The Profitable Supply Chain: A Practitioner’s Guide (2015)
Chapter 9. World Class Supply Chain Management: Key Takeaways
Supply chain management is the process of efficiently coordinating the flow of material across suppliers, transportation providers, manufacturers, distributors, and retailers. Executed properly, SCM improves customer service and revenue achievement while reducing operating costs. Achieving this goal requires a structured approach toward managing production, distribution, and working capital. This book introduced the concepts, mathematical models, and process steps required to realize these improvements. This concluding chapter summarizes the book’s takeaways.
Establish an effective costing framework to enable decision-making. Often, a company identifies costs based on the activity being performed in the areas of warehousing, transportation, and manufacturing. However, effective decision-making often requires different views of these costs, such as a breakdown of transportation costs by standard mode vs. expedited mode. Such categorization of costs can help identify problem areas and causes and is critical for continuous improvement. There are multiple ways of classifying costs, each providing a different view of operations and issues. One method is fixed costing vs. variable costing, which can inform pricing and inventory decisions when demand changes. Another method is to classify costs as shortage-related or holding-related, based on mismatches between demand and supply. This classification elucidates inventory decisions. Yet another method is to categorize costs as standard costs vs. exceptional costs, which helps identify operational issues and reasons for cost overruns. Examples of exceptional costs include use of expedited transportation, overtime labor for production and warehousing, customer charges for delayed shipments, and inventory write-offs.
Determine the optimal service levels for products sold by the company. Depending on the industry, the availability of timely supply has a different level of importance. For a company providing highly engineered products to a customer, the importance of lead time is secondary to meeting the specifications and quality requirements of the order. On the other hand, for most industries providing commodities or off-the-shelf products, the ability to have sufficient inventory and fulfill the customer’s orders instantly or within a few hours or days may be the most important factor in determining business success. This measurement related to timely fulfillment is referred to as the service level or in-stock. For industries driven by high service levels, it is necessary to maintain the right level of inventory balancing the cost of inventory against lost sales.
Incorporate financial measurements to ensure that operating assets are effectively used. The most important financial gauge of a supply chain is the return on operating assets. Although most companies track such a measure, it is often confined to a local level, for a particular manufacturing plant or a distribution center. Calculating these measures at the supply chain level across these silos can provide valuable insights and enable improvements.
Limit reliance on broad-brush settings for policies and parameters. To simplify the task of managing demand and supplies, companies often rely on identical policies and procedures for all products or a large set of products (for example, service levels and forecasting methods). If such a specification includes products and materials that have widely different costs and demand characteristics, higher costs can result. Ideally, supply chain processes should tailor policies for a specific situation and even for a particular item.
Increase the level of collaboration with supply chain partners. The increased reliance on contract manufacturers and third-party logistics providers comes with a drawback: the lack of visibility into partner operations. Any resulting imbalances between demand and supply can leave the company dealing with negative repercussions for weeks or months. These imbalances may manifest as inadequate (or excessive) raw material inventories, shortage (or excess) of manufacturing capacity, or unavailability of timely transportation resources. Therefore, companies need to collaborate, identify, and resolve situations that can lead to imbalance and erode margins.
Ensure all stakeholders are involved in strategic supply chain processes. Strategic processes such as inventory, supply, and network planning result in supply chain parameters and configurations that have a significant impact on the performance of the supply chain—not just on manufacturing but also on procurement, distribution, marketing, and finance. Therefore, it is important to involve all stakeholders and ensure adequate representation and participation in the planning process.
Anticipate trends that can significantly impact demand. The uncertainty in demand caused by day-to-day variances is unavoidable and can be dealt with using safety stock and frequent inventory reviews. However, trends that impact demand significantly (whether positively or negatively) for a sustained duration are harder to manage and may result in higher costs. Therefore, it is important to understand how different economic, environmental, and competitive factors impact demand, to monitor these trends, and to anticipate shifts.
Utilize scarce resources judiciously. The injudicious use of scarce inventory or capacity can result in costly mistakes, such as increasing inventory for products that are not moving while simultaneously shorting demand for fast-movers, or fulfilling demand for a low-margin product at the expense of higher-margin products. Although prudent use of resources is easy to understand, few companies have a rigorous process for ensuring that this is indeed happening. Implementing an allocation process for identifying scarcity situations and specifying a method to ensure judicious use can improve performance significantly.
Design the network to provide a differentiated product offering. Supply chain characteristics that provide differentiation vary by industry and product. For example, cost may be the primary driver for certain low- or mid-range consumer electronic products provided the different brands are perceived to have roughly equivalent features and quality. For products being sold to other manufacturers as raw material, cost and flexibility may be equally important owing to the need to increase or decrease supplies as demand changes. Similarly, responsiveness may be the primary differentiation for critical service parts, such as replacement parts for refrigeration systems or aircraft. Providing these capabilities effectively requires a rigorous approach to location of facilities, routing of material, staging of inventory, and postponement of manufacturing activities.
Monitor supply chain performance regularly, and ensure that parameters can be changed quickly. Left unattended, many inventory policies, demand management methods, and network configurations will deteriorate over time and cease to provide the anticipated benefits. This degradation is mainly due to changing material and labor costs, changing product prices, incorporation of new suppliers and products, and new demand trends. Therefore, it is necessary to define metrics that help gauge the effectiveness of the supply chain and preemptively institute procedures to change policies, parameters, and configurations in the event that performance deteriorates.
Constantly evaluate and incorporate innovations that can transform the supply chain. Understanding how new trends and innovations can transform the supply chain is a challenging undertaking because it requires rethinking entrenched procedures. Insufficient leverage via innovation can result in loss of market share to more up-to-date competitors—or even to obsolescence and business failure if the innovation is disruptive. Therefore, it is imperative for planning personnel to be vigilant in monitoring trends in all pertinent areas, including manufacturing, logistics, and information technology.