Supplier Optimizes Distribution Costs
A leading market supplier saves nearly $3m in freight and variable costs by optimizing its western region product distribution.
Challenge
A supplier was facing demand beyond its plant supply capacity. In this network, the products are almost always transported directly to the customers job site. Freight and manufacturing costs are key drivers to profitability in this business.
Given this situation there was urgent need to optimize the customers’ product sourcing to reduce the freight costs. Customer purchase decisions are based on color more than specific product names and the manufacturer had many plants (10) that made comparable products.
The key question for the company was: What is the optimal distribution plan by plant in order to maximize profit?
Process
The objective was to determine the greatest overall profitability for a network of plants and distribution centers. Our approach would be to build a linear programming model to determine the highest degree of operational profitability given:
- Product substitution eligibility;
- landed contribution margins;
- market demand in specific destinations; and
- established plant output volumes
- Other logistical constraints
From this model, we would be able to calculate baseline and optimized:
- Revenue
- Variable and Fixed costs
- Transport costs
- Gross Margin
Impact
Savings to the company were $1.8m in transport costs and $1.0m in variable costs by moving targeted volume out of Plant 9 and selling customers on similar volumes out of eight other plants (see chart below.)
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