allocations and inventory levels can be changed in the short-term. Modern software algorithms calculate the best inventory strategy, optimize all inventories on the single sites and ensure the optimal allocation inside the network.

The tool, ORion-PI, which Axxom offers in collaboration with Singapore-based consulting company Ayana-Logis, considers several issues when identifying an optimal network scenario, e.g. costs, capacities, lead times, distances, alternative means of transportation or taxes and duties.

Large and very large network scenarios can be simulated and efficiently optimized, including non-linear constraints, via Axxom’s optimization technology – the CSA (cost scaling algorithm) Algorithm. In summary, the end-to-end optimization of supply chains is a new and promising solution that – compared to operative systems – taps into a great potential.

map

simulation

Cristina Gombos is Manager, Key Accounts, Axxom Software;
Ashish Pujari is ManagingDirector, Ayana-Logis.