Supply Chain Optimization: Harnessing Resilience

Possibly the most predictable aspect of supply chain is the impossibility of predicting the next crisis with total certainty. This is the crux of supply chain optimization: contemplating every possible obstacle and developing a subsequent strategy.

In any given year, supply chain professionals have to contend with trade disputes, climate change, macroeconomic shifts and natural disasters. These ever-changing market dynamics force supply chain leaders to wonder, "What if?"

But 2020 and 2021 have been especially tough for supply chain teams worldwide thanks to the pandemic. Therefore, instead of thinking on the fly and reacting as situations crop up, companies can readjust their course according to their established contingency plan. But how can supply chain managers harness network optimization to construct the most effective and resilient supply chain possible?

What is Supply Chain Optimization?

On an elementary level, supply chain optimization is imagining various circumstances and catastrophes that could arise at different points of your supply chain. Network optimization employs a combination of extensive data and sophisticated supply chain analytics that provide an end-to-end, quantitative snapshot of a company's supply chain process. Simply told, it is a network imitation model that allows managers to analyze "what-if" scenarios for the supply chain.

Before getting into today's challenges and how supply chain network design can help, let's rewind for a minute and retrace the roots of many of today's most prevalent supply chains.

What are the Benefits of Supply Chain Optimization?

There is a crucial difference between planning and design. Supply chain planning deals with the day-to-day logistics, such as procurement, transportation and warehousing. Planning and execution systems automate, streamline and optimize the existing operations of an organization. On the other hand, "design" requires more big-picture thinking. Network design establishes the supply chain operation that the logistics run on. While planning is responsible for running an effective business, design determines the supply chain efficiency.

As I mentioned before, many modern supply chains were established based on short-term goals and cost savings, which means that they were not made considering long-term supply chain performance. In other words, supply chain managers have historically allowed logistics to determine the maturation of their supply chain when network design-thinking reaps longer-term benefits.

Looking back over the past couple of years, the supply chain has weathered turbulence and uncertainty. Throughout 2017 and 2018, electronics demand was outstripping supply, subsequently extending the lead times for commodity devices like capacitors, resistors, diodes, transistors and memory. And that wasn't the only factor threatening the stability of the supply chain; geopolitical uncertainties in 2019, higher labor costs and rapid technology transitions also came into play. Considering how heavily a strong supply chain depends on visibility and predictability, this insecure and troubling environment poses challenges for supply chain managers, which a strategic network design can help alleviate.

There are several benefits of network optimization, such as determining the flexibility and resilience in your supply chain strategy, figuring out how to increase or reduce gross margins, reducing operating costs, assessing how to enter emerging countries and conducting a compliance study on taxes.

While each network optimization exercise is unique, the ultimate goal is to prevent supply chain disruption and drive cost-savings. Organizations can gain competitive advantage by running supply chain network scenarios, evaluating and proactively implementing changes in response to dynamic business situations such as new product introductions, changes in demand pattern, addition of new supply sources and changes in tax laws and currencies.

Network optimization provides a powerful modeling approach proven to reduce supply chain costs and improve service levels by better aligning strategies. By incorporating end-to-end supply chain costs — including purchase, production, warehousing inventory management and transportation — a network optimization exercise enables your company to make proactive decisions toward planned or unplanned factors. It can also help companies evaluate their current stability of the four pillars of a resilient supply chain: people, process, technology and design. 

Tips for Supply Chain Network Optimization

To illustrate what a supply chain network optimization model looks like, let's run through a hypothetical scenario.

Consider a company that manufactures Printed Circuit Boards (PCBs) in China and sends them to Mexico for integration into a high-level assembly or finished product. From there, the company ships the final product to a distribution center in the US to be sold to the end-customer. Through each step in this process, there could be opportunities for cost-savings and risk mitigation. It's a matter of asking the question "what if...?" Some of the questions below could serve as a good starting point: 

• What if we moved production to Penang? 
• What if we started working with suppliers in Mexico? 
• What if the cost of my material(s) goes up? 
• What if new tariffs are introduced for my products?

To answer these questions and come up with alternative supply chain models, substantial data is required. We can group some of the data into the following categories: 

• Final Product Details: Annual demand by product, packaged dimensions and weight, bill of materials, etc. 
• Raw Material Details: Prices of raw materials, current origin sourced from suppliers, packaged dimensions and weight, etc. 
• Final Product Destination: Destination locations, cities, annual demand by city of destination by product, future forecast split for market sensitivity, etc. 
• Supply Chain Details: Service level required (transit time, lead time, etc.) and inventory level requirements. 

Then, these data points can be utilized to compare elements such as transportation costs, type and frequency, trade compliance, inventory accuracy levels and other optimum conditions. Through supply chain network optimization, companies can determine how and to what degree all these variables contribute to a total landed cost for any combination of circumstances, simplifying the bottom-line calculation that results from complex supply chain decisions.

For best results, the information is reviewed with an outlook of three years to analyze the riskiness. After all, the supply chain footprint can't be modified every quarter. It takes years to complete a full transition of the supply chain. Therefore, decisions must be made on a long-term basis. Such knowledge and flexibility are crucial to enabling companies to adjust their strategies and achieve market victory.

The Future of Supply Chain Network Optimization 

As I've said, to develop a strong supply chain, decisions need to be made based on longer-term goals versus what is convenient at the time. Unfortunately, many supply chain managers continue to think short-term. Most companies continue to conduct their supply chain network optimization activities on a project-by-project basis:

• If trade regulations change, how will it impact your supply chain?
• If a component supply shortage is occurring, how are your products impacted?
• If a natural disaster occurs, what options will you have to move forward?

While these questions can be answered with supply chain network optimization exercises, the process is still quite manual. However, in the future, we can expect network optimization to be an ongoing effort, where technology will take care of all data inputs-both internal and external-for constant monitoring.

When it comes to supply chain, the digital era is well underway. Already, many experts are turning to technology to enhance their supply chain management and assist in their network design. In our 2019 survey, "adopting new technology" was the number one response when participants were asked what they were doing to manage risk.

Almost every industry has already started leveraging predictive analytics to some degree. The predictive analytics market is expected to grow from $5.9 billion in 2019 to $22.1 billion in 2026, according to Facts & Factors.

Supply chain predictive analytics software combines big data with "little data to paint a comprehensive picture of what may happen up to 10 days before tender. Modern supply chain predictive analytics rely on advanced technology that can generate logistical forecasts more accurately and over a longer span of time than manual reporting, thereby allowing supply chain managers to make the most well-informed decisions.

"What ifs" can be some of the scariest questions we ask ourselves. To find the answer, we must suspend our feelings of security and confidence and face some the potential of very troubling and difficult scenarios. But by confronting those questions, we can be better prepared if the worst does happen.

After all, a truly strong supply chain isn't one that can run well when everything is blue skies; it's one that can continue to grind on when everything is collapsing around it. The evolution of network optimization will be critical for the modern supply chain-one that will lead to better collaboration, visibility and decisions across the company.