Opting for Better Logistics Locations
An engineering process known as supply chain optimization can help companies site their next distribution centers.
Rick Underwood, APL Logistics (Aug/Sep 07)

If Dr. Rajiv Saxena says your distribution center (DC) network needs improvement, don't take it personally. He's said as much to numerous companies over the past few years, all as part of a typical day's work.

Saxena's feedback is the essence of supply chain optimization, an engineering process that helps companies determine the best available solution to virtually any supply chain challenge - including the challenge of where to place North American distribution centers. Introduced in the 1940s, the term may sound familiar if you have an engineering background. Yet it's only become a common logistics phenomenon and frequent DC site selection staple in the past several years.

"The pocket protector set embraced optimization a long time ago," says Saxena, a longtime supply chain engineer. "But it wasn't until the logistics industry experienced some of the most dramatic changes in its history - all in a very short time - that the practice became such a popular supply chain trend."

The more things change.
Saxena doesn't exaggerate. The world of logistics is a vastly different place than it was in the late '90s, when the toughest distribution site selection challenge was how to accommodate Internet sales channels.

Since that time, the dot-com boom has gone bust. Truck drivers have been leaving the profession in record numbers. Fuel prices have skyrocketed. And - perhaps most notable from a supply chain transformation perspective - China has joined the World Trade Organization, opening the floodgates of global manufacturing.

The domino effect this has had on U.S. companies' supply chains is staggering. Those who have moved their manufacturing to China (and they are numerous) have found their supply chains expanded by thousands of miles and several weeks. That, in turn, has substantially increased their inventory carrying and transportation costs and placed new financial pressures on their already-challenged logistics budgets.

Those who have chosen to keep their manufacturing here in the United States - particularly those with West Coast suppliers or manufacturing operations - have suddenly found the efficiency of their supply chains tested by the fact that more shippers are vying for their time-tested carriers and transportation lanes (not to mention their dwindling driver options), especially if those carriers and lanes are located near popular U.S. ports of entry.

In short, it's radically changed the rules of domestic distribution for global and domestic shippers alike - and made it difficult to rely on traditional rules when mapping out a U.S. distribution center network.

"In the engineering world, we have a word for the decisions you're able to make based on experience. It's called `heuristics,' and it's used quite often - even by people who don't know they're using it," says Saxena. "For example, if you asked companies to choose five DC locations for a generic company, the typical response would probably include Los Angeles, Chicago, Dallas, Atlanta, and some place like Memphis or Indianapolis - all based on the fact that this is where the vast majority of companies have located their DCs in the past. That's a valid heuristical assumption - or rather it was, until a few years ago."

Saxena continues: "Now the history isn't there. Even domestic logistics isn't the relatively predictable process it was a few years ago, because it's impacted by other companies' globalization. There are far more variables companies have to try to get their hands around now. And that makes it difficult to make solid supply chain decisions without substantial analytical help."

.the more they stay the same.
Compounding the level of difficulty is the fact that while most things in the world are moving faster, product speed-to-market has become slower.

The weeks it takes many internationally sourced items to travel from production line to end-user are a far cry from the hours or days it once took them to travel across a few states. And the numerous factors that have the potential to slow them down - security issues, more hand-offs, Customs clearance, port congestion, and more - make the litany of potential delays from the "old" days look positively tame by comparison. Granted, some companies are factoring these delays into their supply chains and right-sizing their lead times accordingly. But many still aspire toward the halcyon days of the dot-com era when they could get almost anything delivered same-day or next-day, especially if they were willing to pay for expedited transportation.

In other words, while the ability for many companies to achieve aggressive delivery windows has changed, most customers' expectations haven't. They typically aren't willing to suffer delivery delays or disruptions any more now than they were when supply chains were predominantly domestic. And it's the shipper's responsibility to find a happy medium.

Enter Optimization
In light of these pressures and changes, optimization has proven to be a very effective and expedient supply chain planning tool. Unlike heuristics, it's a highly objective process that relies on systems and math rather than opinions and rule-of-thumb predictions. As a result, it's virtually impervious to the highly attractive economic incentives that can throw so many of today's logistics site selection exercises off task. (While many of these incentives are impressive - because communities see distribution center business as an attractive way to replace lost manufacturing jobs - the fact remains that transportation costs always outweigh real estate costs several times over. If the transportation access isn't there, the potential tax and real estate savings will be far outweighed by increased freight bills.)

