Distribution network optimization enables company to pass along $800,000 in savings for its largest retail customers case study


Courtesy of LLamasoft, Inc.

A large U.S.-based consumer goods company was faced with a 17 percent projected growth for one of its busiest distribution centers in Tennessee - already operating at 96 percent capacity - and a 100 percent and 30 percent demand increase expected from its two largest retail customers. If left as-is, the capacity situation would continue and may lead to additional costs for outside storage and/or productivity reductions. In order to free up warehouse capacity and reduce logistics costs for goods being distributed from 3PLs to these retail customers, the company engaged LLamasoft to create a network optimization model which could be used on a repeatable basis.

Working along with the LLamasoft solutions team, the company used Supply Chain Guru® to develop a baseline model of the existing distribution network based on historical data from the previous year. This model served to validate cost assumptions and provide a consolidated view of the end-to-end distribution network, including Chinese and Eastern Europe suppliers. The baseline was then adjusted to include current year growth and cost assumptions and to serve as a benchmark for scenario comparisons.

The next step was to perform sensitivity analysis of two alternate network configuration scenarios, including moving all or a portion of distribution for its two largest customers to new facilities. This analysis quantified different network decisions and their impact in three main areas:

  • Costs (transportation, fixed and variable facility, inventory holding)
  • Service (days of service impact)
  • Storage space (pallet locations)

Both scenarios offered cost savings to the company, as well as cost and service benefits to both of its retail customers. Scenario 1 would free up approximately 2,764 pallet spaces, while Scenario 2 showed that moving both customers out of its Tennessee DC freed up 1,789 more pallet locations for a total of 4,553 locations, allowing for an additional 30-33 percent growth.

By reorganizing flows, the analysis enabled the company to not only reduce its own costs, but also offer better transit time and significant transportation cost savings to its two retail customers.

As you can see in the table above, moving the select customers out of the at-capacity Tennessee DC frees up approximately 4,553 pallet spaces, or a 22 percent reduction. The move would open space on an average utilization of 74 percent, and also allow for additional growth and reduce the need for outside storage, damage and productivity loss due to congestion.

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