Control transportation costs with network redesign

By James Cooke

With both oil prices and transportation costs showing no signs of falling any time soon, electrical distributors should take a hard look at the makeup of their distribution network. If the warehouses are not correctly located in the right places across the United States, then a distributorship will bear higher shipping costs than otherwise is necessary to serve its customers. Although it might seem counterintuitive, the addition of a warehouse or two in the network might actually result in lower transportation costs. The question is whether the savings from lower transportation costs can offset the added expense of running another facility.

To answer that question a distributorship needs to do a supply chain network analysis. Such an examination can determine the number and location of distribution facilities required to serve customers at the lowest transportation cost. The analysis should examine the places where a distributor is shipping from and where the shipments are going. If the customer demand is starting to shift, say to another part of the country, a network analysis can evaluate whether the current layout can handle new customers without incurring excessive shipping costs. 

Aside from outbound shipping lanes to customers, this analysis should also look at inbound movements from suppliers. If your company has changed its mix of suppliers – or is considering doing so – it would prove useful to determine if the current warehouses are located in the optimal places for the lowest “landed cost.” (The total cost of a landed shipment would be the sum of all expenses, starting with purchase price and including freight transportation, custom duties, taxes, insurance to get a shipment to its destination.) In fact, the analysis may suggest that changes in the supplier base may require a distribution network to be reconfigured to keep inbound shipping costs low.

Weighing all the tradeoffs involved with a network analysis

can be a daunting task if done with a spreadsheet, but fortunately a number of software vendors have developed applications for this purpose. Typically, this type of software models the existing network, runs test scenarios to gauge the impact from relocation of warehouses and plants, and identifies the optimal supply chain structure based on user requirements.

This application can illustrate how transportation costs might be lowered – and even how delivery service to customers improved – if a company made a network change. For example, it could reveal the cost and service impact if a warehouse was situated in another locale or another distribution center added to the network. As noted earlier, modeling can decide whether a reduction in freight shipping costs can justify the expense of running another warehouse before making an investment in another facility.

Besides transportation costs, a network analysis can look at other variables such as whether a new location might reduce lead times for customers. The analysis can also review whether the company has the correct stocking locations to resupply customers and meet delivery requirements.

In today’s volatile business climate it’s no surprise then that many companies are starting to make a periodic network analysis a standard operating procedure rather than a one-time event to tackle a specific problem

James Cooke is the editor of CSCMP’s Supply Chain Quarterly magazine, the premiere journal of global thought leadership for supply chain professionals. He has been writing and reporting on the best practices in supply chains for more than 30 years.

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