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Opting for Better Logistics Locations

An engineering process known as supply chain optimization can help companies site their next distribution centers.

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.

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