In our second Supply Chain Partners Dialogue, Ernst Fabian, managing partner of Supply Chain Partners and Andreas Hucht, partner manager at PSIglobal talk about the benefits of strategic network planning and the reduction of logistics costs.
„Our projects always deliver an economic benefit“
What is network planning?
Ernst Fabian: Many people might initially think of computer- or IT- networks. We deal with logistical networks. This is essentially about optimizing transport routes and locations. The network consists of a large number of relations between geographical locations.
Andreas Hucht: Correct, the locations can be for example, suppliers, production, storage and trading locations as well as end customers. Such networks are used for example, to handle merchandise, supply production with primary materials or to distribute finished products to end customers. Network planning is about optimizing the number and location of sites, the transport relations between the sites and the capacities in the network. It is therefore about the fundamental design of logistics networks in advance: how must networks be designed in order to minimize effort and costs, improve service times, develop alternatives for risky supply relationships – and last but not least – strengthen sustainability?
What situations do you encounter in your projects?
EF: Typical tasks in our projects include customers who are not sufficiently well served within the agreed service time windows. New regional market entries that shift the focus of the logistics network. Developing synergies by optimizing routes and fleet utilization or options for closing distribution locations.
Such strategic issues are always associated with scenario calculations. For these tasks, it is necessary to have a good understanding of the business processes in order to carry out the modelling of the scenarios in a meaningful way. It is essential, on the one hand, to correctly depict the necessary restrictions and, on the other hand, not to limit the scope of optimization of the software too much so that improvements are enabled.
That sounds like a lot of data that needs to be processed. What data is required?
AH: The data requirements depend heavily on the project focuses and the expected level of detail of the results. However, the minimum requirement is not as high as you might think: you only need location and consignment data. Information on the maximum possible capacity of logistics locations is also useful.
If you want to optimize on a cost basis, you need either the actual costs of the shipments to be optimized or the rates according to which the shipments were billed. If it is necessary to determine how the changes in the network affect the article ranges and stocks at the locations, additional article master data and consignment items are required.
Base data is usually historical data from a representative period. With PSIglobal, however, we are also able to extrapolate shipment data on the basis of expected business developments in order to take these into account when designing optimized solutions.
Coming back to the situation with clients- what is the impact of the current efforts to pay more attention to the environment and sustainability? Are you receiving project enquiries as a result?
EF: In general, it has to be said that our projects must always deliver an economic benefit. In recent years, however, we have noticed that the importance of the sustainability aspect in network planning has increased significantly and that corporate objectives are gradually extending. In most cases, activities to optimize the logistics network result in a reduction of total kilometers. This is being achieved for example, by improving vehicle utilization, better area or route structuring and general shortening through additional transshipment or storage locations. It is good to know that the objectives for optimizing logistics networks almost always go hand in hand with a positive effect on reducing CO2 emissions.
AH: PSIglobal has already had various ways of calculating the CO2 footprint of transports and networks for a long time and thus optimizing logistics networks not only on the basis of costs and transport costs, but also on the basis of CO2 emissions. A few years ago, this option was viewed rather neutrally, but sustainability is now a key driver for optimization projects, alongside costs, service, time and risk reduction.
For which clients is software-supported network planning relevant?
AH: In general, PSIgloabl is suitable for a wide range of different industries thanks to its flexible data model. Therefore our customers come from a variety of industries – from mechanical and plant engineering to manufacturers of consumer goods or logistics service providers. What they all have in common are discrete manufacturing or transportation processes.
Otherwise, software support is primarily of interest for larger and more complex networks.
EF: Companies that do not want to operate software-supported network optimization themselves also have the opportunity to take advantage of these benefits. With a suitable consultant such as SCP, it is not necessary to build up the skills to master the software in the company itself in order to process changes in the logistics network. It has proven to be practicable to review the situation cyclically with the customer – once a year, for example – and to fix the necessary changes for day-to-day business.
What can your clients expect from SCP and PSI?
EF: As consultants, we conceptualize important parts of a network optimization project, such as data preparation and validation as well as the modelling of the actual network in PSIglobal. In the next step, we prepare scenarios in order to develop a valid foundation for decision-making. SCP utilizes hereby the analysis and optimization functions of PSIglobal, such as location optimization, route planning or CO2 footprint analysis. Combined with our many years of consulting experience in logistics projects, we can develop and implement customized network solutions for our clients. We complement each other perfectly and can deliver good results for our clients.
What are the critical success factors for achieving good results?
AH: First of all, data quality should certainly be mentioned here. This aspect is often underestimated in projects. If data is incomplete, inconsistent or implausible, the solution determined on the basis of this data cannot really be optimal. The cleansing of basic data in pre-systems as a “by-product” of a network project is therefore definitely associated with a high benefit for the customer and the corresponding gain in knowledge is often very valuable.
Another success factor in projects is an iterative approach: not to describe all the scenarios to be examined in detail from the outset, but to look at one scenario after another. From each scenario, you improve your understanding of the network, and you can subsequently derive the next scenario in a meaningful way.
Thus, you often start with an optimized allocation to the existing locations on the one hand and a so-called greenfield scenario on the other. Here the optimum solution is determined without restrictions as a benchmark, so to speak. The solution to be implemented is then developed step by step on the basis of these two initial scenarios.
EF: It is also important to consider existing degrees of freedom or restrictions in the network in advance. Where can we expand a location, if necessary, where is still free capacity available? The same applies to transport capacities – where does our transport fleet still have unused capacity? Where are we prepared to relocate a site or to consolidate several sites? What investments would we make and what changes do we not want to make under any circumstances?
This is also often an iterative process, as the results of the scenario phase may reveal potential benefits which in turn increase the company’s willingness for changes compared to the initial phase of the project. Or there may be focal points that were not expected at all before the start of the project.
Last but not least, it is important to find a trade-off between the strategic and operational flight altitude in the project. This is also an important function of us as external consultants. It is important not to lose sight of the strategic goal due to a wide range of detailed requirements and not to cling too tightly to existing processes and structures. It is necessary to describe new solutions and adapt framework conditions – in order to have the confidence to do this, you often need the consultant’s perspective, who can point out potentials in a neutral way.
Can you give a specific project example where your network planning has led to significant improvements?
EF: Last year, we only had one project in the food industry with several locations in Europe. The situation was clearly characterized by the assignment of customers to sales employees and their locations. The network analysis was triggered by the takeover of another location and has revealed a potential reduction in total kilometers of almost 15 percent and a cost reduction potential of around 9 percent.
AH: In general, it is certainly not an exaggeration to say that up to 10 percent of controllable logistics costs can be reduced through a network planning project. This potential can be applied analogously to the carbon footprint. The value may certainly be even higher if a company has not addressed this issue for a longer period.