Recently I had the opportunity to speak to an operations management class for MBA students in the Goizueta Business School at Emory University.  The class is intended to give the students an introduction to a variety of problems that they might encounter during their careers, and to management science techniques that might be applied to them, using Excel as a solution platform.  The professor had asked me to address the course topic from the point of view of one who had used these methods in the real world, and I was glad to do so, recounting my work in supply chain network design, hydro power generation scheduling, routing of empty shipping containers, natural gas supply contract management and various other problems.

During Q&A one of the students asked how a company should determine the appropriate source of resources to use for solving these types of problems – should it be in-house expertise or an outside consultant?

As I told him, to me, this depends on a number of factors, and I gave an example, based on our experience: In our practice we perform supply chain network design studies, and we also license the network design software that we use to our clients, if they desire. A number of clients have engaged us to first do an analysis for them, and then they have licensed the software so that they can then perform future projects themselves, using our initial project as a base.  Many of these clients have used the software very effectively.

Those that have been most successful at using the software in-house, and at performing management science projects in-house in general, have several common characteristics-

  • They are committed to tactical and strategic planning as tools for meeting their business goals,
  • They have enough work in this area, and related areas, to keep an analyst or group of analysts busy full time, due to such factors as
    • The scale and scope of their operations
    • The speed of innovation in their industry
    • The level of complexity of their supply chain and variety of products made, and
    • Their desire for a “continuous improvement” approach as opposed to a “one-time reorganization” approach
  • They have a commitment to maintaining personnel who
    • have the proper skills and training to address these problems, and
    • are allowed the time to work on these problems, rather than being constantly pulled off for “firefighting” short term or operational problems.

Most companies can make good use of management science solution methods, but, as you think about how to do this, try to make a realistic determination of your internal priorities, so you can decide between insourcing and outsourcing, or a mixture of the two.


In the recent weeks, I have been thinking about testing our applications, like our popular Profit Network, or Profit Vehicle Planner.  When we test, we run data sets that are designed to stress the system in different ways, to ensure that all the important paths through the code are working properly.  When we test, our applications get better and better. There are many good reasons to test, most importantly, is to know that an improvement in one part of the code does not break a feature in a different part of the code.


I have been thinking about how we could test our code a bit more, and the means by which we could do that. I have been reading about automated testing, and its benefits. They are many, but the upshot is that if the testing is automated, you will likely test more often, and that is a good thing.  To automate application testing requires the ability to churn out runs with nobody watching. And to do that, the application needs to be able to be kicked off and run in a way that there are no buttons or dialog boxes that must be manually clicked to continue. There can be no settings that must be manually set, or information reviewed to decide what to do next. In addition, the application must then save the results somewhere, either in the instance of the application, or to a log file, or to a database of some sort. Then finally, to really be testing, the results must be compared to the expected results to determine the pass/fail state of the test. This requires having a set of expected results for every test data set.


In looking at this process above, I see numerous similarities to the process used to run a sensitivity analysis, in that many runs are typically run, (so automation is a natural help) and the results need to be recorded. Sensitivity Analysis is a typical process for user of our Profit Network tool, and out Profit Planner and Profit Scheduler tool.   An additional step in sensitivity analysis however, is that you ApplicationHarness1may desire to change the input data in a systematic way (say Demand + 5%, and Demand -5%), and to the extent that it is indeed systematic, this too could be folded into the automation. The results analysis is different too, in that here you would like to look across the final sets of results at the differences, while in testing you just compare one set of test results to its expected results.  I can foresee difficulty in automating the data changes, since each type of data may need to be changed in a very specific way.  Never-the-less, even if the data changes are manual, they could be prepared ahead of the run, and the runs themselves could be grouped in a batch run to generate the results needed for a sensitivity analysis.

Constructing a harness that lashes up to an application where you can define the number of runs to be made, the setting for that run, the different data sets to be used, and the output location for results to be analyzed, would be useful not only for testing, but for the type of sensitivity analysis we do a lot of here at Profit Point.

I am going to encourage our developers to investigate this type of a system harness to be able to talk to and control our applications to be able to run them automatically, and have their results automatically stored in a data store for either test or sensitivity analysis.

Jim Piermarini  |  CEO Profit Point Inc.


Celebrating Significant Milestones

December 10th, 2013 9:32 am Category: Optimization, by: Jim Piermarini

Once a year we celebrate some significant milestones here at Profit Point.Baloons
This year, we have the great pleasure of celebrating 10 years of service for our Director of Sales, Richard Guy. In his ten years at Profit Point, Rich has been instrumental in establishing our sales process and in helping to make the connection of several of our largest customers with Profit Point. Rich’s affable style and gregarious nature has served him well at Profit Point. Rich also can tell a pretty good joke. Congratulation Rich for ten years!

Celebrating 5 years of service are Director of Logistics Services Ted Schaefer, and our Senior Programmer, John Cutler (Cutty). In these 5 years each have brought great things to Profit Point and our customers. We look forward to many more years of of working with these folks, and appreciate their efforts to make Profit Point more sucessful. Congratulations to Ted and Cutty for five years!

