Case Study: Holcim uses Network Optimization to Manage Supply Chain Risks and Optimize Cost

1. Research
Publication Date: 6 July 2009 ID Number: G00165999
Case Study: Holcim Uses Network Optimization to
Manage Supply Chain Risk and Optimize Costs
Tim Payne
Companies are having to focus on cost optimization within an increasingly volatile
operating environment. This case study examines how Holcim's North American
operations uses network design to help optimize costs across its supply chain.
Key Findings
• Strategic network design is becoming a more tactical tool (as well as its traditional
strategic role) in a company's efforts to analyze risk and optimize costs across the
supply chain.
• Regular network evaluations, as part of a sales and operations planning (S&OP)
process, can add significant visibility and benefits, through what-if analyses and
scenario planning, to a company's supply chain performance
• Network design tools are not overly expensive, and can be used effectively without the
need for automated interfaces from transactional and other business applications or
data stores.
• The effective use of network design tools requires skilled users with strong analytical
skills.
Recommendations
• Organizations with significant supply chain costs as a percentage of cost of goods sold
(COGS) should consider the use of network design as a means of evaluating tactical
responses to price, demand and supply variability.
• Leverage the modeling and analysis capability of network design tools to increase your
ability to articulate supply chain risk and develop appropriate contingency plans, and to
test the effects of these scenarios on your network capacity rationalization plans.
• Always link models and options to the financial plan/budget to ensure a good level of
buy-in from senior management.
© 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form
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are subject to change without notice.

2. WHAT YOU NEED TO KNOW
Traditionally, strategic network design has been seen as a strategic tool (often sourced through
consultancies) to help companies evaluate their supply chain configurations every few years or
so. In more steady-state operating environments, this has been adequate. However, many
companies are now finding that they are operating in a different world. They are seeing
significantly more variability in raw-material costs, fuel costs, demand levels and certainty of
supply. All these factors and others lead to a more chaotic and unpredictable operating
environment. To better understand the new risk levels and to try to determine optimum plans and
contingencies, network design tools can be used on a more tactical level, linked to a company's
S&OP process. Holcim uses its network design tool to help manage supply chain risk and
optimize costs across its North American operations to great effect.
CASE STUDY
Introduction
For years, the use of network design tools was the domain of supply chain and logistic
consultancies. End users would periodically call in these consultancies to perform an analysis on
the users' manufacturing and distribution networks. The aim of these studies was to verify the
existing supply chain configuration, and to develop a strategic network plan for the next few
years. Changes to the network usually covered the opening (and closing) of distribution centers,
and the strategic sourcing of product groups across the manufacturing base, as well as strategic
"make or buy" decisions. With companies operating in relatively stable operating environments,
this frequency of analysis was often "good enough." However, with the world now in a very
different place, and with significant volatility in their operating environments, many companies
must evaluate their supply chain configurations far more frequently to ensure they are as close as
possible to the optimum cost/service trade-off for their supply chains.
Over the last five years, we have seen an increasing number of end-user companies purchasing
network design tools and bringing them in-house. These tools are usually operated by a very
small group of trained and experienced supply chain professionals within a central supply chain
or logistics team. They are usually desktop-based solutions (they require significant processing
power to solve and optimize the models and do not suit Web-based architectures); due to
competitive pricing in the market, the solutions are often a lot less expensive than other supply
chain management solutions. The frequency of their use and focus is changing as well. This is
particularly the case for industries where distribution and transportation costs are a high
percentage of the total product cost, for example, in the cement business.
Prior to the current economic situation, companies with significant distribution costs were starting
to use network design tools on a subyearly time frame to re-evaluate their overall distribution and
manufacturing networks. At this frequency, their focus was not necessarily on opening and
closing specific distribution centers or manufacturing plants, but more on the optimum use of
existing facilities to maximize customer service and minimize logistic and production costs.
Additionally, over the last 12 to 18 months, there has been increased interest in using network
design tools to provide an evaluation of the carbon footprint of a particular supply chain design.
