Central vs. Distributed Stocks: Trends in Logistic Network Design Northeast Supply Chain Conference Cambridge, MA 2004 Bruce True, Welch s and Michael Watson, Logic Tools 1
Agenda Introduction to Network Design New Trends In Network Design Central vs Decentralized Stocks Case Inventory Positioning Case Introduction to Welch s Welch s Business Problem and Solution 2
Supply Chain Challenges Global Economy Competition and Opportunities Powerful well informed customers Customer driven strategies Increased uncertainty On both the supply and demand side New technologies Web Services, On-Demand Computing, RFID. New regulations Hours of service 3
Value of Supply Chain Planning Strategic Tactical Operational Strategic Supply Chain Planning Advanced Planning and Scheduling MRP/ERP Execution 80% 20% The majority of a supply chain s lifecycle costs are locked-in at the start Such up-front decisions include: Distribution network Inventory Locations Assembly network Part & component suppliers Inventory Levels Desired part & component availability Desired part & component costs In-house vs. contract manufacturers Decisions Solutions Value Logistics suppliers Source: AMR Research, BCI 4
Key Design Questions Supply Chain Design Manufacturing network rationalization Distribution network rationalization Global supply chain design & analysis Inventory positioning & allocation Supplier selection Identify key inventory drivers Supply Chain Planning Optimal inventory & safety stock levels Global Inventory Optimization Global Sourcing & Master Planning Strategic sourcing decisions Time phased capacity planning On-going supply chain master planning 5
Network Design Introduction Components -Data -Optimization -Visualization 6
Trade-Off Between Service and Cost 7
Why Strategic Network Design is Difficult Crosses boundaries within an organization Data required can be hard to collect Variety of data is required: Customer, service, transportation and facilities New types of data: new facility options, viewed differently than current systems The optimization problems are difficult Decisions made with remaining uncertainty Policies that cannot be quantified Labor and Supplier Constraints Political stability, currency fluctuations Ability to shape the data in a strategic study: Costs, demand, constraints Implementation Changes suggested can be disruptive Changes can be radical The need to transition 8
Who is Involved? Operations Can include transportation, warehousing, manufacturing, and vendors Understanding on how the business runs and what is possible Sales/Marketing Provides information on service level constraints and evaluates how different scenarios will impact sales Provides forecast data Finance Determines cost inputs and validates cost of scenarios Information Technology Assists with data collection 9
Input Data Customers Information Where you are shipping to and how much by product Plant / Vendor Information Specifies the origin of the product and related costs and capacities Distribution Centers Existing and potential distribution centers, cross-docks, warehouses, etc. For each, the relevant fixed and variable costs along with capacities Products Transportation Costs The cost to move product from origin to destination 10
Output Data Minimum overall total cost Manufacturing costs Warehouse costs (fixed, processing, and inventory) Transportation costs Optimal number, size, and location of warehouses Appropriate allocation of products to different warehouses Trade-offs between cost and service levels Optimal production quantity at each manufacturing plant Efficient supply channels in the logistics network 11
Network Design Process at Walgreens Walgreens is the largest drug store chain in North America with 2003 Revenues of $32.5B Currently has 4,229 stores More than 50% opened within the last 5 years 400-500 new stores open each year Currently has 12 DC s with a 13 th under construction Each DC serves 500-700 stores Stores are within 250 miles of a DC Logistics costs DC s: $100 million to build Transportation: $100 s million per year Source: Global Logistics & Supply Chain Strategies, Nov 2003. pgs66-69 by Thomas A. Foster. 12
Network Design Process at Walgreens Network Modeling Corporate logistics staff is ultimately responsible for new sites Use a network model to continuously evaluate the network and determine where and when new facilities are needed Modeling includes factors such as cost and service Results of the modeling effort find the general area for the new site Picking a Site Real estate team makes final selection Available land Zoning Labor forces issues Utilities Tax issues Final sign-off at board-level 13
Plant Location Case Study " $# %& # &( )' #' %! $ " #! % #( ( *+ 14
Optimized Network (1.6) (1.2) (4.0) (4.5) (4.5) (2.5) (4.2) (0.9) (3.6) (1.4) (1.2) 15
Trade-Off Curve Below 08 plants there is not enough capacity Baseline Optimized 16
