High costs and inefficiencies are inherent in many companies’ supply chains and yet viewing the operation as a whole can create a more effective operation and can provide a major source of competitive advantage for the company. This advantage is not just derived from controlling physical logistics costs but by integrating each element – from point of manufacture through to point of sale – effective inventory management and viewing the supply chain as a strategic tool supported by skilled people and leading technology. A well-executed supply chain can drive significant value through lower inventory, reduced costs, increased flexibility and improved customer service resulting in enhanced sales, revenue and competitive advantage.
The supply chains of many companies are currently fragmented and characterised by high levels of complexity, lack of integration and a supply push rather than a demand pull planning process. Such approaches do work; an order is raised and the product is delivered, but not always at the right place or time and often having attributed significant cost.
Over recent years a shift in supply chain thinking has occurred with industries moving from ‘push’ to ‘pull’ operations. This has resulted in demand chains becoming far more prevalent. Pioneered in Japan more than 20 years ago demand chain concepts have been applied in a number of industries including automotive and technology.
Indeed, the world’s leading product manufacturers, without exception, all use their supply chains as strategic tools for driving value creation in their business. In light of this we would expect companies to embrace these concepts and manage supply chains as a single entity ‘from dust to rust’.
Despite this, there are many traditional manufacturers that are failing to leverage the full value that is locked up in their supply chains and more commonly we are seeing the purchasing approach as a favoured choice for buying and operating supply chains. The purchasing approach takes each part of the supply chain and optimises it for lowest unit cost – the cheapest warehouse or the cheapest leg of transport.
This approach of optimising in silos, whilst driving down unit costs, misses the biggest prize of integrating the supply chain and providing real value for the business concerned. Working on only one part of the supply chain can often create unforeseen problems elsewhere in the operation. For example, the separation of warehousing from transport, a natural consequence of purchasing-led initiatives, can lead to customers suffering poor service levels as product visibility is compromised in a disparate process. Similarly, whilst purchasing departments may celebrate a 20 per cent cost saving from a new transport contract, the site managers are often left with no control to redress slowly worsening performance. Too often, supposed cost-effective transport contracts lead to higher overall costs in the supply chain through a greater need for stocks and/or increased handling in warehouses.
Focus on customer service
Issues of flexibility, lead times and customer service need to be addressed and a supply chain built around these core principles. The prize of satisfied customers and their repeat business alone far outweighs any benefit that can be achieved from buying individual elements for the lowest unit cost.
It is clear that a holistic approach is required to ensure value creation and the entire supply chain cost and performance should be considered as opposed to operating a series of disconnected supply chain silos. Without this approach the challenges facing today’s supply chains such as shorter lead times, greater availability, lower inventory, reduced cost and inefficiency, can not be met.
Often overlooked in many supply chains is inventory management. It is complex and affects all the other elements of the supply chain but managed effectively can drive out inefficiencies and reduce overall costs. Disregard for this area can partially be put down to lack of knowledge and the level of misinformation where advice often only stretches to buying a new IT system or using a warehouse management system (WMS) more effectively.
However, inventory management is a people process and is not about managing stock with a WMS or enterprise resource planning (ERP) system; it is about assessing what service levels you wish to achieve and setting an appropriate inventory level by managing at line item level suppliers and their lead times, through to delivery to the end customer.
A high level of inventory is not only capital intensive but also expensive to service through increased spend on capital, warehousing, transport and procurement. Typical benefits that can be achieved through more effective inventory management methodology are reductions in levels – by as much as 50 per cent – and improved availability and service, by up to 15 per cent.
Matching supply with demand
Through matching supply with demand, the supply chain becomes far more streamlined and responsive. Not only does this drive down costs through reduced inventory and overhead, it drives up customer service through better availability and speed of response.
A fully integrated and collaborative supply chain can only be managed as a single flow linking together transport, warehousing, manufacturing, inventory management and suppliers. There are many different models for achieving this, however most companies will not have the resources in-house to implement such a model and will turn to a lead logistics partner (LLP) to re-engineer and ultimately manage the supply chain from end to end.
An LLP will bring skills, knowledge, systems and practical experience from ‘best practice’ applications across the globe in order to achieve full integration of all elements of the supply chain – providing end-to-end visibility whilst delivering the required customer service levels and agility to respond to changing markets at the most advantageous cost.
Fundamental to the entire process are people, focusing rigorously on all aspects of the operation to ensure a continual improvement on performance and an effective response to events that unfold. Only a continuous focus on a daily basis can ensure the quality and efficiency of operations, an objective which can only be achieved through revisiting parameters and constantly managing the system.
Through working in partnership with clients and feeding into their ERP systems a service provider can deliver sustainable benefits and competitive advantage. IT also plays a central role to help the process in terms of decision support, operational software, in-cab technology and internet which allows greater connectivity between suppliers, carriers and shippers, providing real information about demand patterns and performance levels. With leading systems combined with quality people, the optimum supply chain can be achieved and value creation generated.
Supply chain issues are increasingly becoming the focus of boardrooms across Europe. As trading conditions become tougher it is easy to take a purely lowest cost approach, however it is those companies that can be more reactive to change that are gaining ground in competitive conditions.
Changing the view of customers looking to optimise in silos is a challenge for the logistics industry, and taking a more holistic approach requires experienced people and supporting IT capabilities. However, far more value can be derived through taking an holistic view than by driving out cost through a more fragmented approach. Recognising that supply chain management is a strategic tool can unquestionably leverage sales and competitive advantage. It needs to be high on the agenda as it can have the single biggest effect on driving value creation for companies of all sizes.
Greg Black is head of marketing in Exel’s industrial sector, and can be contacted at [email protected]
- Viewing the operation as a whole can create a more effective operation and can provide a major source of competitive advantage for the company
- Often overlooked in many supply chains is inventory management. It is complex and affects all the other elements of the supply chain but managed effectively can drive out inefficiencies and reduce overall costs
- Fundamental to the entire process are people, focusing rigorously on all aspects of the operation to ensure a continual improvement on performance and an effective response to events that unfold