Why You’re Doing Network Optimization All Wrong

Most Organizations Miss Huge Variables in Their Supply Chains

I ran network optimization projects for decades. My team completed hundreds of them, all across the globe. We pleased our clients, amazing them with overall cost reductions of 7-15% – combined with increasing service levels 20-30%.

Despite those great results, we were doing it all wrong.

Maybe you’re asking, “What in the world is Jim talking about? His team gave clients better service and reduced costs. What’s not to like?”

Well, it’s true that these strategic initiatives improved efficiency, cost-effectiveness and service quality. Our clients increased performance metrics for their supply chain networks. Our Tompkins team expertly analyzed the current logistics network and redesigned it to better align with business goals. We scrutinized the entire network – warehouses, distribution centers, inventory placement and suppliers.

But I’ve learned in the last five years that we didn’t really optimize transportation routes or consider real-world demand fluctuations. If we had, we could have, in some cases, doubled our clients’ ROI, improving service levels while reducing costs by 15-25%.

However, to be fair, the technology didn’t really exist back then. Now it does. And if your company embarks upon network optimization without optimizing transportation, you’re leaving a lot of savings on the highway.

Static Models Can’t Handle a Dynamic World

You see, the hundreds of network optimization models we completed relied on standard transportation freight rates and the continuation of existing transportation modes, methods and routes.

That’s how most companies start network optimization projects. They examine transportation market rates, create a baseline and use that baseline for their distribution center network. They don’t consider their actual freight spend, service levels and parcel costs.

That’s the old way. You are not only leaving cost on the table, you probably are coming up with the wrong DC network answer.

Why Transportation Is a Network Optimization Technique

You need to target transportation first. Because before you start redesigning your DC network, you must optimize transportation to understand what costs you can take out. Using your optimized transportation, not your current transportation operations, will deliver greater savings while improving service levels.

And during your network optimization study, you need to optimize transportation for each scenario. Because if you don’t, you will get false positives for where you should locate your distribution centers. You could easily wind up with worse service levels and more expensive transportation than what you started with.

That’s truly a network optimization project gone wrong. And I’ve seen a few.

For example, let’s say your company is in the middle of a network optimization project.

Out of a handful of scenarios, you pick the option that recommends five DCs nationwide. According to market transportation costs with your current modes, that scenario shows the lowest overall costs.

But without optimizing transportation, you miss the forest for the trees. Because that five DC network only allows you to consolidate 10% of less-than-truckload to truckload and mode shift only 5% of less-than-truckload to truckload.

Option B, with four DCs nationwide, lets you consolidate 30% of less-than-truckload to truckload and mode shift 10% of less-than-truckload to truckload. Those major savings can total hundreds of thousands of dollars a year. Not to mention one less warehouse location to find, staff, design and operate.

(Reminder: Consolidation and mode shifting are different, yet related, tactics that can strategically improve network performance. You can consolidate multiple less-than-truckloads into one truckload. You can also mode shift from higher-cost transportation modes to lower-cost transportation modes. You would prefer to ship by truck instead of air, rail instead of truck, water instead of rail, etc.)

The Tompkins Methodology Doubles Down on ROI

The following table details the changes from a strategic perspective:

Strategic Element	Traditional Planning	Tompkins Methodology
Facility siting	Based on averages	Based on demand variability
Inventory allocation	Static models	Seasonal & real-time models
Transportation costs	Fixed input	Dynamic & negotiable
Profit margins	Squeezed	Expanded through efficiency

From a bottom-line perspective, the Tompkins methodology can boost overall cost reduction from 7-15% to 15-25%. The numbers stack up like this:

	Traditional planning	Tompkins methodology
Facility savings	5-20%	15-30%
Inventory savings	10-20%	15-25%
Service levels	+20-30%	+30-40%
Transportation savings	5-10%	20-30%
Overall cost reduction	7-15%	15-25%

Network Optimization Ignores Real Transportation Strategy

So, how does transportation fit into all of this?

For example, you need to send half a truckload of cargo to Chicago. You also need to send one-fourth of a truckload to Allentown, Pa., and one-fourth to Richmond, Va.

Most network optimization modeling programs consider those three separate truckloads. That’s three partially empty trucks rolling along the roadways. But to a transportation guy or gal, that’s insanity. Depending upon need and timing requirements, you consolidate those loads onto one truck.

The Chicago part of the load goes in the back of the tractor-trailer. The Allentown part of the load is next, and the Richmond portion is in the front. The truck travels to Chicago, and the Chicago facility unloads the back half of the truck. Then the truck goes to Allentown for unloading, ending its trip in Richmond.

While that seems like common sense, many companies aren’t doing it – whether they’re working on network optimization or not.

So, you must get your transportation routing and costs right to begin with. Otherwise, your network optimization won’t be worth the storage space the project takes up in your computer system.

Network Planning for the Real World

The Tompkins differentiation combines network optimization with transportation optimization and demand planning.

The transportation examples above show how consolidation strategies can reduce cost per unit. Fully analyzing your transportation can uncover savings through mode shifts (e.g., switching from truckload to rail or intermodal), route optimization and carrier negotiations.

Integrating transportation optimization within the network design framework helps you make smarter decisions about facility locations, shipment frequency and inventory placement. All of that directly impacts profitability and overall network performance.

For demand variability, the Tompkins differentiation deploys dynamic multi-period modeling – such as weekly, monthly and seasonal trends – into network simulations. These monitoring tools help you design flexible capacity buffers; scale labor and transportation resources more effectively; and align inventory positioning with actual consumer behavior.

And based on your business model, transportation is critical to whether you should even embark upon a network redesign.

B2C companies must deploy inventory closer to dense population centers. This means higher land and labor costs for distribution centers. Without optimizing transportation, a network redesign could kill your bottom line. B2C executive teams simply must examine transportation in conjunction with optimal distribution footprint.

B2B companies could be well-served with distribution centers in the hinterlands. While that means lower land and labor costs, B2B companies still need reduced transportation costs to justify the expense of redesigning your distribution footprint.

Final Thoughts for the C-Suite

Organizations have done demand planning, transportation optimization and network optimization piecemeal. The Tompkins team has put it all together in a truly revolutionary fashion.

Everybody knows a smarter, more adaptive network can reduce excess capacity, eliminate bottlenecks, lower transportation spend and boost service levels.

All that contributes to a healthier bottom line and supply chain resilience.

But true network planning goes beyond logistics to strategic value creation. When creating your network optimization team, make sure they have expertise in:

• In-network optimization
• With real-world variability
• With transportation optimization

If your network optimization is stuck in the past, it’s time to modernize your strategy. If you don’t, don’t expect to end up with a high-performance network.

Connect with the Tompkins team to discover how transportation and demand variability can transform your bottom line – before your competition does.

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