The supply chain has continuously evolved to meet increasing consumer demands. This is especially true for a global supply chain, which needs to consider distribution on a much larger scale — we sometimes refer to these as supply chain networks.
What is a Supply Chain Network?
Think of a supply chain network as a system that needs to adapt to serve your business effectively. Over previous decades, we’ve seen a big transformation in the complexity of the supply chain, and this increasingly complex structure becomes a network of different interdependent components, from your external suppliers to your transportation and your distribution centres.
To avoid disruptions, it’s important that you invest in supply chain network design. Though it may seem expensive and time-consuming, it actually improves operational efficiency, increases supply chain visibility, and ultimately works to reduce supply chain costs. Let’s break down the three key factors that determine its shape, based on decades of hands-on experience in network design:
Customer Location and Service Promises
This is absolutely the biggest driver of your network’s shape. Imagine you’re promising your customers a two-hour delivery window — that automatically means you need to position your inventory within two hours of their location, and there’s just no way around it! It’s not just about having the stock; it’s about having it in the right place to meet those service commitments.
The outbound side of your supply chain (moving products to customers) typically carries a much higher cost per unit than the inbound side. You’re often dealing with smaller shipments — individual items, cartons, or pallets — rather than full container loads. This is why being strategic about your customer-facing distribution points is so crucial to your overall costs.
Supplier Geography and Inbound Logistics
Whilst this has less impact than customer locations, it’s still vital to consider where your suppliers are and how products move into your network.
The good news is that inbound logistics usually involves bulk movements — think full containers or truckloads — which means lower per-unit costs. However, you still need to factor in whether supplies are coming by air, sea, or road, as this affects both cost and lead times.
Facility Network Design
Once you understand your customer and supplier dynamics, you can determine the optimal number and types of facilities you need. Here’s where it gets interesting: you don’t always need every product in every location.
Take a page from grocery retailers’ playbook — they’re masters at this. They might have separate facilities for:
- Chilled products
- Frozen goods
- Ambient products
- Fast-moving items
- Slow-moving items
For example, if you have products that customers rarely order, you might keep these in a central facility with slightly longer delivery times, rather than duplicating slow-moving inventory across multiple locations.
What makes this particularly fascinating is how these three elements interact with each other. Your customer service promises drive your facility network, which in turn needs to align with your supplier network. It’s like a complex dance where every partner needs to move in harmony.
The key message is: whilst many factors influence your supply chain network, it’s your customer service proposition that should be the primary driver of its shape. Start with understanding what your customers need and where they are, then work backwards to design everything else around meeting those needs efficiently.
Different Types of Supply Chain Networks
There are as many different networks in operation as there are organisations that operate them. However, here is an overview of how some well-known enterprises organise their supply chain networks to meet their own particular operating requirements.
Unilever – Consumer packaged goods. Unilever progressively reduced its physical locations from 30 warehouses to 5 large distribution centres. The emphasis is on cross-docking so that goods shipped out from factories only transit via the distribution centres and are not stored there. Through increased collaboration with its retailers, the company gets more of its products on retailers’ shelves more often (increased customer satisfaction) and cuts its levels of inventory (better profitability).
H&M – Fashion retailer. Life for items of fashion apparel starts in the company’s headquarters in Stockholm, Sweden. The designs are used by its 20 production locations in Asia (for longer lead-time products) and Europe (for faster turnaround). Store replenishment is a key focus and H&M manages inventory via a distribution centre in each country. The company is the importer, distributor and retailer in each case. It does, however, outsource transport.
Ford Motor Co. – Automotive manufacturer. Supply chain information and functionality are handled in one global material manufacturing system. Ford’s suppliers get access to the system for real-time stock and shipping information. Supplier deliveries are coordinated by a third-party logistics provider to ensure efficiency through full truckloads of parts and components. ‘Destination’ transport accounting to get cars to dealer showrooms is a challenge because transport is not billed by distance, but as an average calculated over all shipments being made.
PepsiCo Inc. – Food and beverage. PepsiCo uses a direct store delivery model that eliminates warehouses, a key step in getting perishable goods to retailers in a timely way. The company also leases space directly within large grocery chain stores to directly manage its inventory on behalf of the retailer. In addition, PepsiCo has a large-scale returns logistics programme in which it collects its empty bottles to return them to bottling plants for re-use.
The Shape of Your Supply Chain Network — What to Ask Yourself
A major challenge we see for many organisations is the ‘shape’ of their supply chain network. What do we mean by shape? Quite simply, we mean the physical nodes, facilities and product flows — all the way from the point of supply to the customer.
Just think about your own supply chain for a moment. Can you picture how products move through it? How many different ‘paths’ there are through the network, for example.
Supply chain networks are becoming more complex to meet the ever-increasing demands of customers and products, as well as the constraints of supply and cost. So here are some things to look out for in your own organisation:
- Do you understand how far your inventory needs to be, in hours or kilometres, from your customers to meet service levels?
- What percentage of product movements are merely to reposition inventory in the network?
- Do you have obsolete or slow-moving stock ‘trapped’ within your network? Maybe it’s just in the wrong place to meet current demand?
- Are your main stock locations positioned closer to suppliers or point of supply, or closer to customers? What drives that decision?
- When you create a new ‘node’ in your distribution network, what’s the decision process to pick the location? Do you weigh up land costs, building costs, access to labour, inbound transport costs, outbound transport costs, customer service needs and the impact on overall network inventory levels? Or, like many organisations, is it a decision based on a far more basic approach?
It’s a challenge, but there are some simple approaches that you can adopt to make your decision-making more robust so that it stands up to scrutiny and meets your organisation’s current and future needs.
Supply chain design is an intricate, ongoing process that requires experts with a wealth of experience — feel free to contact us for help with your own supply chain networks.
