Network optimization is a critical issue across all Supply Chains. In Manufacturing, Distribution, Logistics and Retail the effectiveness of your network will make the difference between success and failure.
There are many environmental factors that must be taken in to account in order to define and optimize your network. Your business may be growing or declining. You may be expanding into new channels, such as E-Commerce, or you may be pulling back. And you may have just received a cash infusion allowing you to invest more, or you may have enormous cash and profit pressures forcing you to ratify your network.
Whatever your situation your network must continually be optimized. Your facilities, whether owned, rented or outsourced, are the living organism which make up your network and define how your company goes to market.
I was interviewing for the job with one of the Board of Director members. His question to me was direct:
“What would you do to reduce the number of facilities that we have?”
I proceeded to articulate how I would gather all of the data I could, including a thorough review of the facilities, and then ratify or otherwise optimize the facilities based on a complete analysis of financial performance, customer and growth needs, operating performance, capabilities, and strategic value.
However I answered the question it must have been sufficient because I got the job. But the fundamental expectation was that I was going to reduce cost which the Board assumed meant reducing the number of facilities, regardless of all of the other factors that should have been taken in to consideration.
As I came onboard I quickly gathered all of the data I could to help me understand the financial status and forecast for each facility, as well as an overview of the site capabilities, operating performance, customers, and organization structure.
I also corroborated the generally held view that we did need to reduce cost to improve the company’s financial performance. But I also learned that there were high customer expectations on improving existing capabilities, adding new capabilities, and optimizing where we were located. And the Sales team always wants to add more facilities with the promise of more business ahead.
This gave me enough information to formulate some early thoughts on what we needed to do. And there are many different ways to reduce costs. Early indications were that there was much we could do to improve efficiencies. But I had to get on the road and visit each and every one of these facilities to see for myself exactly what was going on first.
You can not honestly make this kind of assessment from a remote office looking at Powerpoint slides and spreadsheets. You have to see it first hand. You have to meet your employees face to face. So I spent a considerable amount of time visiting facilities all around the world.
Practically speaking we did have tremendous cost pressures. So we launched our Global Process Excellence program and we restarted our Lean program to drive massive improvements in our operating efficiencies. Despite all of the work we were doing to improve our productivity however the basic infrastructure costs associated with running each standalone facility were too high and unaffordable.
On top of that we had a lot of excess capacity. Capacity can me measured in many ways. But for us no facility was operating more than 2 shifts, 5 or 6 days a week. And there was empty physical space in every operation. Further the local management teams had the bandwidth, and desire, to do more work. Everyone wanted more business!
Region by region and site by site we set about formulating a strategy to reduce the amount of physical space, and cost, that we had. In some cases we could reduce our space and return it to the landlord. We were also able to free up space making expansion (along with the associated increase in costs) unnecessary. In other cases we would need to close some facilities.
The key criteria that we reviewed included:
- Financial performance
- Capacity – Space, Time, Equipment
- Costs of reduction, closure, and/or transfer
- Customer requirements
- Strategic value of each location for current and future business
- Ability to relocate business to other facilities and retain business
- Benchmark metrics (eg. profitability, cost/square foot, capacity utilization)
- Employee impact
“Attack On All Fronts” Network Optimization Strategy
In net our Network Optimization Strategy involved an “Attack on All Fronts” approach. We needed to do everything we could in parallel to make the maximum impact in the shortest amount of time. The Strategy included:
- Drive productivity improvements and increase operational efficiencies everywhere
- Reduce discrete space requirements (eg. whole buildings or portions of buildings) wherever possible by returning this space to the respective landlords
- Transfer work from non-strategic locations to strategic locations
- Centralize infrastructure functions instead of having complete stand alone capabilities at every location
- Close or decommission non-strategic locations
- Invest in current or new facilities and capabilities in strategic locations only
It is never, never easy to close a facility or do restructuring. A lot of people are impacted and they have devoted years of their lives loyally contributing to the company.
However the health and survival of your company may force you to make these incredibly difficult decisions to protect the rest of the jobs for those employees that remain with you.
We applied all of these elements of our Network Optimization Strategy. After 24 months we were able to reduce the physical footprint in the company by over 35%. At the same time our efforts to introduce further operational efficiencies ensured that we still had the capacity and capability to support growth.
We didn’t compromise customer satisfaction anywhere. And we positively leveraged our employees to lead the ongoing efficiency improvements that would sustain a dramatically improved level of profitability.
Depending on your business and your pressures there may be different considerations that you need to make. You may be considering outsourcing your business. Or you may need to expand your E-Commerce distribution network to compete in this extremely intense channel. And protectionist political pressures, such as “Made In America”, may be shaping your thinking.
And as you work to optimize your Network it is important to remember that this work is never done. Even if your company sells products your Network can also be considered one of the “products” or “services” that you are effectively selling to your customers.
Your Network is a living, breathing organism and you need to tend to it dynamically, continually and proactively.
One thought on “Network Optimization Success Criteria!”
It might worthwhile to check out our Supply Chain Optimization platform at Vidusi. We created a SaaS (online) optimization platform to model almost any supply chain network.
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