Jim Piermarini, CEO Profit Point

Improving the Supply Chain

One of the pleasures of working at Profit Point is having the occasion to reflect on and write a blog about a subject that is of interest to me. Taking time to reflect on what is important, especially now around Thanksgiving and the holiday season has rewards of its own, but especially with regards to the business we are in, helping people make their supply chains better, brings rewards unique to our profession. I am pleased and thankful to be a part of it.

At the grand scale, improving supply chains improves the very heart of most businesses. It reduces waste, reduces cost, increases efficiency and profit, and reduces the detrimental impact of commerce on our world, including reducing our carbon footprint and land fill waste as well as promoting the most efficient use of our natural resources and raw materials. Profit Point routinely has an enormous impact on the business of our customers, and I personally am pleased and thankful to be a part of it.

On a more human level, the people at our customers who interact with Profit Point personnel on our projects, come away with a profound sense that they can make a difference in their company; the impact of our network studies or scheduling work or other projects demonstrates the ability of a better business process to be rolled out and actually change the business for the better. Once involved in a successful project, many of these people move up in their organizations to lead other successful business change projects. Nothing succeeds like success! I am pleased and thankful to be a part of it.

Reflecting on our part in the business world as small actors on a large stage, it is rewarding to be able to know that we have made some difference.

Wishing you the same peace of mind this holiday season, Jim Piermarini, CEO Profit Point Inc.

The New Silk Road

November 19th, 2013 11:31 am Category: Optimization, by: John Hughes

I read an interesting article in the New York Times concerning a shift in the physical route of the supply chain running between China and Europe. Until recently, trains have played a very small part in the shipment of manufactured products from the Far East to Germany, Holland, France, etc. However, a number of recent developments have caused a number of large companies to begin to shift their supply chains away from maritime to rail-based modes.

Four major developments have spurred this increasing use of trains.

  1. Labor costs in Eastern China along the coasts have been rising. As a result, if they have not abandoned China all together, many manufacturers have shifted their production facilities to more inland locations to the West and thus marginally closer to Europe. However, adding an extra truck-leg to their supply chains has increased the cost, duration, and complexity of moving their goods to market.
  2. Taking full effect in January 2012, Kazakhstan, Russia, and Belarus created a customs union that eliminated time consuming and costly customs inspections at their mutual borders. This was little noticed by the rest of the world, but has shaved days off of the overall rail transit time across central Asia by removing delays due to bureaucratic paperwork.
  3. Kazakhstan is rapidly building new rail routes through its territory. This has the obvious effect of improving the time and reliability of rail transit across that nation. However, this has had the secondary effect of spurring competition from Russia as that country has begun to make infrastructure improvements to its Trans-Siberian railway.
  4. The Kazak rail authority has implemented processes and policies to give certain trains crossing their territory priority over other traffic. These are given a kind of express-status, whereby fresh operating personnel and locomotives are available at specific stops along the way. Also, guards board the train, sometimes riding on the tops of the rail cars, to ‘send a message’ and insure that goods are not stolen in transit.
The Silk Road in the 1st century. Wikipedia

The Silk Road in the 1st century. Wikipedia

Certainly there are many impediments that still exist, which tend to slow the movement of goods by this new Silk Road. The greatest one of course is the fact that the gauge of the rail lines in territories of the ex-Soviet Union are different than the standard used throughout the rest of the world. For this reason, when rail shipments reach the Chinese-Kazak or the Belarus-Polish border large cranes must shift containers between trains designed for the different rail widths.

One of the companies who have begun using this rail option in their Supply Chains is Hewlett-Packard. They report that from their manufacturers in Western China to Europe, the marine route (around India and through the Suez Canal) is 5 weeks whereas the rail-route requires 3 weeks. Although the sea route is about 25 percent cheaper than over-land, the cost of the additional transit time is substantial.

I think the take-away from all of this is to realize that Supply Chains are constantly evolving as a result of changing circumstances. Companies must always re-evaluate their networks and be ready to take advantage of changing conditions so as to optimize their processes and organization.

The primary goal of Big Data Analytics is to help companies make better business decisions by enabling analysts or other users to analyze huge volumes of transaction data as well as other data sources that may be left untapped by conventional business intelligence programs.

Big Data IconAsk yourself, does your company:

  • Use advanced analytical techniques (e.g., simulation, optimization, regression) to improve decision making
  • Routinely use data visualization techniques such as dashboards to assist users or decision-makers in understanding complex information?
  • Combine and integrate information from many data sources for use in decision-making?
  • Use systems that automatically make operational changes, based on performance criteria, business rules in response to signals from sensors?
  • Use systems to give you the ability to decompose information to help root cause analysis and continuous improvement?

If your answers are yes then your company is on the road to implementing Big Data Analytics. If your answer is no, then read on to learn more.

We see companies develop and employ enterprise applications that use advanced analytical techniques to explore Big Data and generate optimal supply chain plans to improve decision making. These applications allow management to visualize their supply chain before and after optimization, helping to identify areas of risk and recommending and allowing management changes to these plans in an almost real-time environment.

The most advanced applications use sophisticated mathematical algorithms, typically mixed integer programming optimization models, to analyze their Big Data and generate optimal schedules and supply chain network designs. In addition, these tools allow the user to modify those plans in real time to align with their tactical or strategic goals.

