A leading global manufacturer and wholesale distributor of precision engineered products sought to expand its position in the U.S. market through a series of acquisitions. Completing the deals allowed the firm to satisfy its strategic objectives, but left it to inherit the inefficiencies of the multiple supply chains it now owned. The company realized how critical supply chain consolidation would be in order not to stifle the potential for growth it had just secured.

After conducting a detailed internal study, the company concluded that the most cost-effective solution would be to consolidate its operations into a “megacenter” style distribution hub close to its corporate headquarters in North America. However, this single point of distribution would create significant resiliency risks, whether human caused or as a result of a natural disaster. A significant business interruption at the proposed center could have posed catastrophic implications for customers in the North American market.

The most obvious solution to the risk issue was the construction of a second distribution center, but the costs of construction were daunting and the potential risk during a reconfiguration of a distribution network were severe. The client approached Marsh Risk Consulting (MRC) with its central question—how could a business case be built for (or against) making an investment in a second distribution center?

The MRC Solution

From the outset of the engagement, it was clear to MRC that the client needed a customized solution focused heavily on business intelligence and analytics. In order for the client to gain a better understanding of the risk versus benefit of its optimization strategy, volume, cost, and throughput data was collected and modeled in conjunction with catastrophic failures and time to recovery cycles for the proposed two centers. Additionally, MRC aided the firm in rating and ranking its product families based on value (revenue, cash flow, strategic importance, and brand visibility). With the product families ranked, MRC was able to illuminate the net effect of the investments versus risks mitigated.  

The Result

At the conclusion of the engagement, MRC’s analysis showed that the benefit achieved through inventory diversification far exceeded the carrying costs of the second distribution center and additional inventory. By modeling various levers (e.g. safety stock, re-purposing product), the team was able to accelerate recovery from 56 to 17 weeks, resulting in a savings of $170 million.

In this case, supply chain business analytics not only served its classical role of achieving the lowest cost, but also showed the other side of the equation in optimizing resiliency at the same time. As a result, and especially having experienced the global trade disruptions from the Iceland volcano event, the company proceeded with building a second distribution center in the United States.