The need for flexible management of supply chains to increase operational efficiencies could not be greater, as modern companies outsource and manufacture overseas. David Simchi-Levi observes that between 2003 and 2008 labor costs increased by 21% in Brazil, 19% in China, and 3% to 8% in other countries. Meanwhile, logistic costs, as a percentage of gross domestic product (GDP), began to rise in 2003, after declining steadily. Adding to this unstable business mix has been tremendous volatility and fluctuation in oil prices.

While these challenging market factors have emerged, there has been an offset and gain from information technology and processing power: IT technology allows easier integration or decision support systems, more data is available, and processing time grows increasingly faster. According to Simchi-Levi, “ These improvements … are key to breakthroughs in logistics operations and management. As you think about managing a transportation system or supply chain with hundreds or thousands of facilities and products, computing power plays an important role. Optimization technology (the combined effect of algorithms and machines) means that some things in 1988 that took two months to solve, in 2004 they

took less than 1 second. Between 2004 and 2008, algorithms improved by a factor of 100! So, with the power that has been generated, I want to take advantage of this, to look at the challenges.”

Simchi-Levi provides a case study of a national food and beverage company using an optimization of their supply chain/ logistics. In his example, the company had 5 locations and five product lines. Clearly transportation costs would go down if each plant produced four more “product families” or lines, but the costs of production would increase if each plant produced four additional lines. Modeling the supply chain produced a surprising result: each plant did not need to produce all five product lines; they simply needed to add a degree of flexibility to their manufacturing. In fact, 80% of the financial benefits to the total cost could be achieved if each of the five plants added just a second, minimal line of capacity.

The key to this puzzle was that if each plant did some of the work of the others, but not all of it, it produced a “long supply chain” that had domino effects. It led to reduced transportation costs. And, it protected the company against manufacturing disruptions (e.g. labor strikes, earthquakes) because changes in the supply chain could be compensated and satisfied by adjusting production elsewhere. Simchi-Levi observes that with an optimization of the supply chain, many costs went down and plant utilization increased. He describes this as making small adjustments in the business strategy to gain high returns.

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