Is co-location the next big game-changer in supply chain?

By Nilay Kumar and Oscar Nieto

Editor’s Note: The SCM capstone Exploring Supply Chain Co-Location: Implications on Cost, Speed-to-Market, and Sustainability was authored by Nilay Kumar and Oscar Nieto and supervised by Eva Ponce ([email protected]). For more information on the research, please the thesis supervisor.

The supply chains for mass-produced goods often involve multiple suppliers and distribution centers scattered across different locations, leading to significant inefficiencies. Extended lead times and coordination challenges arise when suppliers, production sites, and distribution centers are located far from each other; for example, a supplier that fails to deliver potentially jeopardizes production, which can result in lost sales.

Companies with long lead times maintain larger buffers and safety stocks to ensure supply chain resilience. A McKinsey analysis of almost 300 listed companies found that inventories increased by an average of 11% between 2018 and 2021. This further compounded their supply chain inefficiencies. Extended lead times also increase transportation costs and carbon emissions, which grow with the distance traveled.

According to our research, a typical fast-moving consumer goods company with a geographically dispersed network might face lead times of up to eight weeks from suppliers located 500–1,000 miles away from production sites, with distribution centers equally distant. This can lead to higher safety stock requirements, increasing inventory carrying costs by up to $10 million annually. Moreover, transporting goods over such distances can contribute to higher CO2 emissions, potentially reaching 250,000 kilograms of CO2 per year.

Unaddressed, these inefficiencies result in daily incremental costs and highlight the need for companies to continually improve their supply chain networks. Furthermore, growing consumer demand for environmentally sustainable products is pushing companies to innovate with their supply chain strategies to meet these expectations more profitably and sustainably.

Past innovations can solve today’s supply chain challenges

Over the past few decades, innovations in network design have changed the way companies organize their supply chains. One model that has gained significant attention is supply chain co-location, spearheaded by the automobile industry in the 1990s. This strategy involves manufacturers co-locating facilities with suppliers, warehouses, and distribution centers to improve flexibility while reducing costs and environmental impact. Today, this approach can address unique challenges faced by several industries.

Our research aimed to answer the question, How might a supply chain co-location strategy impact a company’s performance in terms of costs, speed-to-market, and environmental sustainability? We developed a quantitative model to evaluate three scenarios—baseline (current network), supplier park model (integrated campus with nodes in close proximity), and milk-run model (nodes located in the same city or county)—and analyzed the impact on costs, lead times, and carbon emissions compared to the baseline.

Are you ready for the co-location revolution?

Our analysis revealed that supply chain co-location can drive significant improvements for companies. The best-case scenario, the supplier park model, can deliver up to 45% cost savings, a 30% reduction in speed-to-market lead times, and more than 80% reduction in CO2 emissions from transportation.

One key insight was the substantial reduction in both freight and inventory holding costs. The supplier park model demonstrated a 77% reduction in freight costs and a 72% reduction in inventory holding costs. The proximity of suppliers to the production plant results in shorter lead times and minimal transportation requirements, major factors in reducing these costs. Moreover, the supplier park model contributed significantly to environmental sustainability objectives. The 80% reduction in Scope 3 carbon emissions from transportation is a direct result of minimizing distances between supply chain nodes.

Implementing a co-location strategy, however, comes with challenges, including significant upfront investments, the need for strong supplier collaboration, and the complexity of finding an optimal site that meets all parties’ needs.

Supply chain co-location offers a powerful solution for companies seeking to remain cost-effective, quick to market, and environmentally sustainable. As the industry evolves, embracing innovative approaches like co-location will be crucial for staying competitive and meeting changing customer demands.

Every year, approximately 80 students in the MIT Center for Transportation & Logisticss’ (MIT CTL) Master of Supply Chain Management (SCM) program complete approximately 45 one-year capstone projects.

These students are early-career business professionals from multiple countries, with two to 10 years of experience in the industry. Most of the research projects are chosen, sponsored by, and carried out in collaboration with multinational corporations. Joint teams that include MIT SCM students and MIT CTL faculty work on real-world problems. In this series, they summarize a selection of the latest SCM research.

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