Role of Software Tools in Supply Chain Optimization
Posted in Operations & IT Articles, Total Reads: 6546
, Published on 19 February 2011
As businesses are getting increasingly complex, their supply chains have also become very intricate. Almost all supply chains are now global, have multiple modes, have been modeled to avoid wastages, and there is increasing tendency to continuously optimize those to improve service levels and reduce total supply chain cost. The role of new software tools and packages has been very critical in what I call “evolution” of supply chain management. Is everyone convinced? Not really.
During my interactions with many third party logistics providers, popularly called 3PLs, or contract logistics providers, I felt they still didn’t want to adopt the latest software tools available in the market. For many of them it was about affordability. But for many of them it was also about “comfort levels”. Even their clients were not really aware about how the latest software tools could help them realize better values.
A lot of supply chain service providers still do calculations on MS Excel. The use of those functions in Excel which are not usually needed for normal data entry makes them feel they are already doing something above average. The terms like “Advance Excel” help them feel good about their current practices. But such a system relies much on assumptions, there are greater chances of errors and mistakes which would often go unnoticed, there are lesser use of multiple constraints and due to all this the results have limited reliability. But then why don’t their solutions fail and they are forced to go beyond Excel based calculations? I think it is because there are so many inefficiencies in execution that blame doesn’t get to reach the planning stage. And hence the limited reliability of supply chain planning and design doesn’t appear to become a serious factor even if the business fails to reach the goals.
Let us take an example of a software tool used for supply chain network design and optimization. I have worked on it and helped clients redesign and optimize their supply chains making use of the tool. I am keeping the name of the package confidential because the same could be achieved by competing software packages too.
We start with understanding the existing supply chain. Where are the plants located, what are the products, what are the SKUs and their dimensions, what are the transportation modes and carrier capacities, what are the lanes, what are the warehouse locations, and then what are the dealer locations – all these are inputs to our model and we do data collection for the same. We try to get as much shipment history as possible, and one year or six months’ data dumps from SAP or an ERP help in capturing these. Now we do an “as is” modeling. Once this is finished, the supply chain tool gives us a pictorial representation of the whole supply chain network. We can see the factories, the warehouses, and the transportation lanes. With mouse clicks, factories would show their capacities, t-lanes would show how much is being transported over them and at what frequency. Now we try to optimize the supply chain and reach the “to be” stage.
We start with getting the sales demand covering the whole network of dealers and retailers. We put the constraints on the plants – something which makes the model very reliable – as not all plants can produce all products. We put the optional warehouse locations, much more in number than we desire. Eventually our optimized supply chain network would take the optimal number and location of warehouses (considering cost of opening a warehouse, cost of storage, cost of primary and secondary transportation, and overall supply chain cost). We define the available carrier choices. Once we give all the inputs and constraints, we try to run the optimizer by giving it targets – whether we want to “reduce total cost” or to “maximize service levels” – often supply chain optimization projects have targets for these two. After we run the model, we get an optimized supply chain network, which would have resulted in either “minimum total supply chain cost”, or the desired “service levels”, or one with the other as a constraint. It would give us locations as well as sizes of an optimum number of warehouses. It would give us how much shipment to make, in what frequency, and in what choice of trucks. It would optimize the inventory kept in warehouses or in plants. And we can tweak with the different parameters to get to reach what we desire.
The beauty of such optimization would be the number of “scenarios” we can run the model for. We have the option of running it with a “hub and spoke model”, with a few “mother warehouses” and then a layer of “secondary warehouses”. Both optimum number and location of mother and secondary warehouses can be determined by the software. We have the option of putting in taxes and tariffs. In fact in the recent times there has been a huge demand for supply chain “redesign” in order to get the best network “post GST”. As we know, the Goods and Services Tax (GST) is pending in front of government of India to implement. Its introduction would avoid the need of keeping multiple warehouses in different states to minimize taxes and costs. The best in class companies in India are already ready with their “Post-GST Plan”. The same is applicable for other nations and markets too, with their own unique challenges.
What if there are new kinds of taxes imposed, or some transportation lanes becoming unviable; can we run our model to find the new solution in time? With the help of these state-of-the-art software tools, we can. We can also do modeling based on Carbon Foot printing. We can do post-M&A analysis. In fact these tools have found much taking in companies which acquire other companies and want to integrate the supply chains. I can go on presenting to you the different scenarios which are possible with these tools.
Let me summarize the benefits I have discussed so far:
1)Reduce total supply chain cost
2)Improve service levels
3)Perform “what if” analysis
4)Enhanced supply chain visibility
5)Inventory Optimization at various stages
6)Do “scenario building” and analysis
7)Plan for changes in Tax structure
8)Better utilization of assets and resources
9)Save costs in sourcing
10)Factor in Carbon Foot printing
11)Integrate supply chains post merger and acquisition
Without doubt, these tools have helped companies save lots of wastages due to poor supply chain design and avoid “doing wrong things at better speeds”. In my knowledge, the benefits that we achieved in the supply chain redesign and optimization projects could never have been achieved by any manual or Excel based modeling. Also, we get the maximum advantage of using multiple supply chain tools, each focusing on different aspects but taking data from the other.
I think there is a prevailing impression that such tools are very complex and need “experts” to understand and run. But not all tools are difficult; in fact their developers have increasingly designed those for more user friendliness. Cost is still a concern for some high-end packages, but I think the benefits outweigh the costs. Just think about the benefits of using these latest tools, as described above, and you would make an educated choice. If utilized properly, these software tools can help companies reinvent their supply chain management.
About the Author: Kumar Rahul, B.E. (NIT, Durgapur), MBA (NMIMS, Mumbai), is a Consultant in Supply Chain domain with a leading IT firm. Views are personal. He can be reached on
. He also has a blog http://rahulbemba.blogspot.com/
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