St. Onge Company Links Supply Chain Blog
Strengthening your supply chain one link at a time.

The Value of Supply Chain Network Design (What Is It and Why Is It Important?)

Supply chains, whether we know it or not, influence our lives on a daily basis. Everything from the food we eat to the clothes we wear have traveled from the source location of the raw materials to the facility that makes the products to the consumer who ultimately buys and uses the products. The supply chain makes up all points in between the source and consumption. Ideally, these supply chains are designed to move products in the most efficient, timely, and cost effective manner possible, from end-to-end. This is where supply chain network design fits in. According to AMR, 80% of a supply chain’s lifecycle costs are locked in at the start, so once the supply chain network has been set up, there is only so much opportunity to improve. This is exactly why supply chain network design is so important to the health and growth of any business. It is analogous to the foundation of a house. If it is built on shaky ground, you may be in for trouble down the road.

By definition, supply chain network design is the end-to-end modeling process of all supply chain network nodes (plants, warehouses, etc.) and the flows between them. This process can answer fundamental supply chain network questions such as:

  • Where should you put your next plant or warehouse; which one should you close?
  • Which products should it handle?
  • How big should it be?
  • What service area (geography) should it be responsible for?
  • How do I handle extreme fluctuations in volume (e.g., COVID-19 causing rapid decreases/increases in demand or shifts from wholesale to e-commerce)?
  • How do I handle reverse logistics?

These scenarios are typically evaluated using a supply chain network design model, and there are literally dozens of these software tools on the market. These modeling tools, in the hands of an experienced user, provide the optimal supply chain network (based on costs, service, or both) that fulfills all the demand while obeying all the constraints. Evaluation of supply chain cost metrics typically includes the following:

  • Transportation costs (inbound, transfer, and outbound)
  • Manufacturing/product souring costs
  • Fixed facility costs (building, labor, utilities, etc.)
  • Variable facility costs (labor, supplies, etc.)
  • Inventory carrying costs

Cost are very important, but modeling real world constraints is where the supply chain network design tools show their value, and illustrate why this is not a simple spreadsheet exercise. Typical constraints can include the following:

  • Plant/supplier capacities and product eligibilities
  • Warehouse capacities and product eligibilities (e.g., ambient vs. frozen)
  • Customer service (differentiated by customer channel, e.g., wholesale vs. e-commerce)
  • Locked facilities (either locked open or locked closed)

Supply chain network design is an extremely important step in every company’s strategic planning process, and we are always asked how often should this be done? Our experience indicates that the best practice to maintain an optimal supply chain is to model it, end-to-end, every three to five years. With this frequency in mind, it may be difficult to keep team continuity from modeling event to modeling event, which may lend itself to using external experts in this field, such as St. Onge Company. That said, it is important to make sure experienced managers and modelers are leading this process. Just because the supply chain network models are run and provide a solution, does not mean that it is the correct one. There are many “watch outs” to keep in mind during the process, which we will detail further in a future blog. The proper supply chain network design considers many potential scenarios, and the final recommendation is usually a combination of many of the scenarios uncovered along the way.

–John McDermott, St. Onge Company

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