Optimization is also relatively fast; some optimizations can be done in less than a day or a week, although many take a bit longer than that. And compared to some other computer-based decision tools, like simulation, it's relatively inexpensive. Best of all, it's surprisingly flexible and applicable to many situations, including one of its most popular applications: DC site selection.


Optimization and Real Estate
When it comes to optimized DC site selection, experts say the ideal place to begin is with a full-scale logistics network design - choosing how many distribution centers your company should have and where they should be located, all in light of where your customers are located and where your product is being sourced from - because that's one of a supply chain's most strategic areas.

But, unfortunately, most supply chains aren't ideal. The realities of DC leases and mortgages mean that very few companies can implement such a wholesale logistics network overhaul - at least not all at once - although many companies probably wish they could. However, companies still can (and do) use DC optimization to great advantage by employing it on a smaller strategic scale - for example, when they reach corporate and supply chain milestones such as:
• A decision to outsource some portion of the supply chain to a third-party logistics provider (3PL). Outsourcing provides a prime opportunity to leverage some of a 3PL's locations. In addition, it can lead to some excellent outside optimization advice, because many 3PLs routinely perform optimizations as part of the RFP response process.
• The expiration of a lease agreement for a logistics facility. Opting to re-up a lease agreement without examining how well that facility location is working for your company is a waste of a valuable cost-savings or productivity-improvement opportunity.
• The entry into a new manufacturing venue. While it might not be possible to alter the location of your existing North American distribution centers right now, an optimization could reveal how adding space or a new DC to the mix could help accommodate a new manufacturing venue with a minimum of disruption. For example, if you're moving manufacturing to China, the optimization might reveal that you need to open up a new distribution center on the West Coast - or that you need to find a deconsolidation center to help you deploy a speed-to-market distribution technique called DC bypass.


Other Improvements

Performance and financial measures such as the following can also pave the way to rewarding optimization results:

• On-time performance: If your company has started to fall short of a longtime goal to deliver product on time a certain portion of the time (be it 95 percent or 99.9 percent) - and it hasn't had problems before - it could be a sign that your supply chain is long overdue for an optimization.
• Logistics budgets: We live in a day and age when logistics budgets are understandably larger. Nevertheless, if you suddenly find your transportation costs getting out of hand, consider conducting a network optimization to examine how adding, subtracting, or changing up distribution centers could help keep costs more under control.

Finally, many companies find optimization incredibly helpful for increasing the productivity and throughput of their individual DCs. Facility layout and design, route and carrier selection, and load building are just a few of the potentially rewarding applications.

"Companies that limit the use of optimization to highly strategic exercises such as site selection are missing a significant opportunity to improve and fine-tune many other elements of their supply chain," says Saxena. "Optimization is equally useful for the tactical as well as the strategic. It can help you find the right site. Or it can help you make an existing site that you're tied into that much more workable for you. Either way, your company wins."

Is there a downside to optimization?
Naturally, there is a caveat associated with optimization, as there is with almost any supply chain technique: It's only as good as the people who use it.

Working with optimization's linear, non-linear, and integer models requires the skills of highly educated engineers. And it's not really possible to take any shortcuts on this. There is no such thing as an "Optimization 101" course that you can send your most technically oriented people to. And even if there were, you should be leery about using these shortcuts because it's not possible to make this complex process that easy.

Additionally, optimization has its limits. Although it's great for identifying the best-case scenario under the circumstances, it can't fully predict how well that scenario will actually play out. In other words, it is a decision tool, not a crystal ball.

Thus, if you want more of a guarantee, you're better off using a simulation instead, because it examines how recommended solutions (such as a particular site) will play out given different circumstances. Better yet, consider "test driving" the recommendations your optimizations turn up by doing a simulation later down the line. Nevertheless, for speed, flexibility, and reliability, optimization is a technique that will do a better job than most of keeping your DC locations not only on the map but on the road to success.

"Eventually U.S. companies will have enough international supply chain history to confidently return to rule-of-thumb, heuristical calls for logistics site selection," says Saxena. "However, that doesn't necessarily mean they will, because they'll also have more of a history and comfort level with optimization. Much like few people use a typewriter anymore now that PCs are around, I can't see companies that have used [optimization] wanting to go back."


Rick Underwood is vice president of Contract Logistics Services in the Americas for APL Logistics, an international provider of supply chain management services that operates more than 24 million square feet of warehousing space. He can be reached by email.

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