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BY MAIDA NAPOLITANO, CONTRIBUTING EDITOR

Transportation, warehouse and logistics pro-essionals cant seem to get a break. Justwhen we thought that the economy wasfnally experiencing a slow albeit unsteadyupturn, uel prices began creeping higher,

orcing reight rates back on the ront burner.According to the U.S. Freight Rate Indexan

indicator tracking the average cost per mile o landtransport in the U.S.the double-digit increase inthe price o uel has pushed the average cost permile rom $2.22 in 2010 to $2.39 in 2011, up 7.7%.That means a manuacturer with an annual transpor-

tation operating expense o $100 million in 2010 canexpect to add $7.7 million more or 2011.

And theres more bad news: Many are predictingthe cost per mile to get even worse with the globaldemand or oil increasing and the availability o truck

drivers decreasing. To help us sort out how these ac-tors are aecting Americas distribution networks,we turn to our network strategy experts rom threeleading supply chain and logistics consulting frms.

According to Marc Wulraat, president o Mon-treal-based MWPVL International, the key questionmany companies are now evaluating is: At what point

Whether driven by reducing costs or by new businessstrategies, our panel of experts says that rethinking yourdistribution network has become more important than ever.

foroptimizing

thedistribution

network6Tips

U.S. freight index(Average cost per mile)

$2.65

$2.55

$2.45$2.35

$2.25

$2.15

$2.05

$1.95

$1.85

$1.752008 20092007 2010 2011

Data source: Freight Rate Index www.freightrateindex.com. Index derivatives include the following: US Federal Reserve, US Department of Labor and Bureau of Labor Statistics,US Consumer Price ndex (CPI), Environmental Protection Agency (EPA), New York Mercantile Exchange (NYMEX) and the US Department of Transportation (DOT).

The double-digit increase in the price of fuel has pushed the average cost per milefrom $2.22 in 2010 to $2.39 in 2011.

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does it make economic sense to addmore distribution acilities to reduceinbound and outbound miles?

Paul Evanko, senior vice presidento York, Pa.-based St. Onge Company,agrees with Wulraats question. Manyare making the move toward smaller

distribution centers located close tomajor markets, to ports, and to inland-intermodal logistics centers.

But it isnt only the price o uel thathas shippers rethinking their distribu-tion networks. The implementation onew business strategies has also beenanother major driver. Almost everycompany that weve helped with logis-tics strategy in the last two years isreengineering their logistics network toeither enhance customer service or tohelp launch a new customer channel,

says Todd Soller, retail strategist orglobal frm Kurt Salmon.

Mike Jones, president o St. Onge, isalso seeing the same changing businessstrategy scenario play out in many o thestudies that his frm is doing. Recentnetwork studies have not only beeninitiated by ongoing mergers or acqui-sitions, but also by corporate edictslooking or cross-divisional synergisticopportunities, says Jones. With thelatter, while the individual businessesmay operate with great autonomy, the

corporate parent still wants them tolook at opportunities to share distribu-tion and supply chain resources.

Whether driven by reducing costsor by new business strategies, rethink-ing your distribution network has now

become more relevant than ever. Withtypical cost savings o 15% and more,these studies also result in allowingcompanies to service their customersmore quickly. This can make a hugedierence with how a company is per-ceived by its customer, notes Soller.

The ability to get product to marketin one to two days when the competi-tion can only deliver in three to fve daysis considered to be a serious weapon,says Wulraat. It may be worth it tospend more to buy more market share.

Which begs the question: Is yournetwork up to par? In the next ewpages, our experts share six essentialtips or network modeling success.

With a combined 83 years o experi-ence and more than 150 network stud-ies under their belts, you might want to

heed their advice as you optimize yournetwork.

Traditionally, in many DC projects,business owners and stakeholders dontget involved until the very end whenthey give their approval on the overalloutput. But in a network strategy study,our experts agree that engaging high-

level management early on is a must.Dont have them show up on the

15th week o a 16-week study and startthrowing curve balls and challengingthe assumptions, explains Jones. Getthem involved rom the beginning toestablish your assumption sets.