For example, in S&OP optimization some of these advanced technologies implement color-coded information, which allows users to identify shortages or constraints with their production operations by SKU. The user then has the ability to point and click to drill down for further data analysis and quickly make the needed changes to modify the plan. The key to this type of a system is to provide actionable insights into their global supply chain, and allow worldwide operations the ability to make changes or corrections to their production process at any time 24/7. This process of examining Big Data using advanced technologies provides global supply chain plan visibility and an improved decision-making process. Contact us to explore a professional approach to take advantage of Big Data Analytics.

George, The Disruptor

September 4th, 2013 7:09 pm Category: Optimization, by: Ted Schaefer

The Yarwell Gang_Web

At Profit Point we often talk about finding the “Disruptors” in a company to help implement change.  A disruptor is someone who takes stock of the status quo, decides whether or not it is good enough, and then does what it takes to change things for the better.

A couple of weekends ago I had the honor of helping such a person celebrate his 100th birthday.  George has had an impact on many things, big and small, over his century on this earth, ranging from his work as an ordinance officer for George Patton in North Africa; his post WWII service, setting up new airfields and installing nuclear missiles during the height of the Cold War; to building the two rows of houses on our block into a close-knit neighborhood.  Through all of these things, George has been a disruptor.

In George’s case, sometimes all it took was an off-the-cuff remark.  For example, when General Patton was on his way to an inspection in Casablanca and the quays at the port were choked with 500-lb bombs, George mused,  “I wonder what would happen if the Germans decided to strafe this place.”  As he tells it, “Those bombs got put away PDQ.”  Just a quick remark to the right person that something needed to be done differently.

Much closer to home, George has disrupted our neighborhood.  Partnering with the family across the street, George and his wife invited the rest of the block to his end of the street for hamburgers and hot dogs.  The deal was that our end of the street had to host the next cook-out sometime in the next six months.  Within a year, we were having happy hours at George’s house every Friday night.  Now, the happy hours rotate from house to house, wherever the pink flamingos are set up.

Well that’s all well and good, but where is the disruption, where is the change in the status quo and why does it matter?  George changed our culture from maybe associating with the neighbors next door, to seeking out each family on the block and getting to know them.  We watch out for each other.  For example, after Hurricane Ike, we were without power for 8 days, but our street was the first one cleared of trees and debris because we, as a neighborhood, started at one end of the street and went from house to house to make sure everyone was OK and then cleared debris.

As you can see, George’s experiences as a disruptor weren’t always high-profile, national security events, and they didn’t always involve a staff of planners and months of preparation.  He just did what it took to change things for the good.  That’s why I like to work with disruptors – they make things better.

In response to ‘Flying high on the Big Data hot-air’

August 6th, 2013 6:32 pm Category: Optimization, by: Alan Kosansky

I enjoyed reading Phil Factor‘s editorial in SQL Server Central, entitled Flying high on the Big Data hot-air. While the piece brings an interesting perspective to the developing ‘Big Data’ discussion and I think there is merit to the opinion,  I believe the author missed a few key points:

  • From a technology stand point the author is correct, but from a business stand point, there is in fact a revolution going on….much like supply chain in the early 90s.
  • While many of the early successes are on small data sets, they are happening because we have big ones.
  • I read yesterday that Google search is having great success with new predictive search technology….this is where you don’t actively search for anything, but something like this might happen….your alarm goes off 30 minutes earlier than you set it, your device tells you there is an accident on your route to your 9AM meeting and offers an alternate route for you and where you may want to stop for your cup of coffee on this new route so you can get to your meeting on time. You did nothing before you went to bed, but while you were sleeping, this new Google search trolled through your calendar, and other info it “knew” about you, trolled through public traffic data, etc….

There is going to be another big step in how our devices work for us over the next 10 years, and it is already beginning, partially enabled by “Big Data”. Don’t underestimate it because some of the leading analytics have been around for a long time. The ways they are being applied are going to change things significantly.

When we help our clients improve their supply chains the first step in the process is usually to identify what problem they need to solve, or what questions they are trying to answer. Examples of such questions might be

  • What will be the impact of several possible capital investments in our distribution system?
  • A major customer is considering changes in their manufacturing – how should we respond?
  • How can we improve the assignment of available production / inventory to customer orders?

After pinning down the objectives, the focus will then shift to the design of a planning model, or a software system, that will help them to address the identified needs. We find that a key design tenet for the model, or the scope of the supply chain to be covered, is to include enough detail to be able to answer the questions at hand, but no more.

A typical supply chain will stretch from procurement of raw materials to manufacturing to distribution to customers (and possibly beyond, on either or both ends.) Part of capturing the supply chain behavior will be to define the transformation of materials along the chain. This can be done by defining a bill of materials, or BOM, which defines the quantities of input ingredients that are required at a point in the supply chain to make an output material of interest. For instance, if you are a baker then your BOM is your recipe – e.g. the amounts of flour, buttermilk, leavening and various other ingredients required to make the batch of biscuits.

Deciding on the detail of the materials going into the BOM, and getting the right quantities for the BOM, is a key step in properly modeling the supply chain. If you are working at an operational supply chain level, the BOM will need to be detailed enough to actually make the product, but many times in a planning situation, it is reasonable to omit some of the detail, and only capture the main flows of product through the system. You will need to make these decisions based on your project objective.