Holcim is now in the process of using network design to help monitor carbon dioxide (CO2)
emissions, and will look at modeling with constrained CO2 emissions.
Some companies have been incorporating the use of network design tools into their S&OP
processes. This analysis is not so much about strategic decisions regarding the network
configuration, but more about tactical and operational decisions about how to best use the
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3. existing network in assigning demand and products flows to the various nodes in the supply
chain. In this scenario, the objective is to meet customer demand at the best possible supply
chain cost, given relatively fixed resource availability.
For obvious reasons, this cost containment, or cost optimization, dimension is taking a pivotal role
in supply chain management. Companies increasingly will need to frequently and quickly assess
several different supply chain responses to a particular demand or supply scenario or scenarios.
The right place to do this, of course, is within the context of an existing S&OP process. S&OP
processes are typically supported by either supply chain planning (SCP) applications (available
as best of breeds or as part of ERP solutions), business intelligence platforms (collecting and
aggregating disparate data sources together) and/or spreadsheets (typically used to graph and
present the data to review teams). However, none of these solutions is specifically designed to
support deep network analysis and optimization studies. SCP solutions come closest to this
function with their ability to optimize static network models to some extent.
The use of network design tools, to support network-level what-if analyses, should be a key part
of any S&OP process with a strategic dimension to it. Through the coming months, demand,
supply, cost and price volatility will likely increase, and enterprises will need an effective way of
quickly analyzing what these changes might mean for them, and how best to respond to a more
turbulent external environment. A best practice for this need will include leveraging network
design tools as part of the scenario management aspects of the S&OP process, as a means to
support cost optimization efforts.
In this case study, we examine how Holcim uses the Oracle Strategic Network Optimization tool
to support best practices, what-if analyses and scenario management to help manage risk and
cost containment for its North American cement business.
The Challenge
Holcim U.S. is a wholly owned subsidiary of Holcim of Switzerland. Holcim is one of the world's
leading producers of cement and aggregates, and supplies ready-mix concrete, asphalt, and a
range of other services. Holcim operates in over 70 countries, with a global turnover more than 27
billion Swiss francs (taken from the company's 2007 annual report).
Holcim is one of the largest suppliers of Portland and blended cements and related mineral
components in the U.S., where it has 16 manufacturing plants and around 76 distribution centers.
The corporate logistics function for Holcim U.S. is located in Michigan, and is responsible for the
planning of all Holcim's North America production plants, distribution centers and transportation.
Across the U.S. and Canada, this amounts to 19 manufacturing plants and 80 distribution
centers.
A significant cost component of cement manufacturing and distribution is transportation, so for the
cement industry, optimizing sourcing (which manufacturing plant and/or distribution center
supports which demand point) is a critical task. Over the last few years, where demand has
outstripped supply, managing make-versus-buy decisions (i.e., does the company buy and
commission new manufacturing capacity, or source it from external suppliers?) is also a key
decision that needs to be regularly revisited as demand plans are updated. To support this type of
analysis, Holcim recognized the value of purchasing and leveraging a network design tool and
bringing model-building and analysis skills in-house.
Over the past months, however, the world has changed. Supply now outstrips demand, historical
demand patterns are no longer good predictors of future demand, and production costs
(particularly fuel) have been much higher and, probably more significantly, highly volatile. All
these factors drive the need for effective and linked strategic modeling through to operational
analysis and planning, supported by capable what-if analysis and scenario management. Holcim
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4. needed to link the strategic modeling it was carrying out with its S&OP process, and to ensure
that each month it was operating with an optimum network and sourcing model — otherwise, the
cost penalties would have been significant.
Approach
About 10 years ago, Holcim acquired the Numetrix network design and optimization product,
which eventually became the Oracle Strategic Network Optimization product through Oracle's
acquisition of PeopleSoft. Initially, Holcim used Oracle Strategic Network Optimization as most
companies do — for ad hoc network optimization studies and for supporting its annual operating
planning process. Based on long-range demand and supply plans, Holcim developed different
operating scenarios to find the best match of supply to demand, and to determine the resulting
supply chain costs for the chosen scenario. These operating costs were fed into the financial
budgeting process to set the annual operating plan.
