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Logistics Distribution & Warehousing 2006: Supply Chain Network Optimization

Real estate decisions cannot be made in the absence of supply chain planning and vice versa.

Ned Bauhof, Vice President, Precision Distribution Consulting, Inc. (Logistics Distribution Warehousing 2006)
"Large industrial users have become more sophisticated. They are no longer just looking for a big box to store product for distribution. They want a comprehensive logistics strategy. While important, real estate is only a component of such a strategy." - Thomas R. Carragher, Studley.

The worlds of real estate and supply chain are colliding. Today's progressive supply chain and real estate executives recognize that there is an inevitable connection between supply chain and real estate. This connection offers possibilities of integration and improving processes in both areas. This can influence a company's ability to operate efficiently on a day-to-day basis and, even more significantly, have an impact on potential profit.

The bottom line is that real estate and supply chain have a symbiotic relationship. A real estate decision in the absence of supply chain planning is as suboptimal as a supply chain strategy without consideration to real estate planning. The latter comes in many forms, whether it is the wrong location (which can result in lower incentives, higher taxes, unsuitable labor, increased transportation, etc.), the wrong cost structure (10 year vs. 5 year lease), or an inappropriate platform on which to operate (including building size, site flow, dock requirements, etc.).

Use a Step-by-Step Approach
Having participated in various levels of supply chain planning for more than 14 years, I have come to understand one undeniable fact: Distribution planning is not easy. The difficulty compounds if you consider this collision of supply chain and real estate planning. Considering these complexities, it is imperative for companies to utilize a methodical step-by-step approach to analyzing their distribution infrastructure.
Fortunately, there are tools and methodologies available that afford companies the opportunity to not only evaluate their current conditions, but also to evaluate alternative operating strategies and the associated impact. As companies embark on such a performance improvement journey, it is critical to understand the objectives of the journey. In most cases, when companies implement any type of supply chain improvement strategy, they are trying to accomplish one or more of the following:

    1. Reduce cost;
    2. Improve service; and/or
    3. Position the company for growth.

Strategies
As members of a company evaluate the objectives of their strategy, it is also important to understand that there are multiple levels of strategy in any organization. At the highest level is the business strategy. Business strategies help to shape what the company is and what it wants to become. With a business strategy defined, companies must then define, or their customer will define for them, the customer service strategies.

Supply chain strategies then represent the operating platform that must be put in place to achieve the customer service strategy, and ultimately the business strategy, at the lowest possible cost. The real estate strategy is then the platform upon which the supply chain strategy resides, acting as a key enabler of success - hence, the symbiotic relationship of supply chain and real estate.

Although the overall roadmap to supply chain planning is a long one, there are two critical touch points of supply chain and real estate planning: distribution network rationalization and site selection. Although different in their methodologies, network optimization and site selection work hand in glove relative to defining a company's optimal distribution infrastructure.

Distribution Network Rationalization
Distribution network rationalization is the process of determining the appropriate facility infrastructure to support a given supply chain strategy. No matter how well distribution centers operate, if a company has the wrong number of distribution centers, distribution centers in the wrong locations, and/or distribution centers serving the wrong purpose, the supply chain will have a suboptimal cost structure. Before a company invests capital in a new distribution center, someone should ask the following questions:

• How many distribution centers should we have?
• Are there opportunities to consolidate distribution centers?
• What is the role of each distribution center?
• Have we properly sized the distribution centers?
• Which products should we inventory in each distribution center?
• Which customers should each distribution center service?
Do we have enough flexibility to accommodate future customer demands?

How do companies answer these questions? As previously mentioned, there are tools available to help. One such tool set is network-modeling software. A well-designed network model will assist a company in answering all of these questions and define what distribution centers are required, where they should be located, and how they operate to support a company's overall supply chain strategy.


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