Trends in Network Planning Network design is now more than WH location Evaluate alternative transportation strategies Impact of inventory strategies Centralization of stocks Sizing of warehouses Transition planning Location and No. of Plants, Warehouses? Plant optimization How much Safety Stock is needed by location? Network Planning Where should product be sourced from? Strategic sourcing Plant rationalization How do I manage Transition? 17
Impact of Inventory Strategies Consolidate slow moving products at some primary warehouses Reduced inventory costs against increased transportation costs Example 1 Echelon Opt Baseline 2 Echelon Optimal Network 2 Echelon Optimal Network (C @ 4, D @ 2) Transportation Inbound $ 6.1 $ 5.8 $ 5.8 WH to WH $ 3.0 $ 1.5 $ 1.4 Outbound $ 34.7 $ 30.7 $ 28.9 Total Transportation $ 43.8 $ 38.0 $ 36.1 Warehousing Variable $ 10.5 $ 10.0 $ 9.8 Fixed $ 15.8 $ 15.0 $ 14.7 Total Warehousing $ 26.3 $ 25.0 $ 24.5 Inventory Inventory Holding $ 10.1 $ 8.5 $ 7.9 Annual Inv Value $ 84.5 $ 70.9 $ 65.7 Total Dist Cost $ 80.3 $ 71.4 $ 69.4 % Savings ---- 11.06% 13.59% Service Level % of Demand < 400 miles 74.28 70.13 69.09 Weighted Avg Distance to Customer (mi.) 226 202 211 $ $ 5.3 5.3 M savings savings in in inventory inventory by by stocking stocking C and and D items items at at fewer fewer locations. locations. $ $ 1.8 1.8 M savings savings in in outbound outbound transportation transportation $ $ 0.5 0.5 M savings savings in in warehousing warehousing 18
Sizing of warehouses for optimal design Seasonality can impact warehouse sizing strategies Production vs. Demand (excluding CANS) Impact of $4M PPoD Savings on Mixing Center 500,000 400,000 300,000 200,000 Pallets 470,000 450,000 430,000 410,000 390,000 100,000 0 May Jun Jul Aug Sep Oct Nov Dec Pallets Jan Feb Mar Apr 370,000 350,000 330,000 May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Before Two Tier After Two Tier Demand Production $2M Peapod Savings $4 M Peapod Savings 19
Transition Planning Migration to new structure is not immediate and typically phased-in Jan 2002 July 2002 Feb 2003 WH Units Regions Served Atlanta - 0 Dallas - 0 Des Moines 236,856 108 Dover 242,308 90 Phoenix - 0 Reno 13,658 16 WH Units Regions Served Atlanta - 0 Dallas 13,697 9 Des Moines 141,902 80 Dover 242,308 90 Phoenix - 0 Reno 94,915 34 WH Units Regions Served Atlanta 27,370 24 Dallas 67,321 38 Des Moines 83,062 41 Dover 220,246 81 Phoenix - 0 Reno 94,823 33 20
Central vs Decentralized Case 17 Warehouses 5 6 4 Transportation: $43.8 M Warehousing: $26.3 M Inventory Holding Cost: $10.1 M TOTAL: $80.3 M Actual Inventory $84.5M Inbound Truck Utilization: 63% % Demand covered within 1-day: 74.28% 2 21
Optimal Network 5 Parent & 9 Forward Warehouses 3 4 4 Transportation: $38.0 M Warehousing: $25.0 M Inventory Holding Cost: $8.5 M TOTAL: $71.4 M Actual Inventory $70.9M Inbound Truck Utilization: 82% % Demand covered within 1-day: 70.13% 2 $ 5.8 M savings in transportation; $13.5M reduction in inventory; >70% of demand served within 1 day 22
2 Tier Network for Northeast Region Suffern, NY (RDC) feeding forward Whses Boston, MA Buffalo, NY Bergen, NJ 23
Inventory Optimization Working Capital ($millions) $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 $83 $69 $71 All SKUs Full Service All SKUs Central WH Combined Solution 24
Inventory Optimization Working Capital ($millions) $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 $83 $69 $71 All SKUs Full Service All SKUs Central WH Combined Solution 25
SKU Strategy High Value, Small Cube High Value, Large Cube High Demand 89% 59% High Demand 99% 89% Low Demand 53% 19% (81% Cent) Low Demand 96% 60% Low Forecast Error High Forecast Error Low Forecast Error High Forecast Error * Percent shown is the percent of that category that is stored in all the regional DC s **Other drivers include supplier lead time, lead time variability, review period 26
Inventory Positioning Case Manufacturer of Metal Components Multi-tier Network Manufacturing in China Central DC in China 5 Regional Warehouses ~20 Country Warehouses Two Types of Customers: OEM After Market Components are shared across multiple assemblies 27
Snapshot of the Network 0/ -,!,, -3 - - -- *" 1,,2 4' " ( -0 -/. -3 ' $ ( " # 28
Logistics Planning Transportation, Duty, and Material Handling Shipping frequency Distribution Network (lane costs, lead times, labor rates, and inventory points) Global Sourcing Planning Source plant cost Capacity constraints Review period/set-up frequency Demand Planning Inventory (safety, cycle, in transit) Customer Service Level Demand and Supply Variability Forecast accuracy Review period 29
Logistics Planning Transportation, Duty, and Material Handling Shipping frequency Distribution Network (lane costs, lead times, labor rates, and inventory points) Global Sourcing Planning Source plant cost Capacity constraints Review period/set-up frequency Management Focus Improve forecast Ask customers for more lead time (30 to 60 days) Try to avoid penalty: line shut down penalty Demand Planning Inventory (safety, cycle, in transit) Customer Service Level Demand and Supply Variability Forecast accuracy Review period 30