Holcim also recognized the importance of linking strategic network modeling with operational
planning processes. It decided that the network optimization process should drive the operational
planning. To effect this change, Holcim looked to tightly tie the network design work with its
S&OP process.
Holcim's S&OP process is run on a monthly cycle. Each month, the sales and marketing teams
review their demand forecasts (a separate demand planning system is used to do this) as an
input to Oracle Strategic Network Optimization. Also, each month, the production group reviews
and confirms how much of which products can be made in each facility. Again, this is an input into
Oracle Strategic Network Optimization. Because transportation costs are a significant proportion
of the total supply chain costs, the transportation group also provides up-to-date information on
relevant transportation rates for the different transportation modes that Holcim uses. This, too, is
an input into Oracle Strategic Network Optimization.
Once all inputs are received, the supply chain analysts run the Oracle Strategic Network
Optimization models, and can determine different potential solutions that maximize revenue
and/or minimize total costs. The optimum solution is chosen, based on how well it meets the
current objectives of the company, and this is presented at the executive S&OP review meeting.
The key at this stage is to present the results of the model, in terms of demand, supply and
financial impact, as well as recommendations for mitigating actions and the assumptions that
underpin the specific scenarios. The role of the executive S&OP team is to review the model
results, and to question, approve and resource the required actions needed to support the chosen
solution. Any required conflict resolution occurs at this stage, with a cross-departmental resolution
being secured. The output from this executive S&OP review is fed into the finance group so that
the chosen plan can be rolled up into a full financial budget, and the new plan is compared to the
old plan for significant differences.
Holcim is a SAP ERP user and previously looked at SAP supply chain management solutions to
see whether these would be a suitable replacement for Oracle Strategic Network Optimization,
but decided to stay with the Oracle solution because it is better-suited to Holcim's modeling
requirements and capital limitations, and because SAP does not have a directly equivalent
product in its SCP suite (SAP supports network design capability via partners). Currently, Oracle
Strategic Network Optimization is not integrated directly with SAP ERP; data input into Oracle
Strategic Network Optimization is manual, with the outputs being pushed back into SAP Business
Information Warehouse (BW) for reporting purposes. Holcim is looking at automating this
interface in the future.
Holcim is also looking to use network design to help determine the carbon footprint of its supply
chain. The first phase of the project is to add the necessary data to the model, and to determine
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5. CO2 emissions for certain network configurations. Subsequent phases will look to
optimize/reduce CO2 levels.
Results
The use of network design has enabled a number of benefits for Holcim, including:
• Significant reduction of barge demurrage fees
• Improved supply chain risk management
• Quickly evaluated supply/demand options for minimizing the impact of natural disasters
and other supply chain disruptions (such as strikes)
• Cost optimization across the supply chain
Critical Success Factors
• Focus on the needs of the business, and show the value to the business of managing
supply chain risk.
• Link the scenario-modeling process to the S&OP process, and drive the connection
back through the financial planning process.
• Ensure buy-in from management and the business at the senior level.
• Ensure buy-in to the whole optimization process. Holcim spent many hours explaining
and coaching stakeholders in how the optimization process worked. It is imperative to
get confidence in the results of the model, and to remove the "black-box" stigma often
associated with optimization tools.
• Ensure that the right skills to use the strategic network tool are in place.
Lessons Learned
• Integration to key data sources is desirable, but not essential, especially in the initial
project phases.
• Focus on getting the modeling process up and running, and relevant to the business.
• Link to the financial budgeting process; otherwise, it's more difficult to get senior
management buy-in.
• Be prepared to react rapidly to significant events that affect the supply chain. The ability
to quickly reforecast and remodel to produce an impact analysis is a valuable capability.
Note 1
Contributions
Gartner wishes to acknowledge the invaluable contributions of key Holcim staff for their input,
help and guidance in developing this case study — especially Gareth Rogers, supply chain
analyst.
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