For instance, if you are modeling a beverage company’s supply chain, water may be a key ingredient in the production process. If the question you are trying to answer for the beverage company is whether traditional warehouses vs. crossdocks is a better distribution solution for a part of the territory, then you may decide that the sources and cost of water for the production facilities will not have a big impact on the answer, so you can omit the water consumption from the analysis. On the other hand, if the objective of the analysis is to evaluate the impact of alternative future production locations on the company’s overall environmental impact and commitment to sustainable practices, then water for production (and waste water, and other intermediate or byproduct materials) would likely need to be included in the production BOMs.

Making good choices in defining your BOM is one of the important steps in getting a supply chain model to help you answer your questions effectively. Our extensive supply chain experience allows us to bring a large knowledge base to the assignment when we are helping our clients design in enough detail, but no more.

IndustryWeekThis month’s IndustryWeek features an article by Alan Kosansky and Ted Schaefer entitled Margin-based Supply Chain Optimization.

“To effectively implement margin-based supply chain optimization, it is important to have three key components in place: data, optimization technology and alignment with strategic business objectives.

Margin-based supply chain optimization is a new business process based on two key business priorities: 1) the desire to deliver more high profit products to customers, and 2) the ability to stop serving customers and products with low profit yield. This supply chain decision support process quantitatively shows companies which customers to serve and what products to produce in order to maximize profit and margin. For companies with complex supply chain operations, this is often easier said than done. Recent advances in the availability of data and optimization modeling, however, enable a growing number of companies to implement more efficient and effective supply chain systems.

A company’s portfolio of customers and products typically changes more quickly than the assets used to meet the customer demand. These situations include changes in the macro-economic environment that precipitate significant increases or decreases in customer demand, shifts in a company’s product portfolio, development of new markets, or changes in the cost to produce and/or deliver products or services. In each scenario, margin-based supply chain optimization is a key tool to help companies manage supply to achieve maximum profitability.

To effectively implement margin-based supply chain optimization, it is important to have three key components in place. They are: data, optimization technology and most importantly, alignment with strategic business objectives.”

Read the complete article here or download a PDF copy here.

To learn more about our Supply Chain Optimization services, contact us here.

Building applications, especially custom ones, carries with it the burden of answering the question: Does this do what the customer wants?

With complicated systems with many interacting features and business rules, answering this question can be daunting. In fact, evaluating the answer can be daunting too, from the perspective of the customer. Having the sales guy check some boxes in a questionnaire, or watching a demo just doesn’t leave you with the assurance that the application with handle all the business requirements, from either perspective, the vendors or the customer. Everyone I have spoken to who has sold complex software, or who has participated in the purchasing process of software has expressed the same doubt. They are just not sure that the tool will be a good fit. As we all know, that doubt does not always prevent the purchase of the software, as each organization has its own level of risk tolerance, and trust in the vendor’s brand or reputation. Often these other considerations can outweigh the amorphous doubt that some folks might feel. How can one quantify that doubt? Frankly, it’s a quandary.
This thought got us at Profit Point thinking… Wouldn’t it be great if there was another way to evaluate the goodness of fit or an application, or the appropriateness of the parameter settings, to match the business needs of an organization. Would it be great if there was a way to eliminate (or greatly reduce) the doubt, and replace it with facts. Either a business rule is obeyed or it is not. Either a decision is made according to the requirements, or it is not. Let’s eliminate the doubt, we thought, and the world would be a better place. (well a little bit anyway).

There are many processes for testing an application as it is being developed, with writing test scripts, and evaluating the results. All these are based on testing little pieces of code, to ensure that each function or sub routine does what it should do in each case of input data. These processes work fine in our opinion, but only when the sub of function is able to be considered independently form the others. When the system has functions that interact heavily, then this approach doesn’t reduce the doubt that the functions may conflict or compete in a way that the whole system suffers. How then to evaluate the whole system? Could we treat the entire application as one black box, and evaluate the important business cases, and evaluate the results? This is exactly what we have done, with the effect of reducing the doubt to zero about the suitability of the application for a business.
With several of our clients we have worked out what seems to be a great process of testing a complex software solution for suitability to the business requirement. In this case, the detailed level function testing methods were not open to us, since the solution relied on a Linear Programming technique.
This process is really just an amplification of the standard testing process.

  1. Define the test case, with the expected results
  2. Construct the test data
  3. Build or configure the application
  4. Run the Test using the Test Data and Evaluate the results – Pass or Fail

This is the standard process for testing small functions, where the expected results are clear and easy to imagine. However, in some systems where there many interacting rules and conflicting priorities, it may not be simple to know what the expected results should be without the help of the tool’s structure to evaluate them. Such is the case with many of our application, with layer upon layer of business rules and competing priorities… The very reason for using an LP based approach makes testing more complex.
In the revised process, we have, for each new business requirement:

  1.  Construct the test case with the test data
  2. Build or configure the application
  3. Set the expected results using the results of the first pass build
  4. Re-factor the code and test until all test are passing
Profit Point's Software Testing Process

Profit Point’s Software Testing Process

In my next blog I will show you the simple excel based tools we use to facilitate the test evaluation.

