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Designing distribution network with deterministic demand assumption erodes agility and results in stockouts.
Consumer Packaged Goods companies spend quite some time and effort in designing their finished goods distribution network. How should the goods flow from various plants to RDCs and depots for further invoicing to distributors or direct channels?
A key parameter in designing the network is the frequency of servicing various lanes. The entire working is often done on certain demand assumption, coming either out of AOP or from the monthly sales forecast.
Infrequent lane servicing leads to higher inventory norms and bigger trucks. On the other hand, frequent servicing results in lower inventory norms and smaller trucks. The entire exercise often boils down to optimising between inventory and freight cost.
As you can see, the important parameter of demand variability is overlooked. When the rubber meets the road and actual demand comes out very different from the assumption, the entire network design goes for a toss. Teams start firefighting to meet the demand.
We can’t afford to ignore the impact of agility in network design. If you want to improve availability, reduce inventory and improve profits, assume that demand will be stochastic.
Optimize for agility!