What comes to mind first when you think about supply chain network design? If you are like most retailers or distributors, reducing cost is probably the most obvious association. And it is true – redesigning the shape of your supply chain network has the potential to reduce your recurring logistics costs by 10 percent or more. But logistics cost must always be evaluated in relation to your customer service, and target service level is the most important determinant of your distribution network’s shape.

Your service offer is decisive in the design of your network

If the objective of supply chain network design is to reduce cost, think of service as the constraint.

When we think of service, one of the most important factors is responsiveness to orders – the lead time between order and delivery.  If you do not have clarity around your target lead times for your customers, it would be beneficial to revisit your business strategy to determine how service contributes to your competitive advantage.  Insights from your business strategy will pave the way for a clear supply chain strategy, which is an important prerequisite for an effective supply chain network redesign.  Many supply chain network redesigns are initiated by the desire to achieve new service, not just the desire to reduce costs.


Once you have determined the target service and service level you want to achieve for each of your customer segments and product lines, you can start redesigning your supply chain network.

There are 3 phases.  Here is an overview.

Phase 1: Data collection and baseline analysis (6 weeks to 8 weeks)

The data collection piece involves collecting, cleaning, and analyzing required data from a variety of sources. It is best to collect at least a year of order/sales data to account for the impacts of seasonality on the study.  It is also necessary to collect information on transportation costs and geographical availability of transport operators.  Warehouse operating costs need to be modeled to understand what costs are variable with the activity and what additional fixed costs are incurred when you add a facility. Once the data is collected, a baseline model is created to validate the accuracy of the modeled cost and service outputs versus the historical outputs.  The baseline model also helps to identify and resolve any major data quality issues.  A baseline model is necessary because the new network will have new links and nodes where is it necessary to predict logistic costs (warehousing, order preparation, transportation, and import duties if any).

Phase 2: Alternate scenario modeling (5 to 6 weeks)

Alternative scenario designs are hypothesized based on a variety of considerations, including cost, service, ease of implementation, and social factors.  This typically starts with a greenfield optimization.  What would my network be like if I started from scratch? How much would it cost?  The cost to serve models enable the total network cost to be compared across scenarios.  Typical cost to serve models include transportation costs (inbound, interfacility, and outbound), warehouse costs, order preparation costs, taxes, duties, administrative costs, and inventory holding costs.  Other factors like social benefits, environmental impact, and automation are also considered.

Phase 3: Target network roadmap (2 to 4 weeks)

After the quantitative and qualitative tradeoffs of all alternate scenarios are evaluated, a target scenario is chosen.  Some implementation decisions around logistics service providers are made, and a clear plan is established to transition from the current network to the target one.

Is it time for you to start an overhaul of your Supply Chain network ?

Supply chain network design is a rigorous, data-intensive, and scientific process that evaluates potential effectiveness of different supply chain “shapes” to achieve different service level targets while optimizing costs.  Other relevant factors including social relationships, ease of implementation, and environmental impacts can also be considered.  If your supply chain is struggling to meet its service targets or is suffering from ballooning logistics costs, it may be time to initiate a supply chain network design study by following the phases described above.

Jean-Patrice Netter, CEO of DIAGMA
Gil Yaniv, Associate of DIAGMA
Nathan Mayes, Associate of DIAGMA