“70% of profitability can be tied to the performance of an organization’s supply chain”. The statement made by an academic keynote speaker at a recent supply chain conference.A Deloitte survey noted,“79% of companies with high-performing supply chains achieve revenue growth greater than the average within their industries. Conversely, just 8% of businesses with less capable supply chains report above-average growth”.On the cost side, it has been estimated that the supply chain generates up to 90% of overall business costs.
These figures point to a clear and critical link between the financial health of a business and its supply chain. However, a survey done by Tompkins delivered a troubling message. More than half of today's of business leaders did not see the need for close alignment between the supply chain and general business strategies. They considered supply chain to be a standalone function despite the fact that almost every value chain within the organization interacting at some point with the supply chain, often at multiple times.
Three Supply Chain Insights to Improve the Bottom Line
Most supply chains grew quickly without the benefit of a long-term strategy. Given the statistics above, and how much information and changes are coming (digital transformation), it is critically important to review and/or develop a strategic supply chain plan. Aligned with the business, a properly designed supply chain will be a catalyst to achieving commercial goals and profitability.The strategy should specifically address those business activities that are unique and value drivers for the company and also address universal supply chain fundamentals including:
- Demand Planning (always start with demand)
- Supply Planning
- Balancing Lean (efficient) and Agile (responsive) support structures
- Automation and System utilization (are our people adding value or executing transactions the system should be doing?)
- Network design (inbound and outbound logistics and locations)
- End-to-end integrated organization (data and communication are real-time and trusted, cross-functional communication is proactive, and we make and keep customer promises)
Take action: Review your supply chain strategy. If it doesn’t align with the objectives of the business, we have work to do.
Measure Supply Chain Performance
One of the key elements of profitable growth is happy and satisfied customers. Our supply chain strategy must be focused on the customer (external and internal). Many operational inputs make up a customer’s experience and each of these should be measured.
One key area to measure is supplier performance. Working in collaboration, at least with primary suppliers, is essential for optimizing supply chain performance and minimizing uncertainty. Uncertainty in the supply chain costs money, disrupts operational performance and impacts service levels. To measure and improve performance requires the right data. Most ERP systems have supplier scorecards and reports. Unfortunately, in our experience, we find less than half of organizations use these valuable tools. Instead, information is pulled out of the system, loaded into spreadsheets and then updated there. What added value is created by those steps? If customer satisfaction is a key lever for business success, then effectively measuring, managing and improving supplier performance should be an ongoing expectation.
Other performance measures that impact customer experience and operational efficiencies include:
- On-time and In-Full to customers (Perfect Order)
- Inventory Turns
- Inventory Levels
- Overdue Elements (Supply and Demand)
- Exceptions or Alerts (System generated a call to action notices balancing supply and demand)
- Production Schedule Attainment
- PO% Automation
The performance of our supply chain in these areas will impact customer service levels and profitability. With more and more data available in our systems, measuring these areas, setting improvement targets, and executing improvement strategies will pay huge dividends. We will be on our way to a more successful supply chain that improves operational improvement and thus, achieving a better overall customer experience.
Measure the operational elements in the supply chain that have an impact on customer experience. Use the data and analytics in your ERP system like the one source of truth to rally around.
Results of a 2014 survey conducted by PwC revealed that businesses with optimal supply chains have 15% lower supply chain costs, less than 50% of the inventory holdings and cash-to-cash cycles at least three times faster than those not focused on supply chain optimization.When optimizing supply chain performance, the focus should be on improving our people, our processes and how we leverage data to improve results. Starting with your people: look at how the supply chain operates. Does the supply chain cross-functional team on issues and improvement opportunities or do we function in silos? Are you using real-time data and leveraging our ERP systems to make decisions and manage the business or do you rely solely on spreadsheets and tribal knowledge? Is the business in constant firefighting mode or do you manage by exception? Do you have a culture of continuous improvement or are you consumed with activities just to meet demand? Optimization is about enhancing the skills of your people and putting them in a position to collaboratively work smarter, not harder.When reviewing processes, we need to examine if current processes across the supply chain support business objectives. If one of our business objectives is to be able to make a promise to a customer and achieve 97% on-time and in-full performance, then our processes (and data) must align with this strategy. You should ask yourself these questions to fulfill this strategy: do we have forecasts loaded in our ERP system? Do our team members run exception reports at the start of every shift? Are processes in place to address the exceptions across the supply chain and elevate key issues requiring management attention? What is our cadence to review key performance metrics? What is our process to review the performance and accountability of our team members?
Good news: as the digital transformation continues to progress, the amount of data will continue to grow. The bad news is that most organizations don’t use or trust the data that is currently available to them. ERP, WM, CRM systems all provide treasure troves of information to help supply chains make decisions. Rare is the organization that has invested in education to help team members learn how to leverage these systems and the data available to better manage their business.
Earlier, we called out using data to improve supplier performance. Another good example of this is inventory management. Whether its raw materials, work in process, finished goods, spare parts or equipment, chances are good you are moving inventory through a supply chain. The ability to manage inventory efficiently through the supply chain will make a huge impact on business results. Too much inventory and you’ll end up tangling working capital and potential cash flow. When inventory levels are too low, we risk stock outs and can potentially impact service levels. Here are a few ways you can leverage data to improve inventory management leading to reduced supply chain costs and improve service levels:
- Forecasting to reduce the need for excessive safety stock
- Managing Material Requirements Planning (MRP) settings (automate reorder points, lot sizes, coverage profiles, etc.)
- Analytics to identify opportunities (slow-moving, high levels of the buffer, ranges of coverage, turns, etc.)
- Product Lifecycle changes (reducing one material while increasing another)
- Lead time management
- Visibility and Trust (one system of record that can be relied upon to make a promise)
To improve the supply chain’s value to the business we need to optimize the performance of our people, align our processes to our business objectives and improve the use of available data.
Take action: Identify team member activities that are not adding value and automate. Invest in the skills of your people to perform at a higher level, and develop a culture that continuously reviews and adjusts processes to achieve desired business outcomes. Lastly, consider increasing the utilization of your systems and data to manage the business.With the undeniable link between supply chain performance and business profitability, supply chains must be considered strategically important.
Organization Leaders Should Consider the Following Questions:
- Do we have closely aligned supply chain and business strategies?
- Do we measure, review and optimize our supply chain performance?
- Are we continuously and actively seeking supply chain service improvements?
- Do we have visibility and an understanding of key data to control supply chain costs?
- Have we implemented a supplier performance management program?
- Are we taking steps to mitigate risk in our supply chain?
- Is inventory being managed effectively?
If you answered “no” too many of these questions, then you are likely stepping over $100 bills with each step taken in our plants and operations. Developing a world-class supply chain is no easy task and takes time. The time is worth taking, and investments are worth making, even if skills are needed to be supplemented with those of external experts to address some key supply chain issues and challenges. By improving supply chain operations, you have the power to increase profitability and position your business for a bright and successful future.
Reveal transforms SAP-centric supply chain-driven businesses to run better. Our focus is to challenge the traditional thinking of the modern supply chain to ensure sustainable and successful businesses. We change the way people think and operate by revealing the hidden value in existing processes and deploying the smart use of technology.