Optimizing your supply chain to counter rising costs and improve processes
To offset the rising costs of doing business, manufacturers and distributors are looking to optimize their supply chain to increase efficiency. A healthy supply chain allows your company to adapt quickly to evolving risks and market opportunities, maintain a satisfied customer base and grow the business. By carefully evaluating your current strategy, identifying areas for improvement, addressing risks, improving processes and implementing new technology, your organization can significantly increase performance and profitability.
Responses to McGladrey’s 2013 Manufacturing and Distribution Monitor survey demonstrated the emphasis companies are putting on supply chain optimization. When asked what strategies they were using to maintain or improve profit margins in the current economic environment, the most popular answer was lowering costs through operational efficiencies. That response was followed by working with suppliers and customers to improve processes and costs, and investing in equipment.
Respondents also saw costs related to transportation and fuel, utilities and inventory and materials rising from 4-6 percent, putting additional pressure on increasing supply chain efficiency to counteract these growing expenses.
Aligning your supply chain with your business model
When developing a supply chain model, you should first evaluate your corporate strategy. Taking your market and business objectives into consideration, assess your methods of satisfying customers, growing the business, managing your organization and capabilities, achieving financial objectives and reacting to market and economic change. Your supply chain strategy is dependent on what types of products are going through your supply chain. For example, if you produce a functional product, your supply chain strategy will be much different than if you develop an innovative product.
Companies often encounter difficulty with their supply chain strategy if forecasting is utilized to predict what their customer is going to buy. Forecasts inherently are always incorrect, and when relying on projections at every step of the supply chain, the negative effects are amplified with excess inventory, product shortages and general inefficiency.
The answer is to substitute real information for forecasts. Accurate demand information can be obtained through trust and collaboration with supply chain partners and sharing real demand data. Manufacturers should also transition to a pull approach, sending a signal through each of your supply chains when the end customer purchases products. This strategy reflects actual demand in the supply chain, rather than relying on a forecast.
Organizations seek to integrate their supply chain for several reasons. Consolidation has resulted in larger, but fewer customers who can set terms to lower their costs. The number of suppliers has also diminished, resulting in fewer options and less flexibility in negotiations. In addition, manufacturers and suppliers have integrated due to price and profit margin pressure and commodity pricing requiring products to have additional value.
Features of collaborating within the supply chain include joint development of shared processes and metrics, open sharing of knowledge and information, clear roles and responsibilities, and increased visibility. These improvements directly lead to lower costs, enhanced quality and customer service, and reduced inventory, cycle times and lead times. However, you must be careful to understand and manage the barriers to collaboration, including:
- Each partner working for their own benefit
- Misaligned incentives
- Working with competitors who are also supply chain partners
- Power-based relationships
- Underestimated benefits
- Weak partner benefits
- Culture conflicts
- Technology barriers
After choosing or confirming your supply chain strategy, identify your value stream. Map your processes, and hopefully most of them are found to create value. Some non-value added steps such as government regulation are required, however, there will always be many steps that do not add value and can be eliminated.
Implementing process improvements
To introduce process improvements to your supply chain, frame your processes so all employees understand the components and how they are currently operating. Identify opportunities to improve processes and develop a design for your desired outcomes, mapping necessary changes and establishing a plan for implementation. Some improvement activities within the value chain to focus on include inbound logistics, operations, outbound logistics, marketing and sales, and customer service. Further optimizing these processes or their support activities can make a significant impact to your bottom line.
Mitigating supply chain risks
When developing a supply chain strategy, it is important to understand your supply chain risks. For example, if one of your major suppliers went out of business and caused a supply disruption, a ripple effect would be felt from increased material costs and time to market to decreased product quality, customer satisfaction and brand perception. Ultimately, a disruption will also have a negative effect on revenue and earnings.
When identifying and monitoring supply chain risks, most companies only look at financial risks, determining if suppliers are financially viable. However, you should also consider operations, industry, external environment and dependency risks that can have a significant impact on your productivity. Utilize a balanced scorecard and dashboard approach, evaluating more than just financial risk and focusing on the measures that are valuable to your organization.
Using technology to your advantage
Technology presents a major opportunity for manufacturers and distributors to increase efficiency and visibility into operations while decreasing costs. Companies are responding by investing in cloud platforms, customer relationship management (CRM) and enterprise resource planning (ERP) systems, and mobility and business analytics solutions. These transformative platforms enable collaboration, pushing data to suppliers, providing better access to data to make more informed decisions and connecting with suppliers and customers locally or globally.
A growing number of companies are taking advantage of cloud solutions for features such as demand planning solutions, supplier portals, product life cycle management and ERP. Advantages of the cloud include:
- Ease of connecting with suppliers and customers
- Extending your supply chain to all partners
- Speed of deployment
- Refocusing organization resources away from deploying and maintaining technology
- More and better data in real time
Mobility is also having an impact on many organization’s supply chain strategies, providing increased data access from any location and capturing targeted information at the source. Any data, from maintenance to sales, can be quickly delivered over mobile devices. The changing, more connected workforce is driving mobility adoption, as real-time information is expected and is more readily available than ever.
Monitoring your supply chain
Once you have taken the previous steps, you must develop processes to measure improvements and ensure new performance levels are maintained. Developing reliable performance metrics is a critical step to optimizing your supply chain. Determine the metrics that directly relate to efficiency and how they drive supply chain behavior. It is unrealistic to measure all possible objectives; consequently, you should develop a reasonable number of key performance indicators (KPIs) that allow you to track and measure your effectiveness.
For example, typical KPIs for product introductions could be the internal and external failure rate, as well as introduction lead time and total supply chain inventory turns. From there, develop similar KPIs for your other key processes and activities such as merchandising products and replenishment. Inventory turns are typically an important metric across all levels of your supply chain as there are significant variable costs associated with managing inventory.
In summary, to enhance your supply chain performance, you must first develop a strategy that details your processes and identifies areas that provide the greatest opportunity for improvement. Detail, measure and manage your unique supply chain risks and how they could affect you and your customers. Develop a technology plan that supports your strategy and, finally, identify and implement KPIs throughout your processes. Optimizing your supply chain does take some work, but the benefits can be significant from several perspectives, including efficiency, cost savings and customer satisfaction.
For more information on increasing your supply chain performance, download a recording of our recent webcast, Enhancing supply chain performance: Leveraging people, processes and technology to improve performance.