A Director's Guide: Cutting Costs By Optimising Infrastructure

Introduction

With the UK's finances in a parlous state and a General Election probably only two years away, the Government has little room to manoeuvre.  It is likely that the Governments number one priority is to demonstrate financial competence for their remaining term.  The second priority is to be in a position to offer tax cuts in 2024 as part of a new ‘election winning’ manifesto.  This means that it is highly unlikely that there will be any actions that are likely to provide material support to Business or the economy in general for a while.  The next year is likely to remain particularly challenging for many parts of the economy, particularly those dependent on discretionary consumer or Government spending.

This economic challenge also comes at a time when the UK is going through a major cultural shift in the way we work and live.  Whilst people are now returning to the office, working from home has now become an established feature together with online meetings using video conferencing.  These changes are having a profound impact on several sectors including hospitality, transport, hotels, and housing.  Retailing was already experiencing a major change with the switch to online services and home delivery before the change was accelerated by the Covid lockdowns.  Brexit, the shipping container shortage and now concerns with China are also causing companies to rethink where goods are sourced and stored prior to distribution.

Given the economic, cultural, and global challenges that are taking place now is a good time to prepare your supply chain operation to meet current short term needs and future requirements.  Reducing costs in the short term whilst preparing for the economic recovery is of particular importance at this time.

The Davies & Robson team has complied a practical guide to support cutting cost by optimising infrastructure.

Contents:

• The Role Of Infrastructure
• Determining The Optimum Stock Location & Inventory Requirement
• Identifying Possible Solutions 
• The Number Of Warehouses & Location
• Warehouse Design
• Transport Design
• Davies & Robson Modelling Support

The Role Of Infrastructure

Within the supply chain physical infrastructure has three fundamental purposes:

• To store product in order to address the mismatch between supply and demand
• To prepare customer orders for delivery
• To facilitate the transfer of product as part of the transportation process either between different transport modes or between different sized vehicles

How infrastructure is deployed will have a significant bearing on the overall cost of the supply chain and the service levels achieved.  The more stock that is held close to customers the greater ability to reduce delivery lead times.  However, the more stock holding locations the higher the infrastructure cost and the higher the investment in inventory.  Unnecessary infrastructure not only drives property costs, it can also increase inventory and transport costs.  Achieving the optimum infrastructure is essential to minimising overall supply chain costs.

Determining The Optimum Stock Location & Inventory Requirement

The starting point for any infrastructure review is to ask five key questions:

• What service levels need to be achieved to satisfy current and future customers?
• What stock needs to be held with regards to range and quantity?
• Where is the product coming from?
• Where is the product going to?
• What sustainability targets are you trying to achieve?

The critical service levels are:

• The time required from customer order to delivery.
• The product availability that is required.

Unless the cost can be recovered in the prices charged, over servicing customers will increase operating costs with no material benefit.  Whilst under servicing customers leaves you vulnerable to your competitors.  Getting the balance right is crucial for profitable growth.

Determining the stock levels required it will necessary to consider:

• Level of product availability required to satisfy customer requirements and promised availability by product and customer group
• The minimum order quantities demanded by suppliers
• The discount structure from suppliers
• The risk of obsolescence
• Inventory funding costs. This is particularly important as we come to the end of ‘cheap’ money
• Stock holding costs – Storage, insurance, utilities etc

Typically, the solution is not straightforward and will require a compromise between service and cost.

Often it will be necessary to consider placing products into different groups from a stockholding and distribution point of view e.g., fast and slow movers, made to order products, products requiring 100% availability etc.

Of particular importance is the need to understand who your competitors are and what they are offering.  Part of the reason for the success of e-commerce has not just been convenience but also speed of delivery for which, in many cases, customers have been prepared to pay a premium.

Identifying Possible Solutions

Once the stockholding and service requirements have been considered and documented the next stage in the process is to identify and evaluate the possible options with regards the number, design and location of stockholding locations and the optimum transport operation for each of the different options.

At this stage consideration will need to be given to sales growth by product group or customer group and forecast inflation by cost category.  Since Brexit & Covid labour costs have increased in real terms making automation a far more attractive application in many operations. 

Typically, solutions fall into the following categories

• Single Central Warehouse. This could be to serve a Country or a Multiple Countries
• Central warehouse supported by Regional Warehouses. Regional warehouse could be geographic area within a Country or to serve multiple countries. Typically, in this scenario the Regional warehouses would serve local or fast-moving items.
• Regional warehouses only
• Product specific warehouses close to the point of manufacture or entry port

Which type of solution is adopted will usually depend on the products held and the customers served.  Consumer products operations tend to be based on a Single Central Warehouse whilst, food retailers will typically adopt Regional Warehouses supported by a Central Warehouse for slow moving products.  OEM’s will typically store product close to a manufacturers production line whilst automotive parts retailers will often have local, national and international warehouses for fast, medium and slow movers.  Central Warehouse usually require cross dock facilities around the Country unless delivery can be undertaken on two or three day runs.

