Cost & Value Management

Who the client was

“They were a $4 billion distribution operation, with 250,000 skus and over a dozen warehouses, who had recently made it through an industry downturn and wanted to preserve operating efficiency, even as they grew.

Why they looked to us for help

“They had questions about their distribution system design and efficiency. One issue that pre-occupied them was that their main competitor used a different mix of dedicated and outsourced capabilities. They wanted to know which approach was better. Also how would their system perform if they experienced significant changes in demand and mix.”

What we did for them

“Since the client wanted to analyze different scenarios, we began by building a simulation model and using it to predict how their system efficiency would vary under different assumptions. Fortunately, for us, they had a wealth of data available, including process costs and volumes, so our model was able to answer some specific questions. We discovered that:

1. On average, they were more efficient than the competitor
2. However, their cost structure was more fixed, so the competitor enjoyed less down-cycle risk
3. Exacerbating the fixed-cost-problem was a system which was geographically designed for more volume levels in the north-east and was not ready for the expected growth in the mountain states
4. Supplier concentrations had shifted since the system’s initial design, leading to the evolution of sub-optimal workarounds.

The model also highlighted opportunities for greater efficiencies that could be obtained at the cost of lower customer service levels.

What was the benefit

“Based on these facts, our client decided that it was time for a major re-design of the system. They chose to make the changes that could lower their cost structure with no impact on customer service levels. The changes affected warehouse locations, delivery service options and stocking guidelines.”