In practice, the process works well, new versions of the application go into production without any surprises, and with full confidence of the application management team that all the business requirements are 100% met.

No doubt – no doubt a better process.

By Jim Piermarini

Communications Technology and Supply Chains

April 6th, 2013 12:18 pm Category: Optimization, by: John Hughes

There is nothing fundamentally new in the area of Supply Chain management! Supply Chains have existed ever since some caveman somewhere decided to make specialty dinosaur clubs from a particular kind of really hard wood and very sharp rocks that he got from two other troglodytes over in the next valley. What has changed however is the nature and speed of the communication that occurs between the participants in a Supply Chain, and the ability of those actors in the process to keep and use past information for making decisions.
In my current job in Supply Chain consulting, I frequently work with Production Schedulers. These are folks who I have a lot of empathy with, since once upon a time, a long time ago I actually started my career as a production scheduler (and no I was not involved in the dinosaur club market!).  And I was recently thinking about this idea that what is new in the area of supply chain management is a result of the way we communicate today as compared to the past.
I hate to admit it, but “back in the day” when I was scheduling, computers were huge boxes controlled by a phalanx of support people in separate departments, if not different buildings. They were not the practical job-aids that they are today. And if you used the word internet, people would have thought you meant to say ‘hairnet’.  In building a schedule the basic tool was a board where I would physically place magnetic strips that were marked to indicate which products should be produced on particular pieces of equipment.
The communication that occurred was in the form of either paperwork carried in the interoffice mail, phone calls, or face-to-face conversation. So if a particular manufacturing process was running late, there would usually be a tremendous time lag before the scheduler would find out. Or if there had been some major snafu somewhere either in my own organization, or in any of the suppliers’ plants, I probably would not hear about it until I proactively asked. And of course from the customer’s point of view, they couldn’t simply change their order and email (what’s that?) me the new information. Obviously there was no real-time tracking of a truck’s location, and whether or not it was broken down or stuck in traffic on the N.J. Turnpike. And of course because there were no computers, I could never really be sure as to just how much product was available to ship to customers. Although the paperwork might say that there were 20 pallets on hand, the guys out in the warehouse might have lost track of where exactly all of those pallets might be.
What this all inevitably led to was a lot of extra inventory being carried at every stage of the Supply Chain. This was because you always wanted to try to have a little extra cushion built in to cover yourself for the unexpected. As a scheduler, I would catch a lot of grief (a nice way of saying you know what) from my boss if a production line was to shut down because they ran out of the intermediates or raw materials needed to keep running. Or if I committed to a customer order of 15 pallets on Wednesday, but the shipping department could only find 14 pallets, there was “hell to pay”.  I can remember literally climbing over the tops of shifting and unstable pallet stacks (OSHA would have had a field day), and shining a flashlight down the gaps looking for inventory that a “3 x 5” index card said was still in the warehouse somewhere.
And I don’t think the comparison of my experience vis-à-vis schedulers today, is any different than the comparison of those who did scheduling in 1900 versus me in 1974. In 1900, telephones were only just coming into widespread use, and typewriters were a comparatively new-fangled gadget. Ultimately, Trog (the son of the caveman who I mentioned earlier) was able to streamline his father’s Supply Chain tremendously when we was able to get the customers, as well as the wood and the rock guy, to start using that new concept called “writing” (of course which language to use could have been an issue).
The field of Supply Chain management will always be at the mercy of communication technology. Over time, Supply Chains will continue to morph into more efficient contributors to organizations’ bottom lines as the ability of humans to communicate with each other evolves.

The Future of Supply Chain Management

February 28th, 2013 5:35 pm Category: Optimization, Supply Chain Improvement, by: Editor

Here’s an audio interview with Dr. Alan Kosansky on the “Future of Supply Chain Management”.


Interviewer: What’s the future of supply chain management? Many companies have implemented ERP software solutions, but if you’re relying on well-traveled, standardized software to manage your supply chain, you could actually be eroding your competitive edge. Joining us now to explain why is Dr. Alan Kosansky, co-founder and President of Profit Point. Alan, welcome!

Now, Alan—ERP Software has definitely become commonplace as a solution in supply chain management—it’s certainly convenient, but is the software on its own enough?

Kosansky: ERP software plays a critical role in the enterprise. From its inception it has provided the backbone for accounting and financial functions. As it has extended into supply chain functions, it allows us to quantitatively manage the supply chain. All these systems have enabled significant efficiencies for companies over the past 20 years. And they have become commoditized. Leading companies are both leveraging what these ERP have to offer AND ALSO defining complementary supply chain processes that offer competitive advantage. For those supply chain processes for which being as good as the marketplace is enough, out of the box ERP and APS solutions are great. However, for those supply chain processes where your company believes they can create and maintain competitive advantage, using the solutions that the marketplace is using is not enough.

Interviewer: At Profit Point you believe that the future of supply chain management is in optimization based decision making – what is optimization based decision making?