Getting the basic infrastructure right is the first step in meeting customer service requirement and minimising supply chain costs.

The Number of Warehouses & Location

The number and location of warehouses is usually a trade-off between:

• Service requirement
• Stockholding costs
• Inventory costs
• Transport costs

Also, to be taken into account for cross border operations is the issue of customs duty and potential delays.  A major driver for infrastructure change since Brexit has been the issue of receiving products from the Far East and exporting to the EU.  The establishment of stockholding points in the EU has been essential to avoid paying customs duties twice.

Warehouse Design

Once the stock to be held in a warehouse has been establised, the next step will be to determine the optimum design.  This will need to consider the customer order profile as well as the product profile and stockholding requirement.  The design of a warehouse will typically include

• Space and handling for product receipt
• Storage medium
• Order picking method
• Packing and kitting where appropriate
• Space and handling for product despatch
• Yard area for vehicles delivering to and distribution from the warehouse

Given the cost of buildings and labour, increasingly, consideration is being given to robotics and automation in order to maximise the use of space and minimise labour costs.  This can be as simple as a robot for pallet stacking or vertical carousels for small slow-moving items.  Increasingly, full automation is now becoming viable for fast moving items that receive, store and pick items ready for despatch.  Key factors that determine whether full automation is likely to be viable include:

• Product profile and consistency of packaging. Supplier adherence to agreed standards is often critical
• Likelihood the system will be suitable for the operation for a period longer than the payback period
• Reliability and flexibility of the system to meet the evolving needs of the operation
• Confidence that the system will be able to handle the peaks and troughs of the operation
• Availability of IT and technical skills to manage the system
• Confidence that the system will achieve cost savings over and above alternative solutions
• Security of tenure within the planned building
• The issue of business continuity in the event of a major failure has been addressed

Finally, any review of the operation must consider what sustainability targets are you trying to meet.  In addition to energy use within the warehouse operation consideration will need to be given to how transport is likely to evolve particularly with regards the use of battery powered vehicles.

Transport Design

The transport solution within a supply chain provides the links in the chain and can involve sea, land and air.  As a general rule, subject to meeting the time requirement, costs will be minimised by maximising the size of a load for the longest part of each link. Whether it be 40ft shipping containers for a sea crossing or the use of artics and trailers between a central warehouse and a delivery depot where smaller delivery vehicles are based.

Today a typical supply chain will use a multitude of services in order to achieve the required delivery times at the lowest possible cost.  This can include:

• Freight forwarding to manage international movements
• Dedicated fleet operations – In house or contracted
• Full and part load movements
• Parcel carriers
• Pallet carriers
• Shared user services
• Specialist services 

Optimising the full range of different transport services that are available is essential for achieving the required service levels at the lowest cost.  This is not always straightforward, as the mix of services change so can the prices charged which can then affect the choice of optimum solution.

The optimum use of transport is highly dependent on the optimum use of infrastructure.  Key factors include:

• The location of warehouses and cross dock facilities to minimise mile run whilst meeting service requirements
• The likely range of battery powered vehicles
• Design of facilities to be able to unload and load vehicles quickly and efficiently and handle the peaks and troughs of the operation
• Available yard space to facilitate inbound and outbound parking requirements including paring for stand loaded trailers when required
• The availability of charging points for battery powered vehicles

Davies & Robson Modelling Support

Evaluating the cost and service levels of multiple infrastructure options is extremely complex as changing one element in a supply chain will usually impact on the cost of another. Evaluating different warehouse configurations, means not only evaluating the property cost implication but also the stock funding and transportation costs including the use of different transport services.

Davies & Robson operate a range of software packages to enable them to evaluate a range of infrastructure scenarios quickly and cost effectively. 

Of particular importance, in the present climate, is the ability to evaluate different scenarios including:

• Changes to sales volumes
• Changes to the product range
• Changes to source of supply
• Changes to stockholding policies
• Changes to order lead times and policy on product availability
• Changes to routes to market
• Changes to minimum order quantities
• Changes to trade with the EU and the rest of the World.

Conclusion

In the last few years, we have seen rapid changes in consumer behaviour, and this is certainly set to continue.  In addition, with an ever-increasing concern with regards to climate change, sustainability is now becoming of critical importance.  The current economic situation, whilst for many companies is extremely challenging, provides an opportunity to review the structure of the supply chain in order to reduce current costs and prepare the Business for future growth and sustainability requirements.  The challenge now is not to be so focused on short term actions that the opportunity to use this time constructively is missed.  Where volumes are down, now is a good time to undertake infrastructure changes ready to take full advantage of the upturn when it comes.