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A model of independence
As any first-year college student can tell you, it's not easy to go out on your own after sharing space with family members for so many years. Perhaps that's how supply chain managers at Carestream Health Inc. felt when their company was sold by Eastman Kodak Company to Onex Corporation a year and half ago.
Prior to the sale, Carestream had shared warehouses and transportation services with Kodak. After joining a new "family," however, the medical imaging company could no longer piggyback on a parent's distribution network. Now it would have to develop a stand-alone network that included warehousing and transportation facilities and services.
But Carestream's managers did not simply re-create what the company had during the Kodak years. They took advantage of a rare opportunity: the chance to design an economical and efficient distribution network from the ground up.
One is not enough
Carestream makes a variety of products that are sold to hospitals and medical distributors. These include medical and dental film, chemistry and printing systems, digital and analog X-ray imaging systems, molecular imaging systems, and health care information solutions. In 2007 the company netted about US $2.5 billion from sales of its products in more than 150 countries.
Carestream began its life as the Health Group of Eastman Kodak, a Rochester, New York, USA-based company that is best known for the cameras and film it manufactures for the consumer, professional, and industrial markets. In May of last year, Eastman Kodak sold the Health Group to Onex, an industrial conglomerate based in Toronto, Ontario, Canada. The Health Group, renamed Carestream, retained its headquarters in Rochester.
To serve the U.S. market, Kodak Health Group had used four warehouses in the United States that were owned by Kodak. One was located in Windsor, Colorado, near a manufacturing plant that made most of its flagship product, medical x-ray film. Another was in Rochester, New York, near Kodak's corporate headquarters. The group also shared warehouses in Georgia and California with Kodak's consumer goods business.
The sale to Onex meant that the former Kodak Health Group would have to strike out on its own when it came to transportation, warehousing, and distribution. In preparation for the change of ownership, the medical imaging company adopted what appeared to be a simple solution: serve all of its U.S. customers from one location.
"Prior to the split from Kodak, we tried to get everything into one warehouse," recalls Mark Ewanow, worldwide network design and inbound logistics manager. "We quickly recognized that it wasn't the best strategy."
The company had chosen the Colorado location as its central distribution point. That worked well for products that were manufactured at the nearby plant. But Carestream also manufactured some products in Rochester and was sending to Colorado—in the western half of the country—products that would later be shipped back to the U.S. Northeast. Clearly, having a single distribution point was neither efficient nor cost-effective. It was time for Carestream to rethink its plans.
Into the pool
Fortunately for Carestream, Kodak had by that time sold its Rochester warehouse to a third-party logistics company, which was willing to provide storage and handling for Carestream. The company now would be able to use that warehouse and the one near its manufacturing plant in Colorado as distribution centers and thus avoid unnecessary shipments. But that was just a first step in the process of redesigning its network. The company would also have to analyze and revise its transportation patterns.
During the Kodak years, the medical imaging unit had saved money on transportation by consolidating customer orders into full truckloads whenever feasible and delivering them to "pool points." These were locations where truckloads were broken down into less-than-truckload (LTL) shipments for final delivery to customers. The pool points were based on a network that included Kodak's four warehouses, and the truckloads were built with orders from both the Health Group and its parent company.
Now that Carestream had two warehouses instead of four—and no Kodak products to help fill the trucks—the company needed to identify pool locations that would optimize its new outbound product flow, Ewanow says. To conduct that analysis, Carestream's managers needed specialized software. After evaluating a number of packages, the company selected Supply Chain Guru, a network-design tool from Llamasoft Inc. that models a supply chain network, identifies the optimal structure, and then runs test scenarios to predict operational performance.
Accurate network modeling requires a significant amount of information, both current and historical. "The first step is modeling the existing network and getting the model in line with costs and inventory that we saw in history," says Ewanow.
To do this, the company needed to create a single picture of historical activity. This meant that Carestream had to pull all sorts of data from its corporate information system, including SAP applications inherited from Kodak Health, and then get that information into a format the modeling software could use. Among the data required were product types, the weights and quantities bought by its 2,000 or so customers at each of their receiving locations, and the frequency of shipments to each location.
Ewanow and his colleagues knew that indiscriminately loading all of the company's historical data into the model would skew the results. Instead they had to filter that information to some extent. Otherwise a shipping lane that was used once as an exception might be treated as a routine run in the analysis.
Soon they had the information they needed to conduct the analysis and run operational scenarios. "Getting a 'steady state' representation of history is difficult," Ewanow says. "But when you do, that gives you the confidence that the results from the software reflect the savings from any future network design."
Savings all around
When Ewanow completed the modeling exercise at the end of 2007, the results suggested that Carestream use six pool points, as opposed to the nine it had when it was Kodak Health Group. By using facilities operated by its motor carriers in Pennsylvania, Georgia, Texas, California, the U.S. Northeast, and the U.S. Midwest, Carestream could minimize its costs for shipping to all of its U.S. customers. Breaking down truckloads into LTL shipments in those geographic areas would also allow Carestream to obtain better truck utilization, Ewanow says.
Modeling Carestream's U.S. supply chain network validated the earlier decision to operate distribution centers in Rochester, New York, and Windsor, Colorado. That assessment was based not just on outbound considerations but also on inbound costs and service factors. The model showed that the distribution centers were situated properly not only for the products that it manufactured in Colorado and New York but also for those that it sourced from plants in Oregon, Mexico, and China. "One of the things that surprised some folks was that the locations we chose were pretty good locations because of the impact on inbound logistics costs," Ewanow says.
On the outbound side, Carestream could clearly see how costly it would be to serve the entire country from one point; as Ewanow puts it, the model quantified "the number of trucks we wouldn't have to run out of Colorado to serve the United States."
The medical imaging company also used the model to analyze its truck routings and shipments—and found that it was wasting resources in many cases. "We saved on the elimination of hundreds of truck movements per year," Ewanow says.
The combination of two distribution centers and the six pooling points allowed Carestream to shave US $1 million dollars from its US $50 million annual transportation budget. Those savings would have been considerably greater if fuel costs had not risen so high over the past year, Ewanow says.
Modeling beyond borders
Indeed Ewanow says that supply chain modeling and analysis will become a regular exercise for Carestream, partly because high energy prices will make transportation costs a concern for the foreseeable future. He sees a number of potential applications beyond transportation and warehousing analysis; his next exercise will be determining optimal inventory holdings and locations in the United States.
The medical imaging company also plans to apply supply chain modeling outside of the United States, using the software to analyze the optimal locations for serving its many international customers. Its first target is Europe, where Carestream has just begun examining its delivery network. Making changes in Europe will take longer than it did in the United States, Ewanow says, partly because Carestream has customers in so many countries and partly because it is constrained by thirdparty logistics contracts there that it inherited from Kodak HealthCare.
Ewanow believes that supply chain modeling will allow Carestream to "right-size" its global network and look for better ways to distribute its specialized products, taking into account the medical equipment market's shift from traditional imaging to digital technology. At the same time, modeling will help Carestream respond to changing economic trends. "We will continue to look for network opportunities as our customer base changes and fuel costs increase," Ewanow says.
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