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DESIGNING OPTIMAL SUPPLY CHAINS Your supply chain can make or break your small-package operation. Here’s how to design the best one for you. By Terry Harris
upply chain design — if it wasn’t important before, it surely is now. Online selling’s dramatic growth has energized supply chain design, bringing with it a lot of questions. How many warehouses should I have? Where should they be located? What should I stock in them? How will my supply chain help me sell more? The benefits of e-commerce — principally fast delivery — ripple through the broader economy; even B2B consumers ask, “Why can’t you deliver it like Amazon?” We’re spoiled! All material things begin and end in “Mother Earth.” In between, they’re in a supply chain. Supply chains are everywhere. For an organization designing or just improving their supply chain, there are two dimensions to wrestle with — service and cost. Providing service to customers is the sole purpose of a supply chain. Because you can spend your way to virtually any service level you wish, cost is the other core dimension critical to any well-designed supply chain. Each of these dimensions has components.
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SERVICE AND MARKET SHARE Many believe the service dimension can be sorted into several components. They cite lead-time, availability or fill, resolving problems, returns, and so on. Interestingly, these can all be collapsed into one component — lead-time. If your supply chain minimizes the time it takes your customers to get what they want, you’ll have all the service bases covered. So significant is your lead-time that it drives market share. Everything else being equal, the market share/lead-time relationship looks like Figure 1. This relationship stems from the recognition that one day out of a long lead-time, say 20 days, is minor (five percent). But a day out of a two-day lead-time is 50%. That difference gets noticed by shoppers and drives the buying decision. So lead-times, always important, are more critical in short lead-time markets; all the more reason to know your competitors and design your supply chain to provide even shorter lead-times than theirs. LEAD-TIME OPTIMAL WAREHOUSE NETWORKS You can actually design a supply chain to minimize the lead-time provided to your customers. It’s not a bad idea, so let’s do it. Take the US population as if they or some uniform subset of the population were your customers. Let’s design a warehouse network to minimize the lead-time to get to these customers. Figure 2 on page 20 is the result. This means that if you put a single warehouse in any place other than Vincennes, IN, your average transit lead-time will