Constrained by Storage, Big Business Unlocks Supply in Tight Market
A manufacturer has more than doubled in size after several successful acquisitions over seven years. However, as product sales continue to set new record highs, supplying the market will become even more of a critical business issue over the next couple of years. And the seasonal nature of product demand creates an annual mismatch problem for the operation.
Challenge
Finished good storage is a problem. The winter months are usually a time for inventory building while the spring/summer months generally bring more demand than the business can supply. Plant A and Plant B could produce extra in the winter periods yet they are limited to 80-85% of their capabilities due to storage constraints within the region. The business needs to arrive at a decision about addressing this supply and demand problem without adding any more production capacity.
Bottom-line implications include:
- Delayed customer shipments
- Reduced margin on about 15% of the volume (that is supplied from outside competitors)
- Greater dependency on railcars for storage purposes
- Potential for lost customers if supply bottleneck is left unresolved
Exhibit 1
You want a team assembled to address the fundamental questions of:
- How much additional storage is required ?
- Where should the storage be located?
- What type of storage?
- How to implement within the required timeframe?
Discovery
Based on history, the sales region has an inventory capacity shortfall (at end of every April.)
Exhibit 2
To begin, we defined where the future state supply locations should be by:
- Assessing mid-term demand (2-4 years)
- Using advanced statistical analysis to determine optimal locations based on distance to the customer
- Studying any differences in current vs. theoretical footprints
Next, we:
- Prioritized markets according to the market attractiveness and the value that can be extracted from the market.
- Modified this prioritization based on “other” factors, such as proximity to main roads/rail lines.
- Future storages levels were calculated by location using the Base Stock Model equation. Only 4 locations required upgrading. However, a few greenfield options were recommended.
Impact
For the project, the network EBITDA benefits were calculated by finance to be approximately $21m/year.
NPV over 10 years is $86m with a direct payback of 2.0 years.
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