Supply Chain Evaluation Finds Estimated $1.3M in Net Annual Savings

Project Background

As a result of aggressive business growth through acquisition, a global provider of design-coordinated surfacing solutions to residential and commercial customers suffered from operational inefficiencies directly correlated to a lack of business integration. As the client’s new management team began to assess the opportunity to successfully combine two similar, previously competitive businesses, it was apparent that achieving the true benefits of a successful integration, one that occurs physically as well as legally and financially, would be difficult. One of the most severely impacted areas of their business was perceived to be the distribution operations.

It was difficult for the client to rationalize, and subsequently improve, their distribution network given that the two merging companies produced and distributed products under differing philosophies. One philosophy supported a distribution network structure that contained regional entities throughout Europe. Each European region operated as a discrete business unit, typically manufacturing and distributing products to serve customers within their regional boundaries. The other philosophy facilitated European-wide distribution.

Over the course of four years (since the expansion of the business) several modifications to these philosophies were implemented creating a distribution network that was dramatically complex, wrought with additional cost and inefficiency, and supported management through heuristic techniques.

Given this situation, the client requested the support of Integrated Project Management Company, Inc. (IPM) as part of a larger supply chain evaluation, to specifically evaluate the distribution network and identify opportunities to improve its operational and cost effectiveness.

IPM’s Solution

Utilizing its phased project management approach, IPM project management consultants quickly developed a clear, unbiased understanding of the client’s distribution network. This approach included individual site reviews, data collection, and detailed analysis for twelve manufacturing plant warehouses, regional stand-alone warehouses, and distribution centers that comprised the client’s physical distribution network.

The IPM team determined the current flow of products across the network, accurately documenting previously unobtainable information such as regionally exported products and intra-regional stock transfers, to clarify the complex product movements within the network. The network flows were then quantified in terms of shipment volume and freight costs. Additionally, the team completed observations and data analyses for each site regarding critical attributes of the distribution network, such as operational costs and performance (i.e., shipment volume, delivery performance, product claims, labor, packaging, and overhead costs). The team also researched local government and European Union transportation legislation that could influence, or should otherwise be considered, in the implementation of improvements to the network.

The results of the distribution network evaluation were validated, using input from responsible client team members, and summarized. The summarized results were presented as a series of recommendations that would be used to guide the re-design and optimization of the distribution network.

Project Results

The results of the evaluation provided the client with significant insight into the operating characteristics, costs, inefficiencies, and potential for improvement of the overall distribution network. The following table summarizes several of the key conclusions and recommendations of the evaluation and an order of magnitude estimate of the net cost benefit for the project:

Conclusions

• Shipment volume was disparately allocated across the network. One of the largest capacity distribution centers shipped only 5% of the client’s total volume.
• Approximately 33% of the total shipment volume is due to the client’s internal decisions to reallocate inventories; all of these shipments included redundant handling and freight costs.
• Additional transportation fees in Germany, Austria, and Switzerland would have a significant, negative impact on freight costs.
• Proposed manufacturing plant closure within the client’s central region would have created a significant distribution imbalance across Europe.
• Labor, packaging, and overhead costs, per unit shipped, varied significantly between location.
• 48% of the total overhead expense within the entire network was accumulated by one inefficient facility.
• The stand-alone warehouses operated as profitable regional (Spain) retail warehouses offering a potential strategy to utilize this approach throughout Europe, which would allow the client to obtain sales that were captured by distributorships at the time.

Recommendations

• Consolidate two major distribution centers in Sweden and Scotland.
• Relocate a major distribution center in France to another location in western Europe to improve flows and reduce operating costs.
• Minimize the negative cost and throughput impacts of stock transfers through predetermined and calculated network flow improvements.
• Expand the retail warehousing concept to the south/central portion of the United Kingdom.

Estimated Net Annual Savings

$1.1 million to $1.33 million