Soller also recommends involvingmanagers rom sourcing, product devel-opment, merchandising, and sales toget all o their perspectives or inclu-sion in the overall solution design.These managers bring perspectives tothe table that make the overall resultmuch more eective; it also ensuresbuy-in and belie that the new networkis a good decision or the business.

Soller cites, or example, how a salesmanager can bring to light specifcneeds o individual customers, allow-

ing you to address them within the net-work, rather than creating a one-size-fts-all solution or all customers.

A good distribution networkredesignencompasses a number o key areas othe business that all need to be consid-ered and questioned.

Wulraat lists some o critical ques-

Tip1

Involvehigh-level

management

Tip2

Asktheright

questions

Source: Updated from Sta te of the Art Survey of Commercial Software for Supply Chain Design by Kenichi Funaki from Supply Chain and Logistics Institute,Georgia Institute of Technology

Commercially available software tools for supply chain design and network modeling

Name Supplier Year released Web site

CAST Barloworld 1989 www.barloworldscs.com

4flow vista 4flow AG 2001 www.4flow.de/en/logistics-consulting.html

LogicNet Plus XE IBM ILOG 1995 www-01.ibm.com/software/integration/sca/logicnet-plus-xe

LOPTIS Ketron Optimization N/A www.ketronms.com/loptis.shtml

NETWORK Supply Chain Associat es 1968 supplychainassoc.com/NETWORK.htm

Opti-Net Technologix 1993 www.technologix.ca/software/opti-net

Voyager Network Design Logility N/A www.logility.com

PRODISI Prologos 1985 www.prologos.de/Engl ish/Prodis i.htm

SAILS Insight 1984 www.insight-mss.com/_product s/_sai ls

SCM Network Design Infor N/A www.infor.com/product_summary/scm/network-design

Supply Chain Guru LLamasoft 1998 www.llamasoft.com/Technology/NetworkOptimization.aspx

Network Design & O ptimization JDA Software N/A www.jda.com/solutions/network-design-optimization-overview

OptiSite MapMechanics N/A www.mapmechanics.com

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tions that need to be answered: What are the storage andthroughput capacity constraints associated with my existingdistribution network? What perceived service level require-ments are required or major markets being served in orderto be competitive? I the delivery lead-time is changed thenwhat is the anticipated impact on sales revenues or a given

market? What are the logistics operating expenses, one-timeexpenses, inventory assets and capital investments requiredor the baseline scenario? How do these compare to alterna-tive scenarios?

Evanko then points to a ew questions concerning dier-ent orms o sourcing: Should you be sourcing your productslocally, importing or returning manuacturing to the U.S. orto countries closeralso known as near-shoring?

Our experts agree that despite the buzz, near-shoring is notimminent. In act, they expect most companies to continueto outsource the manuacturing o low-value items such astoys and clothes to China. As labor becomes more expen-sive in China, then manuacturing isnt moving back here.

It will move urther south in Asia into Indonesia, Malaysia,Vietnam and India, says Evanko. Those countries still havea labor cost advantage over China.

Up to a certain scale,mod-eling your network in houseusing home-grown spread-sheets and databases can getcumbersomei not impossi-ble. Choose one o many com-mercially available networkmodeling tools.

These tools can help a com-

pany develop a very robust initialsolution and build the capability within your organization tocontinually monitor whats happening within the logistics net-work, explains Soller.

Wulraat cautions, however, against solely depending onthese tools to optimize the network. A sotware tool willhelp to fgure out a small but important subset o the overallinormation that is needed or a study, he says. But truth-ully, the CEO does not care i you used a hammer or a drillor the job. The CEO wants to understand the fnancials,customer service impacts, and risk sensitivities.

Whats the consensus? In any good network model redesign,you need both. Its important to involve the business owners

within the organization in conjunction with using the analyticsavailable in the tools, concludes Soller. The business own-ers help you ask the right questions and the tools assist youin developing more sophisticated answers to those questions.

