White Paper
Product Flow Path Design –
Because One Size Doesn’t Fit All
By Tom Tiede
www.Fortna.com
This report is provided to you courtesy of Fortna Inc., a
leader in designing, implementing and supporting
complete supply chain solutions. For additional
information about how Fortna can assist your company
achieve business goals, please call us at (800) Fortna-1 or
visit our Web site: www.fortna.com
Why Not One Size for All?
Imagine your business with only one product purchased from just one supplier and distributed to a single
customer who orders the same quantity on a regular basis. Perhaps this was the case during the infancy of your
organization. Perhaps it’s simply a fantasy. Assuredly, your business is nothing like that now. If you are like
most distribution intensive businesses, you have multiple products in a variety of shapes and sizes sourced from
points across the globe. And, you are likely to be distributing through multiple sales channels each with customers
demanding ever higher levels of service. Clearly, a one size fits all approach to your Distribution Network Strategy
isn’t the optimal path forward for your business.
Why Not One Size for All?
We recently benchmarked a number of U.S. retailers, comparing their network design to inventory performance.
Our analysis indicates that companies within the same retail category have similar inventory performance. This is
especially so when retailers employ similar network designs as their competitors. It’s certainly not surprising.
Each company within a given category must meet the same customer expectations for inventory availability. So, a
“me too” approach to network design is logical. But, it’s not an approach that leads to breakout performance or
competitive advantage for any distribution intensive organization.

Sporting Goods A
Sporting Goods B
Sporting Goods C
Electronics A
Electronics B
Auto Parts A
Auto Parts B
Auto Parts C
Office Supplies A
Office Supplies B
Books A
Books B
Home Supplies A
Home Supplies B
Company Inventory Turns Distribution Network
Source: Fortna Analysis of Most 2006 Company 10Ks – Courtesy of Edgar Online
Note: Inventory Turns reflect global Cost of Revenue and Inventory
Of more interest in our benchmarking analysis is the relationship between inventory performance and the
sophistication of the network design. Further, there tends to be a correlation between organizational maturity and
a more tailored approach to Product Flow Path Design. Larger, more mature organizations have the economies of
scale to employ more innovative methods of flowing product from suppliers to customers. Those that excel take
advantage of their scale. But, you don’t have to be a large organization to employ innovative methods. In fact, it
may be easier for smaller, more nimble businesses to tailor their line of attack in servicing customers. Regardless
of size, remember that it’s not simply a matter of shipping direct or through a DC. Multiple product flow path
alternatives can and should be considered.
Start with Product Flow Path Design
Start with Product Flow Path Design
Too often, organizations put the proverbial “cart before the horse” when designing their distribution network. It
tends to be facility focused rather than path and product focused. We have all learned that the goal is to get the
right product to the right place at the right time in the right quantity. How many facilities you have and where
you place them on the map are a “facility focused” means of supporting this goal. But, you cannot truly determine
the optimal number and location of facilities unless you first step back and align the many flow path alternatives
available to you with the unique characteristics of your product offerings. This alignment process is called Product
Flow Path Design.
The Distribution Network Strategy Cycle
Product Flow Path Design defines the most cost efficient and service effective paths by which to flow products
from suppliers to customers. It also provides a strategy, a business case and prioritized road map for moving
forward. It can be considered as the critical link in the Distribution Network Strategy Cycle.
Emphasis:
• Physical Attributes
• Supply Chain Characteristics
• Assessing Alternative Flow
Paths from Supplier to
Customer
• High Level Business Case &
Road Map
Product Flow Path
Design
Emphasis:
• # & Theoretical Location of
Facilities
• Service Assumptions
• Freight Cost Analysis
• High Level WH and
Inventory Costs
• Identifying Minimum
Logistics Costs of Scenarios
via Optimization Engine
• Financial Justification
Network
Optimization
Emphasis:
• Actual Locations
• Practical Constraints and
Considerations
• Inventory Deployment Plan
• Service Implications
• Detailed Transition & HR
Planning
• Detailed Budgeting & Cash
Flow Requirements
Network
Strategy
1. Define the Future Flow Path Design
2. Determine the Number
& General Location of
Facilities
3. Develop a Detailed
Strategy and Plan Based
Upon Practical Constraints
Re-assess
Over Time
Prioritize the Areas in
which to Focus
Prioritize the
Alternatives
to Assess
Distribution Network Strategy Cycle
To execute the Product Flow Path Design, the next question is often “how many facilities do you need and where
should they be?” Ideally, this is done through a network optimization analysis. Network optimization takes a deep
dive specifically into the estimated freight costs associated with alternative distribution facility locations. Most
often, a commercial software tool is used that has an optimization algorithm that essentially functions like a linear
programming model to determine the minimum cost of alternative locations and product flows. It’s a highly data
intensive and theoretical process requiring trained analysts to use the tool. But, the most important input to this
process is identifying the alternative scenarios and flow paths in which to analyze. Rarely do these projects have
sufficient time or budget to evaluate all the potential flow path scenarios or product segment permutations. So, a
Product Flow Path Design avoids sub-optimizing your network optimization study by providing a prioritized set of
alternatives in which to evaluate.
Strategic Questions Addressed
The resulting network optimization analysis following Product Flow Path Design is valuable input to the broader
and more comprehensive requirements of a Distribution Network Strategy. A Distribution Network Strategy
includes inventory deployment planning, service capability definition across channels, systems planning, and
detailed financial budgeting. It is also based on practical constraints and considerations such as the availability
of resources and logistics partners to execute and maintain the strategy.
Because all businesses change over time, the network strategy needs to be periodically re-evaluated. This need
creates a loop back to Product Flow Path Design.
Strategic Questions Addressed
The intent of a Product Flow Path Design is to answer three strategic questions.
1. Product Flow Path: What are the most effective and efficient methods (balancing cost and service) to
flow unique product groupings from suppliers to customers or stores?
2. Supply Chain Operations: What is the impact of the recommended product flow paths on existing
operations (near and longer term)?
3. Business Case/Migration Plan: What is the supporting business case and migration plan to support the
recommended changes?
Recommended tasks and deliverables from this effort are outlined in the chart below.
Develop
Business Case
& Migration Plan
Develop
Business Case
& Migration Plan
Define Impact
to Existing
Operations
Define Impact
to Existing
Operations
Assess
Product
Flow Paths
Assess
Product
Flow Paths
Prepare
for Project
Prepare
for Project
Primary
Activities
Key
Deliverables