Strategic Inventory Positioning # & #& 31
Strategic Inventory Positioning! " # $ #&5637 # &5,,7!" #&5.27 # &5007 ## #&5,37 # &56,7!! #&5.07 # &5027 #&5,67 # &56-7 # & #& 80% of Safety Stock is at 2 tiers - Plant Raw Materials - Regional DCs 32
Inventory Drivers Global Optimization can identify hidden inventory drivers Driver Reduced Forecast Error Longer Lead-Times Inventory Positioning Synchronization Changing Transit Times Increase Shipping Freq Impact <1% <1% 30% 0 19%* 9% 11% Driver Suggested by Management Management Global Optimization Global Optimization Global Optimization Global Optimization * Based on Customer Contracts 33
Background Founded in 1869 by Thomas Welch Became a Cooperative in 1945 National Grape Cooperative Association 1350 members Net sales in FY 03 equaled $579 million Majority of business is Domestic 34
Distribution Primary manufacturing/distributing locations in Pennsylvania, Michigan and Washington Small co-manufacturing operation to support the plants Many items made at all 3 plants Growing interplant volume Growing refrigerated business not part of study All manufacturing and distribution done by outside party 35
Transportation Welch operates a core carrier program Shipment breakdown 44% truckload 40% multi-stop 15% customer pick-up 1% LTL 98% of D/F customer orders ship from 3 plant warehouses 36
Network 37
Historical Focus Keep it simple Minimize costs Maximize customer service Welch s is a follower, not a trend setter 38
Reasons for Network Study Welch Network becoming more complex Growing amount of inventory in overflow warehouses Growing number of co-manufacturers Growing interplant volume Customers demanding more services bar-coded cases ASN/Pallet license plates Extended warehouse hours of operation Shorter order cycle time 39
Reasons for Network Study Potential for significant investment Additional warehouse space Barcoding RFID Oracle- WMS 40
Study Objective Determine the best overall distribution network # of warehouses, sizes and locations Shipment modes Insource vs outsource Expected cost Distribution study only Plant movement not an option 41
Process Project timeline was 7 months Core team assembled Logistics Manager Operations Manager 2 analysts LogicTools Consultant Monthly updates given to senior management steering committee 42
Approach Examine future customer needs Conduct benchmark study Perform network analysis 3 rd party analysis Internal analysis 43
3 rd Party Analysis Put together an extensive RFP Selected 4 3PL s top participate Selection based on food industry experience and ability to handle Welch business 3PL s to complete proposal for handling some/all of distribution network Met with each 3PL at a both headquarters and a plant location Conducted 2 rounds of proposals 44
Internal Analysis Software selection Looked at a small number of options Selected LogicNet Plus Reason for Selecting LogicTools Value Ease of implementation Product used in earlier analysis 45
Analysis Loaded LogicNet Software with the following information: Sales by ship-to, by minor group Plant production capacity Plant production costs Truck and rail rates 25 potential DC s identified 40+ scenarios run: Single sourcing locations versus multi-sourcing With and without shipping from Welch plants With and without rail 46
Findings Add up to 3 forward warehouses Dallas Jacksonville Las Vegas Average distance to customers drops from 667 miles to 445 miles Savings with 1 warehouse $1.5 million Additional warehouses save a couple hundred thousand each Much of savings comes from use of boxcars 47
Network Solution 48
Network Solution Final solution constrained by business constraints Single sourcing of regions Limited opportunity to change sourcing locations 49
Sourcing Review Decided to allow system to move/eliminate production and plants Potential savings increased to $7 million, with 2 forward warehouses 50
Network Comparison Both 3PL and LogicNet solutions similar in design and cost Most significant difference is expected savings with Dallas DC Major difference between LogicTools and 3PL costs is the 3PL management fee 51
Recommendations Investigate feasibility of a southern warehouse in Dallas area Conducting detailed discussion with various Distribution providers Decided that savings associated with additional warehouses not worth going after If forward warehousing makes sense, outsource Review manufacturing strategy Operations reviewing study findings 52
Final Thoughts Check your beliefs at the door Allow the data to lead you Challenge, but don t ignore, current business requirements Don t start out too detailed Consider consulting help on larger project Update study a minimum of every 5 years Or whenever a significant event occurs 53
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