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Utilizing Supply Chain Modeling for Both Long-Term Strategy and Daily Operations: A PriceSmart Case Study

By Toby Brzoznowski  December 9, 2015

I recently had a chance to talk with Frank Diaz, Executive Vice President of Logistics and Distribution at PriceSmart and Dan Gilmore, Editor of Supply Chain Digest for a videocast on the topic “Using Supply Chain Modeling to Improve Operations and Outperform the Competition.” Frank and his team at PriceSmart are users of the LLamasoft supply chain design platform and have been leveraging supply chain design for both long-term strategy and tactical analytics.

Before we dive into PriceSmart’s use of supply chain design, let’s take a step back to look at today’s supply chain climate.

The State of Supply Chain Today

Volatility is the one of the only constants in today’s supply chain market. Organizations are facing mounting disruptions from business as usual when managing their supply chain operations. These disruptions can include external factors like currency fluctuations, fuel prices, natural disasters and driver’s strikes, but also internal factors like mergers and acquisitions, entering new markets and adding SKUs and product lines. There are increasing questions that supply chain managers must be able to answer to manage the business, trying to balance cost and service along the way.

Organizations like PriceSmart are now focusing teams to specialize in supply chain design. In fact, companies that have been able to incorporate design as a core business process are able to gain visibility into their current-state network and then use modeling to validate new business decisions. These companies are better equipped to respond to unexpected market changes and are benefitting from huge savings as a result. In fact, over 70 percent of companies surveyed in a recent University of Michigan study had saved over 10 million via supply chain modeling across all fixed and variable costs.


PriceSmart Uses Supply Chain Modeling to Validate Decisions during Steady Growth

PriceSmart is a U.S. based club-retailer, who sees most of its business in Latin America and the Caribbean. PriceSmart’s approach to supply chain modeling was straightforward, but incredibly effective. While a merchandiser, PriceSmart is able to utilize their supply chain as a key differentiator in the market to deliver a higher quality of service, and a variety of products that enables them to provide a unique shopping experience and beat the competition.

“One of our principle missions is to be a key enabler to our stakeholders and we all recognize that supply chain execution is how we’ll accomplish our goals,” said Diaz. “Traditionally these tools have been used for long-term strategy, but increasingly I see them used as tactical tools. Having the ability to make those decisions, recommendations and long-term investments and having that conviction in our decisions has really made a difference for us due to that newfound insight.”

Due to the fact that PriceSmart is operating in multiple countries, they needed to enhance the approaches and tools they were using to better optimize the supply chain and maintain responsiveness in the constantly changing environment. PriceSmart has experienced consistent growth over the past five years, experiencing 11.5 percent growth in the last year. While great and in-line with objectives, this growth does put further strain on the supply chain. That coupled with stores and facilities that were designed for a lower volume of sales drove PriceSmart to make changes as they were rapidly approaching capacity limits.

“We needed to answer the question of what are our capacities going to look like over a period of time? Then, what if anything can we do about it? That’s where the LLamasoft Supply Chain Guru tool really helped us take the baseline information and learned from what we know today and project it out and have some visibility of how we need to organize our supply chain into the future, well in advance of the need. (It also helped us) take into account all the complexities of dealing with multiple countries,” said Diaz.

The modeling approach was fairly straightforward. First with Supply Chain Guru, PriceSmart built a baseline model of where the business was at today. By establishing a baseline model, organizations have a starting point to benchmark against. It is also an excellent place to identify some quick-wins to build momentum around other modeling objectives. In this case, the baseline model was all that PriceSmart needed to apply it straight to the market.

PriceSmart’s inventory was at that point manifested in three stages, 1). For display, ready to be sold, 2). In reserve or 3). When capacity was exceeded, queued in storage containers in parking lots. They knew there had to be a better way.

Through Supply Chain Guru and with the LLamasoft team, PriceSmart built a hybrid model that allowed them to push info into the model and adjust when needed, but also pull data out of the model to make strategic decisions. PriceSmart was able to identify and forecast the most optimal locations for the adjusted inventory strategy, including where and how large the locations would need to be, as well as identify what products and suppliers they would need to target. They were able to gain a better understanding of their cycle stock and could therefore reduce reserves and safety stock.  Where they once had five facilities, they now have 14, serving as an interim step as they work to consolidate the processes of multiple countries into a standard. PriceSmart is actively working on knowledge transfer across the various geographies as they recognize the need for more autonomy and proficiency in the tool as they expand and grow.

“As we continue to grow, we turn to the model to analyze,” said Diaz. “We’re pleased with what we’ve been able to accomplish so far. We’re making very thoughtful and deliberate decisions about our supply chain mostly enabled by the modeling tools. It gives us the confidence and conviction to make those decisions and know what we’re getting into before we take the first step.”

Implementing Best Practices

As the PriceSmart team has stressed, utilizing supply chain design as a critical business process – not a one-time project, doesn’t happen overnight. Organizations need to invest in the right people and technology to reach the full potential of the supply chain network. But by building that foundation, companies are poised for continuous improvement.

To learn more about PriceSmart’s use of LLamasoft supply chain design tools and for more analysis and insight, check out the full videocast here.