Pre- Project Step 1 Step 2 Step 3

Alternative Flow Paths
Evaluating and Trimming Flow Path Alternatives
To gain competitive advantage, we advocate a highly tailored approach to product flow path design. But, it’s not
economically practical to implement and maintain too many unique paths. Some consolidation is necessary, which
leads to a more manageable set of alternatives to evaluate. Further, there’s no sense in “boiling the ocean” in
assessing every alternative imaginable. The more sensible approach is to:
ƒ Apply deductive reasoning in developing a set of hypotheses for the future supply chain;
ƒ Allow business priorities to dictate where to focus your analysis (e.g. inbound vs. outbound alternatives);
ƒ Create a set of logical product segments by which to assess alternative flow paths within the hypotheses;
ƒ Develop and use a financial model to compare the impact and sensitivity of each hypothesis vs. a “do
nothing,” baseline alternative.
The resulting financial comparison will provide the means to prioritize efforts and investments moving forward.
The diagram below outlines many of the potential alternative flow paths available to distribution intensive
organizations.
Alternative Flow Paths
“Rule of Thumb” Considerations
Obviously, not all of the alternatives depicted will make sense for every organization. Product attributes such as
size, volume, value, source, and destination largely dictate how a product should flow through the supply chain.
As such, suggested “rules of thumb” on when to consider each flow path alternative is outlined in the following
table.

Impact on Financial Performance
Impact on Financial Performance
So, what is the impact of Product Flow Path Design on the supply chain? And, more importantly, how does it
impact financial performance?
The ultimate goal of any supply chain leader and any large investment in the supply chain is to maximize the
return on invested capital (ROIC). The primary components of the equation are profitability and capital
efficiency. So, the key question as a supply chain organization is “how do we help the company maximum profit
and minimize capital assets?”

Profit
Decrease
Operating
Expenses
Capital
Deployment
Increase Net
Operating
Profits
Improve
Capital Costs
& Allocation
Return on
Invested
Capital
Cost of
Capital
Profitability
Capital Efficiency
The simple answer is that there are a number of ways Product Flow Path Design can impact ROIC.
On the profit side, Product Flow Path Design impacts costs by minimizing net landed costs to the customer
(which includes freight and warehousing expense). It also impacts revenue by enabling higher levels of service.
For example, higher product availability of the right product in the right locations and at the right time means
fewer stock outs and more sales. Less of the wrong product at the wrong place and the wrong time means less
excess inventory needed to be sold at discounted prices or not sold at all.
On the capital side, Product Flow Path Design provides a myriad of opportunities to minimize the required
investment in inventory and capital assets necessary to meet service needs. For example, flowing product
through distribution nodes other than a large DC may mean a smaller commitment in space. Flowing slow
moving product through a single DC rather than multiple locations may reduce inventory investment.
As you can see, Product Flow Path Design is not myopically focused on logistics cost. Instead, it takes a “bigger
picture” view of supply chain assets, service levels, costs, profits, and investments. In fact, it’s sometimes
possible logistics costs could rise by redesigning your product flow paths. But that should be perfectly acceptable
so long as the business as a whole benefits from doing so. That is why we suggest using a broader economic
model such as ROIC when evaluating product flow path alternatives.
Trimming and Evaluating the Alternatives
Summary
Your Distribution Network Design requires a very tailored but practical approach unique to the needs of your
company, the products you offer, and the customers you serve. The strategic and tactical challenges you face
are likely very complex. So, how successful and competitive will you be long term if you over-simplify your
approach to distribution? Gain a step on your competition by tailoring your approach and innovating the paths
you take to flow product across your supply chain. Think outside the box. Look beyond what you’ve done in
the past or what you’re competitors are doing. Define the possibilities. Evaluate what is practical. And then
reap the substantial financial benefits that await a tailored approach. It’s worth the journey.
About Fortna
Fortna designs, implements and supports business solutions to optimize your supply chain. With
Fortna’s client focused approach, you have a partner who acts and thinks like you do. Our focus
on the business case and willingness to share your risk ensures that you are meeting your
business objectives. Your success is our success. Fortna delivers solutions that are appropriate,
implement-able and financially justifiable and we are honored that supply chain leaders are
adopting our model. www.fortna.com 1-800-fortna1
© 2010 Fortna Inc. All rights reserved.
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