To Understand a Supply Chain, You Need to Model It With Supply Chain Design Tools

I am slogging through the book “Thinking, Fast and Slow” by Nobel Prize winning economist Daniel Kahneman. The main premise of the book is that the human brain has two systems for thinking: one that is “fast,” uses simple rules, and learns patterns; the other is “slow,” requires great effort, and is the source of greater rationality.

However, because people so often use “fast” thinking, and prefer to use it because it requires less effort, people are prone to making systematic errors. These biases recur predictably in particular circumstances. All of this is a big problem for economics because the field has historically been premised on rational and self-interested market participants.

I, however, was trained in rhetoric in college, on how to use emotional appeals in conjunction with logic to make persuasive speeches. Since then, I’ve never assumed that people are logical. In fact, I assume people are about half logical and half emotional. And after every political campaign, I think I may be overestimating how logical people really are.

So what is the point of this extended introduction? I think it is very easy to talk glibly about supply chain without really knowing what you are talking about. If you really want to understand a supply chain, and the levers that matter and those that don’t, you need to model it with supply chain design tools. Supply chain network design tools used in conjunction with multi-echelon inventory optimization are the core tools.

Supply chain network design tools help companies design a low cost supply chain aimed at satisfying demand at a particular service level. Some of the problems network design tools help to solve include:

  • Understanding the right number, location, and necessary capacity of production and warehousing facilities;
  • Understanding which customer territories should be supported by particular warehouses;
  • Understanding what products should be made by particular factories or sourced from a particular region;
  • Understanding how product should flow through a supply chain; for example, should a product be completely manufactured and packaged at one factory or should there be light finished production facilities closer to customers?

While network design tools can handle inventory costs, “they do so at a high level by using the turnover in a facility and the carrying cost,” says Edith Simchi-Levi, VP of Operations at OpRules. What they cannot do, however, is determine the inventory impact of changes in the network, which is why multi-echelon inventory optimization solutions are also important.

Typically, a small number of potential network configurations are determined using the network design tool, and then the multi-echelon tool is used to look at the different amounts of inventory the different networks would carry. Therefore, network design plus strategic multi-echelon inventory optimization allows companies to best reduce total supply chain management costs across a supply chain network.

Supply chain design projects are, of course, driven by a company’s desire to find ways to save substantial amounts of money. Companies that have not conducted a supply chain design project in several years can expect to reduce supply chain costs by 5 to 15 percent.

But you shouldn’t ignore the ability of these projects to make key executives “smarter.” It is very easy to talk about particular supply chain strategies without fully understanding the ramifications. Once executives have seen the analysis from a network study, they begin to understand the core tradeoffs and supply chain performance levers in a way that is all but impossible without this experience. And in fact, many of the smartest people I’ve talked to in supply chain management work with supply chain design consulting or software companies.

(Note: I want to thank the following people for their thoughts and contributions: Edith Simchi-Levi, VP of Operations at OpRules; Jeff Metersky, VP of Supply Chain at CHAINalytics; Mike Jones, the CEO of St. Onge; Jeffrey Karrenbauer, President at Insight; and Don Hicks, CEO of Llamasoft.)


  1. Hello Steve, this is a great observation as fairly often Supply Chain technology holds mysteries known only to a selected few. Whether one uses either or both Fast and Slow thinking, common sense should prevail and, as we know, common sense is a very scarce commodity!

    However, SCM presents an inherent problem in that it works itself into redundancy at least every few years. In other words, SCM optimization is a moving target due to, among others, company policy reviews, changing customer demographics, market vicissitudes, mergers and acquisitions, global market influences and many more internal and external factors, which have a highly significant bearing on what has to be included or excluded within inventory dynamics. Therefore, as grand as the latest remodelling may be, this does not exempt it from constant surveillance and interrogation for redundancy. Mega investments (fixed assets) can quickly become liabilities so, as you have pointed out, it requires an understanding of what is trying to be achieved that really counts, before resources are committed to the detail. And finally, according the chair of CSCMP board of directors, Nancy Nix, your SCM should be resilient, agile, efficient and innovative, at least more so than your nearest market rival.