Kosansky: Supply Chain profitability is based on the price you sell your goods minus the total delivered cost of making and getting those products to your customers. While this may seem like simple arithmetic, it is actually very difficult for companies to accurately predict profitability and then make supply chain planning decisions that maximize their profitability. Firstly, Computing the total delivered cost is difficult. Secondly, even those companies that are have a centralized way to view all this data typically have difficulty making the tradeoffs implicit in their supply chain costs: Inventory or customer service? Manufacturing, warehousing or transportation costs? Optimization based decision making allows supply chain planners to both see all the relevant data and make the tradeoffs that lead to maximum profitability.

Interviewer: … and how can optimization based decision making help ‘unlock’ a company’s competitive edge?

Kosansky: Companies that identify supply chain processes where they have developed some sort of competitive advantage need to embody those processes in enabling technology that support this better decision-making. Most often, this includes some form of optimization decision technology that quickly evaluates alternative scenarios and identifies those decisions that lead to maximum profitability. By combining the big data that is available today, with leading edge decision making technologies, leading companies are beating their competitors in every aspect of their operations, including the supply chain.

Interviewer: Well Alan this is great news – thanks for coming on and telling us about it! That was Dr. Alan Kosansky, President of Profit Point. For more information go to… that’s

Optimization and Competitive Advantage

January 24th, 2013 9:53 am Category: Optimization, by: Alan Kosansky

The most mature Supply Chain organization are engaging in a strategic process whereby they identify two categories of supply chain processes within their company: Category B are those processes where performing at the industry standard is sufficient. Typical processes in this category include accounts payable, accounts receivable, raw material sourcing, and freight contracting. Category A are those processes where they believe they have ideas and/or practices that give them competitive advantage. These processes might include S&OP, production scheduling, territory planning, or network design.

For supply chain processes for which performing at the industry standard is sufficient, standard technology solutions are sufficient as well. However for processes here there is an opportunity for competitive advantage, out of the box standard solutions will not do. Often mathematical optimization is a critical enabling technology for those supply chain processes that are a source of competitive advantage. Furthermore there is typically some level of customization required in order to uniquely capture the ideas and processes that embody the competitive advantage.

For example, consider the order fulfillment process in consumer electronics. Products in this industry become obsolete very quickly. For this reason, electronics suppliers to “big box” retailers like Best Buy and Walmart often operate in a back-order situation to reduce the probability of getting stuck with returns and obsolete stock. While standard solutions most commonly use a traditional first-in, first-out (FIFO) method to allocate inventory to orders, more advanced consumer electronics companies use more sophisticated approaches to determine how best to assign limited inventory to their customers. These approaches take into account customer priority, in-transit inventory and inventory already in the channel to determine algorithmically in what sequence and quantity to assign inventory to orders. Since they cannot simply fill all the orders of their biggest customers at the expense of the rest of their customer portfolio, they apply sophisticated business rules to balance the needs of all their customers while making sure their most important customer’s feel the pinch of inventory shortfalls the least. In this case, a custom solution for deploying in-transit inventory helps to “score” orders based on customer priority as well as on the inventory in the channel. This approach, which uses logic and algorithms well beyond the capabilities of standard ERP solutions, reduces the seller’s total supply chain costs and improves its performance scorecard relative to its most important customers.

Mature supply chain organizations typically identify about 80% of their process as “standard” and are able to use out of the box standard ERP and supply chain solutions here. In addition, they are identifying about 20% of their processes as being a source of competitive advantage and are developing and implementing solutions that capture that advantage.

If your organization is engaged in these strategic management practices, we commend you for your leadership in supply chain maturity. If not, let’s work and grow together.

For a more detailed discussion of this topic, read the Supply Chain Quarterly magazine article by Dr. Alan Kosansky and Ted Schaefer entitled Is standardized software eroding your competitive edge?

This quarter’s Supply Chain Quarterly magazine features an article by Dr. Alan Kosansky and Ted Schaefer entitled Is standardized software eroding your competitive edge?  The article addresses the pros and cons of standard enterprise software packages and discusses how generic applications may not accommodate the processes that leading company’s utilize to gain competitive advantage.

 You can read the complete article on the SCQ website here or download a PDF here.


Manufacture and delivery of a company’s products usually consume a wide array of materials, either directly or indirectly, ranging from rare commodities like titanium or zinc, to the most basic, such as water. Given the explosive growth of world population in recent history, and the resulting increases in consumption of food and other products, and the finite nature of raw materials, the sustainability of the supply chain over time is a growing planning concern for many companies.  Water is often a key focus in their planning, whether it is the main ingredient in their product, as it is in the beverage industry, or a major component, as it is for power generation, paper production, mining and many other industries.

One way to measure the water impact of companies (or countries, or production of industrial or agricultural products, such as textiles, rice or beef) is through the calculation of a “water footprint”, which can help identify what water is used (both directly and indirectly), where it comes from, and the relative efficiency of its use.  This concept is discussed in detail on the website  which has a wide array of statistics, as well as an interactive water footprint calculator and the option to download extensive research materials.  According to the website 92% of total water consumption in the world is associated with agricultural use.  However, since agricultural products are raw materials in many corporate supply chains, and are shipped from one location to another around the world, nations and companies effectively consume water from around the world.  The figure below shows major international water consumption flows, taking into account such factors as goods consuming water in production in one part of the world are shipped to a consumer in another area.

