THE ART OF A NETWORK ANALYSIS
BY PHIL SCHMIDBAUER
very successful business owner today focuses on delivering customer value — faster, better, and cheaper than their competitors. While relative to different types of consumers, one thing every business has in common is the cost of logistics. According to the 2020 CSCMP State of Logistics Report, business logistics costs were $1.63 trillion in 2019, or 7.6% of the national GDP ($21.43 trillion). Cost is one-third of the “better, faster, cheaper” equation. Speed and quality are equal parts, but it is often difficult to measure how much value they provide to the consumer. A good network analysis can provide strategic guidance toward reaching the optimal mix of the three variables. At a high level, a network analysis helps you understand a few critical spend elements: transportation, warehousing, and inventory. Additionally, it helps you understand the service impact on the end consumer. This article will focus on the distribution of physical goods as opposed to the service industry. How many distribution points should I use? Where should those nodes be located?
18 PARCELindustry.com MAY-JUNE 2021
What’s the impact on these costs (transportation, warehouse, and inventory)? Most importantly, what is the impact on customer value? As with most models, there are no perfect answers. There are directional answers based on company strategy, customer perceived value, and the competitive marketplace. Number of Distribution Points Determining the optimal number of distribution points can be complex. Most importantly, it is highly dependent on a company’s strategy. Are you trying to build velocity into your supply chain? What visibility do you have to customer orders? How quickly do your customers expect product from you? How much will you pay for speed? Increasing distribution points allows you to meet customer demand faster. Amazon continues to expand its footprint in order to provide next-day delivery on more items. Walmart and Target are using their store footprint to fulfill online orders. Consumers can order products and have them delivered overnight or, sometimes, the same day. Not everyone has the capital of these large companies to simply expand and compete in this marketplace. At a high
level, more strategically placed distribution centers (DC) will allow you to service your customers faster. The complexity of more distribution points, however, is added transportation costs and higher inventory levels. Additionally, there is a complexity to managing inventory levels of the same product at multiple locations. It is very difficult to ensure you have the right product, in the right place, at the right time, and in the right quantities when you have many locations. Naturally, the more locations, the more complexity. Location of Distribution Points Location of nodes is going to be driven by your supply chain. You need to ensure your model includes your inbound (raw material) flow, as well as your outbound customer shipments. A “center of gravity” can be misleading if you are not using baseline transportation rates in your modeling. There are many warehouse costs to be reviewed; however, your transportation cost, or service time, needs should drive the location of your distribution points. In the case of one business, the model (based on transportation cost) suggested they open in Valdosta, GA and another in Dallas, TX. During due diligence, a few issues arose which led them to review alternate locations. This process led to the opening of a
PARCEL May/June 2021