Sunday, September 22, 2013

Remodeling Supply Chain Networks

Supply chains are not something that companies can design at the beginning of the year and assume that the model will be effective for the remainder of the year or even the quarter. Rather continuous modeling and reorganization is needed in order for supply chains to operate most efficiently. This is because everyday supply chains are vulnerable to series of unpredictable factors such as changes in cost structures, shortages of supply, and changes in demand. According to Industry Week, "Organizations can gain competitive advantage by running supply chain network scenarios, evaluating and proactively implementing changes in response to dynamic business scenarios like new product introduction, changes in demand pattern, addition of new supply sources, and changes in tax laws."[1] Therefore, today companies are not just actively monitoring their supply chain networks but going one step further and modeling supply chain networks to prevent one of the aforementioned scenarios from damaging their business.

An example of why companies should take a proactive approach to modeling their supply chain network is Home Depot. Since Home Depot was founded in 1978, their strategy has not been focused on supply chain management. Instead, the company has focused largely on expansion and increasing its product base. Because Home Depot does not manufacture the items that its sells in its store, their supply chain consisted of many manufacturings shipping items to Home Depot distribution centers and from their the items came to Home Depot stores. Yet, most items continued to be shipped directly to the stores from the manufacturers. In 2008, the Home Depot had over 60 distribution centers that shipped to over 2000 stores in the United States.[2] Yet, in the thirty years since the company was founded, it never reanalyzed its supply chain. Therefore, when the housing crisis hit in 2008, they were unprepared for the toll that it would have not only on its stores, but on its distribution centers and stores which were bursting with unsold product. It was evident that a complete overhaul of their supply chain network was needed.

In order to fix thirty years of mismanaged supply chains, Home Depot hired Mark Holifield as the new Vice President of Supply Chains. His immediately went to work analyzing the current structure and discovered that part of the problems lied with store-centric nature of Home Depot. According to Holifield, 70% of items were ordered by store managers and only 30% were ordered centrally.[3] Holifield was shocked to discover that their system of reordered was done through store managers given the size of the stores this national chain. Therefore, Holifield has started to roll out a series of changes aimed at reducing the variability in Home Depot's supply chain. The new changes consisted of:

  • Creation of Rapid Deployment Centers (RDCs) which would ship to 100 stores or less
  • RDCs will be automated 
  • Elimination of transit facilities
  • Centralized ordering 
  • Implementation of a new forecasting system 
The new changes have already resulted in the stores' stock being better managed. However, no system is perfect and Home Depot continues to actively monitor its supply chain network to prevent situations like the one in 2008 from occurring again. 

Do you think that continuously modeled supply chain networks is the correct solution for Home Depot? 

Sources: [1]



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