Two of the major cost drivers for a large pharmaceutical company's supply chain, transportation costs and order processing costs, are directly related to inventory placement across a distribution network. The combination of high variations in customer demand and the steady emergence of new products create a highly dynamic marketplace in which service can be difficult to analyze and improve. Adding to this challenge are the requirements for rapid delivery to customers, federal regulations that require redundant inventories for many of the company's products and operational processes supporting both full and partial case shipments. These requirements generate a significant challenge in balancing the demands of cost-effective customer service.

Merck seized the opportunity to take a fresh look at their current operations in light of ongoing events within their supply chain. These included the approaching expiration of a facility lease, the depreciation of a large number of refrigeration units and escalating shipping costs. They needed to examine their current operations and policies in order to identify potential cost-savings across the supply chain and also ensure that a planned facility review would generate appropriate recommendations during such a critical time. Due to the high dollar value of their products and the need to maintain small order cycle times in a highly variable environment, Merck chose to address the challenge with simulation in order to guarantee a robust and long-lasting solution that correctly captured the impact of daily and seasonal complexities on operations. Automation Associates, Inc. (AAI) was contracted to assist Tompkins Associates, Inc. in determining the appropriate balance of facility and product inventory necessary to provide a robust level of customer service at the lowest cost.

AAI was given the task to rapidly develop and accurately analyze a simulation model of Merck's North American supply chain infrastructure. This model would determine the correct number and best locations for distributing products to a shifting customer base while leveraging existing facilities. The goal of the project was to cut transportation and facility costs while maintaining short order cycle times and compliance with federal regulations under several anticipated business scenarios. Variables for these scenarios included diverse forecasted customer order volumes on a five-year horizon, alternate facility locations and cost structures, various combinations of products ordered by a range of customers and assorted transportation service selection approaches and costs.

Given the encompassing nature of the problem, the need for timely answers and the importance of exact cost information, simulation was selected for the project. The dynamic model incorporated actual forecasted customer demand to "drive" activity in the simulated network. Detailed, real-time transportation service selection logic and costs were represented to provide a pragmatic basis for simulating the movement of goods from multiple facilities to over two hundred aggregate customer locations. These scheduled movements took into account the costs for shipping full and partial case orders for each product family and facility. This approach allowed the team of analysts to evaluate feasible alternatives against a baseline operation. By comparing alternative costs and level of service, the team was able to determine the most justifiable and low risk distribution network alternative to implement.

After completing a thorough analysis of multiple scenarios, AAI and Tompkins recommended a streamlined supply chain that reduced costs against the fixed cost of manufacturing without compromising customer service standards and compliance to federal regulations. This outcome allowed Merck to confidently develop a proven distribution center network. The new distribution network utilized both existing operations -- to handle all ambient pharmaceuticals to the United States and Puerto Rico -- and three new distribution centers - to serve as the primary distribution point for less than load (LTL) shipments of vaccines. The improved network reduced Merck's distribution costs by over 13% on an annual basis and was implemented (including all facility and equipment changes) for $5 million in capital. While the rapid configuration and analysis of the simulation model provided an enormous return on investment in a very short time, Merck retains the ability to refine their supply chain using the existing tool. Even now, in the midst of shifting demand and newly introduced products into a tumultuous market, Merck is equipped to face challenges and questions that can be tested and resolved in a robust environment using the results of AAI's supply chain tool.