Source:Mekonnen and Hoekstra (2011)


Why should a company be concerned about their water consumption?  There are several risks that all companies face, to varying degrees, as global water consumption increases, including

  • Physical supply risk: will fresh water always be available in the required quantities for your operations?
  • Corporate image risk: your corporate image will likely take a hit if you are called out as a “polluter” or “water waster”
  • Governmental interference risk: governmental bodies are becoming increasingly interested in water consumption, and can impose regulations that can be difficult to deal with
  • Profit risk: all of the above risks can translate to a deterioration of your bottom line.

But with risk comes opportunity – planning for your water consumption, and footprint, as part of your supply chain analysis, and acting in response, can keep you ahead of the curve!


A Cautionary Lesson from Electronics Supply Chains

October 1st, 2012 4:02 pm Category: Optimization, Supply Chain Improvement, by: John Hughes

It wasn’t very long ago that the United States was still a major location for the manufacture of electronics. Apple Inc. used to boast that its products were all made in America. There were a number of large plants (and many were in fact foreign owned) making everything from televisions to mass-market audio devices.

But in the past few years that has changed dramatically. Today, almost all of the millions upon millions of Apple Inc. devices are manufactured oversees. Or look at the Amazon Kindle. Despite the fact that the key innovation that underlies the success of the Kindle – the electronic ink which is produced in Massachusetts – all the remaining components in this product are manufactured in Asia. Over dinner in February 2011, President Obama is rumored to have asked Steve Jobs of Apple Inc. why couldn’t the company’s products be “made in the U.S.A.”. Jobs replied “those jobs aren’t coming back” according to another dinner guest.

No company’s supply chain exists in a vacuum; they are like living organisms that exist and depend on their environment and surroundings. So what Jobs was saying was that the supporting economies, societies and infrastructure in which Apple’s supply chain exists have moved to Asia and it is an extremely difficult task to uproot it and relocate it to the U.S.

Executives at various mass-market electronics manufacturers tell glowing stories of the flexibility and responsiveness of their Asian suppliers. There’s a story where Apple made a late-stage design change to the frames around the iPhone screen. The Chinese manufacturer roused 8000 workers in the company’s dormitories at midnight, and within half an hour they began a 12-hour shift. Four days later, the factory was turning out 10,000 iPhones per day.

And the reason why these supply chains have taken root in Asia is not just a result of relatively cheap labor. In an article in the New York Times, Timothy D. Cook of Apple explained that factories in Asia “can scale up and down” at breathtaking speeds. They have the mid-level engineering talent and other skilled and un-skilled personnel resources to be able to rapidly adjust to their customer’s requirements. And in addition, the supporting 2nd-tier businesses that supply the electronics manufacturers are located nearby and are themselves extremely flexible and responsive. Thus a full and complete ecosystem has grown and flourished in East Asia for manufacturing mass-market electronics which is not easily or quickly replicated elsewhere in the world.

The experience of the electronics industry should be a cautionary tale for the U.S. and other advanced economies. Supply Chains are networks of interdependent actors. And in the case of manufacturing enterprises, their physical location has an impact on their ability to perform efficiently. This nation should have a debate as to what are the critical industries that we want to keep rooted in this country and then develop policies and infrastructure that will foster the growth and long-run health of the businesses that are involved in these areas of the economy.

There is nothing like a bit of vacation to help with perspective.

Recently, I read about the San Diego Big Boom fireworks fiasco — when an elaborate Fourth of July fireworks display was spectacularly ruined after all 7,000 fireworks went off at the same time. If you haven’t seen the video, here is a link.

And I was reading an article in the local newspaper on the recent news on the Higgs: Getting from Cape Cod to Higgs boson read it here:

And I was thinking about how hard it is to know something, really know it. The data collected at CERN when they smash those particle streams together must look a lot like the first video. A ton of activity, all in a short time, and a bunch of noise in that Big Data. Imagine having to look at the fireworks video and then determine the list of all the individual type of fireworks that went up… I guess that is similar to what the folks at CERN have to do to find the single firecracker that is the Higgs boson.

Sometimes we are faced with seemingly overwhelming tasks of finding that needle in the haystack.

In our business, we help companies look among potentially many millions of choices to find the best way of operating their supply chains. Yeah, I know it is not the Higgs boson. But it could be a way to recover from a devastating earthquake and tsunami that disrupted operations literally overnight. It could be the way to restore profitability to an ailing business in a contracting economy. It could be a way to reduce the greenhouse footprint by eliminating unneeded transportation, or decrease water consumption in dry areas. It could be a way to expand in the best way to use assets and capital in the long term. It could be to reduce waste by stocking what the customers want.

These ways of running the business, of running the supply chain, that make a real difference, are made possible by the vast amounts of data being collected by ERP systems all over the world, every day. Big Data like the ‘point-of’sale’ info on each unit that is sold from a retailer. Big Data like actual transportation costs to move a unit from LA to Boston, or from Shanghai to LA. Big Data like the price elasticity of a product, or the number of products that can be in a certain warehouse. These data and many many other data points are being collected every day and can be utilized to improve the operation of the business in nearly real time. In our experience, much of the potential of this vast collection of data is going to waste. The vastness of the Big Data can itself appear to be overwhelming. Too many fireworks at once.