According to St . OngesEvanko, one o the most over-looked areas in many networkdesigns is inventory. While add-ing more DCs may reduce trans-portation costs, it also requires

you to carry more inventoryand many times this inventory is

Marc Wulfraat, president, MWPVL International

The concept of the 12,000-mile supply

chain whereby goods produced in China

and Asia are shipped into North Amer-

ica is here to stay for any industry witha high labor time component involved

in the production of goods. We expect

to see a shift toward near-shoring and

domestic production for products that

are characterized by high cube/weight/

value as businesses look for ways to reduce inbound trans-

portation expense and to increase inventory turns caused by

25-30+ day delivery lead times inbound.

Mike Jones, president, St. Onge Company

Ten years ago, people were hung up

on inventory reduction. That desire to

reduce inventory drove the consolida-tion of facilities. Now, with low inter-

est rates decreasing the carrying costs

of inventory versus the rising costs of

freight, many have argued for more fa-

cilities. The more facilities you have,

the shorter the lead times, the lower

your outbound freight. However, the

more important your inventory sizing and deployment strat-

egy becomes.

Paul Evanko, senior vice president, St. Onge Company

More companies have expressed in-

terest in sustainability as corporatecitizens and also as wanting to be per-

ceived by their customers as being

green. So when we do a network study,

one of the things weve been looking at

is the impact of various network config-

urations on greenhouse gases. You can

see what the incremental cost would be

to add a facility that might yield a significant reduction in

greenhouse gases.

Todd Soller, retail strategist, Kurt Salmon

In the past many companies would

have their own internal network and not

leverage any logistics service provid-

ers or 3PLs. Companies are becoming

much more sophisticated. Theyre using

3PLs and integrating them into their

own internal network of DCs. 3PLs have

a greater capacity to scale and ramp

with regard to seasonal volume, assist

with rapid geographic expansion, and

handle certain product flows that allow a company to level

load its existing network while meeting the demands of a

changing environment.

More thoughts on U.S.distribution networks

Tip3

Useaneffective

networkmodeling

packagedtool

Tip4

Performaninventory

optimization study

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ar rom optimal. But it can be madeoptimal by coordinating an inventoryoptimization study with the networkdesign study, says Evanko.

Ater the modeling tool identifes thenumber o acilities needed and roughly

where they should be located, Evankosuggests using algorithms to determinethe right amount o inventory to achievea specifc level o service that can be cus-tomized or each o the acilities.

Jones points out that how you deployinventory becomes more and moreimportant the more acilities you have:

What products are you going to stock?Where are you going to stock them?Were getting customers wanting usto supplement the network study toanswer more tactical level questions,

says Jones. Its not just how many acil-ities and where theyre located, but howam I going to deploy the inventory, routemy trucks, and in some cases look at thedesign o the acilities themselves.

Certain areas have become hotbedsor distribution primarily because otheir proximity to the U.S. population.

Evanko points out, however, thatthese popular areas that companiesgravitate toward means that there could

be ferce competition or the labororce. Turnover rates become highbecause workers would rather workdown the street or another DC thatsoering 25 cents more an hour.

He recommends analyzing the local

labor market o the candidate loca-tions to determine not only i theresan adequate labor supply, but also todetermine i socio-demographic char-acteristics are amenable to jobs in lightmanuacturing and distribution.

Depending on the complexityo thenetwork, the availability o the data,and the experience o the project team,a typical network study can take up tosix months.

Im amazed at how many com-panies are making big, multi-milliondollar decisions, but or some reasondont spend the time to do it right,

says Jones. They have to do it infve to six weeks. Most o these stud-ies rarely take less than three or ourmonths to do right.

Maida Napolitano is a ContributingEditor to Modern Materials Handling.

Tip 5

Makesure

thereslabor

Tip 6

Takeyourtime

Warehouses & distribution Centers

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