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Inward Investment Guides

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)
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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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