A Unique Approach to Optimizing Rental Supply Chain: A Network Study

Posted by Rajendhar Uddavolu on Sep 28, 2018 9:32:00 AM
Rajendhar Uddavolu
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In current economic times, where economic cycles are shorter and volatile, companies within all industries are looking for every competitive edge. Financially, companies are looking into all aspects of the business to improve their bottom-line.  Costs of renting or leasing equipment outweighs the benefit-to-expense ratio of buying and owning equipment. Business trends show an increase in equipment rental, as part of their business strategy, allowing them to conserve capital.

Looking at this trend, heavy equipment manufacturers and dealers are leaning towards rental services as a part of their product and service offerings.

According to the American Rental Association, the equipment rental market has witnessed outstanding growth in recent years. From 2016 to 2017, heavy equipment rentals increased 75%. By 2023, the total revenue is expected to be $90 billion.  This poses a supply chain challenge to manage the rental fleet network.

Key challenges for rental supply chain:

  1. Optimize rental network: Having right set of rental locations/hubs to serve customers
  2. Rental fleet management: Carrying right types and quantities of rental fleet at the right locations/hubs
  3. Maximizing rental fleet utilization
  4. Increase availability to customers
  5. Maximize profits & minimize total costs

The Solution

To be able to arrive at a solution for the challenges above, it is imperative to map and model entire rental operations and associated costs, flow of inventory (rental fleet), and customer arrivals to rental locations. This allows businesses to have a more holistic view of the problem and helps identify bottlenecks and constraints across the rental supply chain. CGN's unique methodology simulates and optimizes rental supply chain networks. One can design alternatives and explore the service, performance, costs and risks associated with change, all within a single integrated software platform.

A holistic solution, leveragin CGN's expertise and Llamasoft's Supply Chain Guru platform, helped a major rental dealer identify opportunities to consolidate its rental facilities resulting in bottom line improvement. This approach helped make decisions surrounding rental fleet management that resulted in increasing availability to customers, while maximizing the fleet utilization and minimizing idle inventory.

Below are two approaches that addressed the client's rental business challenges.  These approaches identified opportunities to increase service levels by 6% and sales revenue by 7%.

Greenfield analysis to identify the right number of rental locations to serve the existing customer base.

This analysis considers the center of gravity or weight center technique, which is a quantitative method for locating a facility at the center of movement in a geographic area, based on weight and distance. In this case, total operating costs were considered as weights, where distance is physical distance from rental locations to customer locations. This analysis aided decision making around location consolidation, as well as new location additions within the rental network. These strategic decisions allowed rental locations to position themselves closer to the customer base, while minimizing the total cost of business.

Current State

current state

Future State

future state

Total Cost Evaluation

total cost evaluation

Fig 1. Greenfield analysis recommending optimal number of rental facilities

 

CGN's rental network modelling and optimization approach for better fleet management.

From a supply chain standpoint, there is a distinct difference in the way inventory flows in a rental network, compared to the flow of inventory in a manufacturing network. In a typical manufacturing supply chain, inventory is generated in a raw material form, at the upstream, and gets consumed as a finished product at the end customer point of use; a relatively straight forward flow where the model variables have a linear or a step function.  However, in a rental network, there is a return loop and an average rental period, which dictates the fleet inventory and availability.  It is imperative to make quantitative decisions, like how much inventory the network should hold; while minimizing total costs and improving availability. Managing the rental fleet by positioning the right inventory at the right location in a return-loop cyclic environment, is key. Deriving an appropriate objective function that considers the business objectives, including all of the above-mentioned rental constraints, is critical.

MSC

Manufacturing Supply Chain

RSC

Rental Supply Chain

Modelled inventory-1

Fig 2. Modeled vs. Actual Rental Inventory - recommendation on right rental fleet inventory