Net benefits

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As supply chains become more complex, effective network strategies should unlock more value from them. That’s the theory. But the practice is very different. Too many network optimisation projects are far too narrow in scope – and many more result in network strategies that are only partially implemented, if at all.

The result is that as trends such as globalisation add growing levels of complexity to supply chains, companies fail to pick up the benefits. And for ‘benefits’, read profit flowing through to the bottom line: a truly effective network strategy, built on a properly-scoped modelling analysis, can yield a margin improvement of up to five percentage points. That’s a significant amount of money left in the supply chain, but it’s exactly what many businesses are doing.

Why is this? To begin with, many network modelling analyses are illconceived. In theory, they should be attempting to unlock value from the supply chain from wherever this can be found. In practice, they are often aiming at a different target – the closure of specific warehouses or an increase in fleet utilisation.

A third party logistics provider, for example, will usually carry out a network analysis for a client. But the purpose of the exercise can be as limited as seeking to determine the best fit between the client’s requirements and their own operations in terms of truck routes and distribution centres. Once undertaken – generally as part of the sales process – the analysis is rarely repeated: the requirements may change, but the strategy remains locked in stasis. And only rarely is a third party logistics provider engaged to model a network beyond their own areas of responsibility to include parts of the network run by competitors.

A more complete perspective
But the answer isn’t necessarily to commission a network strategy from a specialist niche consultancy, either. While offering a great deal more independence – as they don’t possess an asset base of trucks and sheds to overlay on the analysis – it might be expected that this would produce a more complete perspective.

However, the result is usually different shortcomings rather than fewer shortcomings. The scope of the analysis, for example, is usually constrained to the client’s existing distribution operation and the objective is usually defined in terms that constrain where benefits are to come from – the sought – for closure of a warehouse, for example. Further, there’s often a buy-in problem as different parts of the organisation kick back at an analysis – or network strategy – that was originally sponsored by another part of the organisation.

Weakened from the start, the outcome is a document that may at first seem powerful but which delivers little by way of results. A ten point strategy, say, might see a couple of quick wins implemented before the whole project is quietly shelved.

So what is the alternative? Taking a much wider view – drawing into the analysis not just a business’s downstream distribution operation but also the distribution operations and supply chains of customers, suppliers and other partners.

Termed ‘integrated fulfilment, it’s an approach that delivers immense and measurable value by viewing a supply chain from the ground up, rather than by attempting to tweak what is already in place. Such analyses aren’t easy but they do have the potential to result in margin improvements of up to five percentage points – a figure much higher than a typical logistics budget, never mind an incremental improvement to it.

How is such an improvement achieved? Take the impact of globalisation and the huge amounts of consumer products now being sourced from the Far East. Typically, this material arrives at, for example, a UK distributor or retailer who has ordered them in one of two ways – either shipped from the Far Eastern manufacturer, or from a UK landed warehouse. Either way, logistics costs are essentially fixed and the customer has little control of, or visibility into, the flow.

Now imagine a consolidation centre located in the Far East. Goods are shipped there, not direct to the UK. Because of the increased volume after consolidation, better shipping deals are possible but so, crucially, is better visibility, and flow control. Goods are shipped to the UK only when needed. And goods reliably reach the UK when required – bringing an end to hastily ordered in-fill ranges to avoid empty shelf space and also an end to the need to heavily discount the original goods when they do arrive. Not only is the need for warehouse space lower – producing further cost-savings – but the warehouse space that is required need not be in the UK, bringing about further cost reductions.

Whatever the scenario, some things are common. Think laterally, and consider the supply chain operations of both customers and suppliers. Reduce the number of ‘touch points’. Look for opportunities to share data in order to improve purchasing and forecast decisions, and explore the savings offered by strategic sourcing.

It’s not rocket science – and admittedly, some industries lend themselves more to the capability than others – but equally clearly, given the state of most supply chain network strategies today, there is considerable scope for improvement.

Certain themes recur. Trust is one: involve outside parties in your operations, goes the logic, and you lose an element of control. Ownership of cost-savings is another: if a retailer identifies a change in a manufacturer’s operations that unlocks an efficiency improvement, who takes the benefit, the manufacturer or the retailer who identified it? Another common theme is the lack of skilled capability to carry out such analyses, either in-house or in third parties. These are big projects, delivering benefits over a timescale of years, not months.

And those benefits won’t be achieved until businesses acknowledge the prerequisites for a successful network strategy: a clean sheet of paper, buy-in, and a commitment to change. Identifying improvements is one thing – implementing them quite another.

James Eteen is a senior manager, supply chain practice at Accenture

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