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Moore on Pricing: Other dimensions affecting network cost optimization

By Peter Moore, Adjunct Professor of Supply Chain
November 01, 2013

Many of us think in terms of three dimensions, but I believe we need to broaden our horizons. 

I am referring to distribution network optimization (DNO) and the big three “dimensions” that transportation-centric models optimize—transportation cost, time, and labor rates. These factors are important, but there are others that should be in your calculations when laying out a new distribution strategy.

If we make a wrong decision about the location of our distribution facilities, we can end up paying a premium for transportation services, or other expense areas, for the life of the facility. Getting DNO right takes skill, tools, and a creative approach to supply chain building. 

Many DNO models focus heavily on a least-cost transportation solution for the network given a known set of demand volume by zip code. You input rates for inbound and outbound lanes and volumes and you get a suggested optimum geo location—often with a radius of several hundred miles. This is then further filtered for transit time and local labor rates. For the sophisticated optimization team, this is just too simple.

I was recently called in to help a specialty chemicals manufacturer supplying a chip fabrication facility near Phoenix. Their models told them to be near Phoenix to meet just-in-time (JIT) delivery requirements that carried a service delay penalty of $5,000 per hour.

They located near Phoenix, but failed to consider the lack of availability of truck trailers for rush orders on their side of town—not to mention the significant traffic delay crossing the city. They nearly lost the business in the first few months of opening the new warehouse, as they very quickly realized that this problem will be a long-term condition requiring expensive supplemental arrangements to provide JIT service. 

Some more sophisticated models allow for even more variables. Here are a few that you’ll need to take under serious consideration: 

Specific site location is critical. While the real estate folks are talking incentives with the city, the transportation team needs to research the availability of service at the site for rail, intermodal, and highway. Talk to neighboring shippers and get the real scoop on their experience with local- and long-distance carriers—and make sure to ask about how many carriers are available so you can have competitive bids.

Learn the strategic plans for key carriers the area. Are these providers expanding or contracting in your market? What investments are they making in people, facilities, and technology in the region?
Is driver turnover high locally? Or are conditions favorable for a stable team of operators that get to know your operations and your customers? 

Understand local infrastructure. You’ll need to fully understand the current and future infrastructure plans, including local highway construction or upcoming developments near your new location that could affect traffic, rates, and competition for the best providers. What’s the state of intermodal locally? Intermodal container inventories are important for exporters, but increasingly for domestic mid- and long-distance carriage as well. Talk with local intermodal shippers and your forwarder to get some service level benchmarks. 

Do you have the standard weather conditions? Bad weather can bring power outages and delays. Very bad weather can mean highway closures that stop outbound loads and cut empty trailer inventories overnight. The location should have alternate access routes and the potential of mutual aid from local service providers and fellow shippers. 

It’s hard to model everything while doing a distribution network optimization sitting in a conference room. After tweaking the models to get a general area for your new sites, it’s time to put the model down and get out to see what only a knowledgeable logistics professional can see. 

Some critical factors can only be seen when you step away from the computer screen. Find out about the tactical details that can really hurt your chances of getting to the cost and service targets you’ve set for your DNO project.

About the Author

Peter Moore
Adjunct Professor of Supply Chain

Peter Moore is Adjunct Professor of Supply Chain at the University of Denver Daniels School of Business, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at .(JavaScript must be enabled to view this email address).


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