Having the data is only part of the solution. Businesses are adopting systems to organize that data and make it available to their business users in data warehouses and other data cubes. Business users are learning to devour that data with great visualization tools like Tableau and pivot tables. They are looking for the trends or anomalies that will allow them to learn something about their operations. And some businesses adopting more specialized tools to leverage that data into an automated way of looking deeper into the data. Optimization tools like our Profit Network, Profit Planner, or Profit Scheduler can process vast quantities of data to find the best way of configuring or operating the supply chain.
So, while it is not the Higgs boson that we help people find, businesses do rely on us to make sense of a big bang of data and hopefully see some fireworks along the way.

Isn’t that one of our main objectives in life, whether the setting is business, participation in sports, your personal life?

I see part of our role at Profit Point as helping our clients to achieve their potentials. We do this by applying mathematical techniques to find good solutions to the problems that business leaders face. Many of our clients call upon us when their business is going through a time of transition, particularly when there is a merger of organizations.

Analyzing the potential for facility rationalization is one of the standard uses of our Profit Network infrastructure planning software. We, and clients, have used this software to decide how many plants, production lines and warehouses they need to best serve their customers in many different types of situations.

But mergers present opportunities to organizations further down the supply chain as well, of course. Many companies use vehicles to deliver product to customers on a regular basis, and when there is a merger (and at other times) well-run businesses are looking for ways to ensure that these types of activities are carried out efficiently.

Our Profit Vehicle Planner (PVP) software can help in planning for a merger at that next level down – for instance, when you have two organizations serving customers in a metro area, how do you combine them together?

The diagrams below give you an idea of the situation a company might face. They have operations in various parts of the country, serving hundreds of customers in each area. Their Southern California customers might be spread as in the pattern in the diagram below on the left.

To serve these customers they currently have five route territories, covering the customer deliveries, as is shown in the diagram on the right.

Now they plan to merge with a smaller competitor in the same type of business. The acquired company has customers in southern California with a similar spread across the geography, divided into two territories, as is shown in the diagrams below.

PVP will allow the analyst to look at all of the customers together,

and in this case, when the territory planning algorithm runs, it finds that deliveries can be made in six more-compact route territories, covering all customers. Separately the two companies had seven territories – and merged they have the potential to serve them with six – thus saving a truck and various associated expenses.  The merged solution is shown below.

Implementing this merged solution can help the company better achieve its potential – for profits.


Uncovering the Value Hiding Behind Environmental Improvement Investments

Supply Chain optimization is a topic of increasing interest today, whether the main intention is to maximize the efficiency of one’s global supply chain system or to pro-actively make it greener. There are many changes that can be made to improve the performance of a supply chain, ranging from where materials are purchased, the types of materials purchased, how those materials get to you, how your products are distributed, and many more. An additional question on the mind of some decision makers is: Can I minimize my environmental footprint and improve my profits at the same time?

Many changes you make to your supply chain could either intentionally – or unintentionally – make it greener, so effectively reducing the carbon footprint of the product or material at the point that it arrives at your receiving bay. Under the right circumstances, if the reduced carbon footprint results from a conscious decision you make and involves a change from ‘the way things were’, then there might be an opportunity to capture some financial value from that decision in the form of Greenhouse Gas (GHG) emission credits, even when these emission reductions occur at a facility other than yours (Scope 3 emissions under the Greenhouse Gas Protocol).

As an example, let’s consider the possible implications of changes in the transportation component of the footprint and decisions that might allow for the creation of additional value in the form of GHG emission credits. In simple terms, credits might be earned if overall fuel usage is reduced by making changes to the trucks or their operation, such as the type of lubricant, wheel width, idling elimination (where it is not mandated), minimizing empty trips, switching from trucks to rail or water transport, using only trucks with pre-defined retrofit packages, using only hybrid trucks for local transportation and insisting on ocean going vessels having certain fuel economy improvement strategies installed. These are just some of the ways fuel can be saved. If, as a result of your decisions or choices made, the total amount of fuel and emissions is reduced, then valuable emission credits could be earned. It is worth noting that capturing those credits is dependent on following mandated requirements and gaining approval for the project.)

Global Market for GHG Credits

If your corporate environmental strategy requires that you retain ownership of these reductions, then you keep the credits created and the value of those credits should be placed on the balance sheet as a Capital Asset. Alternatively, if you are able, the credits can be sold on the open market and the cash realized and placed on the balance sheet. Either way, shareholders will not only get the ‘feel good’ benefit of the environmental improvement, but also the financial benefit from improvement to the balance sheet. If preferred, the credits can be sold to directly offset the purchase price of the material involved, effectively reducing that price and so increasing the margin on the sales price of the end-product and again improving the bottom line. If capital investment is required as part of the supply chain optimization, the credit value can also be a way to shorten the payback period and improve the ROI, or to allow an optimization to occur

So, when you consider improving your environmental impact or optimizing your supply chain, consider the possibility that there might be additional value to unlock if you include both environmental and traditional business variables in your supply chain improvement efforts.

Written by: Peter Chant, President, The FReMCo Corporation Inc.

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