Background

The client wanted to identify opportunities for capital investment, options for lowering the distribution costs and alternative manufacturing locations for particular product groups. This would allow strategic initiatives to be undertaken within the manufacturing and distribution network to lower costs, and manage existing capacity constraints.

Challenge

• Representative data for a full year of sales was not available due to recent changes within the business. The most recent three months of data were annualised to represent annual sales.
• A number of similar SKUs were aggregated to simplify distribution. These SKUs differed only in final packaging and aggregating these improved the view of manufacturing requirements.

Approach

A project was commissioned to assess the benefits of strategic opportunities:

• Baseline vs Unconstrained network
  • The current network was replicated in a baseline mode
  • An unconstrained model was optimised, allowing deliveries along any available transport route, with unlimited capacity at manufacturing sites
• Direct Customer Deliveries:
  •The top 20 customers for each product group were identified and served using direct deliveries along new or existing routes. This was compared with the optimised model to identify additional distribution cost savings
• Alternative Manufacturing locations:
  • Alternative manufacturing locations were set up for a product group which is currently manufactured in one location. This was compared with the optimised model to identify savings in the distribution of these products

Outcome

• Distribution cost reductions up to $2.3M pa (13.6%) without requiring changes to manufacturing or delivery contracts
• A further $400,000 pa saving can be made by changing the source of supply within the network.
• Only one manufacturing location was likely to be capacity constrained. The small impact (~$65,000) of changing the source of supply for a small number of products does not justify the capital expenditure required to increase capacity
• Direct customer deliveries for high volume customers highlights a $340,000 pa cost reduction. Most of this benefit would utilise existing delivery routes, with only $40,000 saved by negotiating new transport routes
• Setting up alternative manufacturing facilities for a group of products would lead to a $128,000 pa reduction in distribution costs