Best Practices for Optimizing Supply Chain Management
“The major trends in business right now — low-cost country sourcing, outsourcing, customization, globalization — all create tremendous complexities in a supply chain,” said Steve Matthesen, vice president and global leader for supply chain at Boston Consulting Group, in a special business operations report. “In most cases, however, companies have not changed how they manage this critical part of the business.”
With increasing globalization and changing customer expectations, the supply chain of today looks significantly different from those of thenot-too-distant past. In order to access the growth and additional revenue of an effective supply chain, CEOs and supply chain executives need to implement some proven changes.
According to the Indian Institute of Materials Management, “Business today is in a global environment [and] companies are going truly global with Supply Chain Management (SCM)… Companies have changed the ways in which they manage their operations and logistics activities. Changes in trade, the spread and modernization of transport infrastructures and the intensification of competition have elevated the importance of flow management to new levels.”
An important Management Events survey was completed recently, titled The Optimal Supply Chain, which found some important things to note about how the current supply chain works and affects an organization overall:
- An organization’s supply chain is a critical business process, not just a business function. Today’s supply chain can bring significant value to your organization, provided it has the support of the board.
- Supply chain development is now driven by customers, with shorter lead times and increasing customer expectations. Supply chain optimization is crucial for a successful customer experience.
- Improving efficiency and optimizing performance are the top areas of focus for supply chain executives. The best practices listed in this guide will be key for achieving this.
- Supplier relationship management is becoming more and more important for best-in-class supply chain organizations, causing a shift in procurement function.
As they look to improve supply chain management and process, CEOs and executives of the supply chain, procurement and production are focused on eight key drivers of supply chain development, according to the Management Events report. These are reducing supply chain costs, improving responsiveness to customers’ needs, enhancing delivery performance, minimizing supply chain complexity, strengthening supply chain sustainability, improving volume flexibility, optimizing end-to-end visibility, and mitigating risk.
In order to effectively implement these drivers of success, executives at all points in the supply chain must engage in focused planning and process implementation measures. The following best practices in supply chain management offer a critical look at best-in-class manufacturers and what they are doing to implement the most effective supply chains.
1. Set up your supply chain council. Without an internal council of leaders in place, your supply chain may lack a clear strategy for efficiency and functionality. There’s also a good chance an existing supply chain strategy will not align with the company’s overall strategy if your organization doesn’t have a governing body to synchronize the two. For example, if a company goal is to improve inventory turns, your supply chain probably shouldn’t take in a container of raw material requiring about 12 months to consume. By supporting your supply chain with a council of executive leadership and lower level management, your council can improve cross-functional communication and demonstrate the value of an organized supply chain — two barriers to success that often hinder operations without a supply chain council.
2. Establish an appropriate and thoughtfully staffed supply chain structure. Ideally, your supply chain will be staffed and structured in a way that maximizes effectiveness as well as efficiency in order to bring the most benefit to your organization. Most organizations these days find that a centralized strategy, implemented by specialized managers in their various business units is the most optimal approach. Reportedly, this combination leads to more harmony between strategy and implementation, while also resulting in the best service. In staffing your supply chain, you should be more focused on strategy than simply transactional ability with your top leadership. These leaders should extend this strategic thinking toward creating value using strong interpersonal skills (such as communication and relationship management) internally as well as externally.
3. Identify areas where technology can help improve and streamline processes. Approximately 79 percent of supply chain enterprises surveyed worldwide fault manually driven processes as the cause for continued lack of supply chain visibility. Lack of visibility and another global concern, the uncoordinated nature of supply chain processes can be solved with the automation provided by technology: “On average, large companies report that their international supply chains are only 50 percent as automated as their domestic supply chains. Overall, only 6 percent of companies report that they have highly automated end-to-end and cross-functional processes.” Although improving efficiency in your supply chain is a key concern when selecting software and technology, it’s backwards to structure your processes around technology. Instead, review processes that are producing below standard to determine areas where technology can help improve, and then select your software solutions to fit those needs. With appropriate technology in place, detailed reporting data will be more accessible and accurate to better inform the supply chain council for performance measures as well as strategic planning.
4. Maintain healthy supplier relationships. An important indicator of success in this industry is the health of your supplier relationships. These connections should be maintained and cultivated on an ongoing basis, beyond the finalization of your deal. The best supplier relationships are the ones with two-way communication between the buyer and seller. Your objectives should include mechanism(s) to maintain the health of your relationship, goals for continuing improvement and value, performance measurement and a platform for conflict resolution.
5. In procurement, look at total cost of ownership over price. Follow the example of best-in-class companies, and move away from the procurement practice of selecting a supplier based completely on price. Instead, strategic sourcing involves understanding the total cost of ownership/consumption (TCO) of a product or service. This makes more business sense when you remember that the cost of acquisition for most products and services is only 25 to 40 percent of the TCO, while the rest is comprised of operating, warehousing, and transportation costs, to name a few. Not surprisingly, your procurement teams will need more collaboration with your suppliers in order to determine an accurate TCO.
6. Source suppliers strategically and with collaboration. Strategic selection of suppliers is at the heart of successful supply chain management, and adding a collaborative element to strategic sourcing produces even better results. In a 2009 Industry Week article, J. Paul Dittmann of the University of Tennessee noted that successful supply chains are proficient in five key pillars of excellence: Talent, technology, internal collaboration, external collaboration, and change management. Collaboration is at the heart. Take your sourcing beyond the purchasing department to engage your suppliers in the decision-making process. Solicit their feedback on all areas of internal business or function that may affect the success of your initiatives or processes. With collaborative strategic sourcing, you’ll enjoy streamlined operations, reduced costs, and improved responsiveness.
7. Move contract management responsibility to the supply chain. Although potential savings are often negotiated during the procurement process, they are rarely fully realized. This is most commonly because of a lapse in communication or lack of follow-through on contract compliance. To combat this and actually realize those cost savings, best-in-class companies move contract management under the supply chain. This allows the supply chain leader to leverage spend where there is greater opportunity for reducing costs and mitigating risk, usually with services.
8. Optimize inventory for reduced cost. In any business, there’s a desire to reduce costs and improve the bottom line. This is especially true in times of global economic downturn, like the one we’re currently subject to. In light of and in support of these efforts, supply chain management should include a consistent look at optimizing inventory quantities. There’s a very real cost of holding and storing inventory, and it’s almost always higher than the generally assumed 20 to 25 percent. In fact, “Research reveals that inventory holding costs could represent up to 60 percent of the cost of an item that is held in inventory for 12 months,” as reported by Supply Chain Quarterly. To optimize your supply chain inventory, include forecasting and demand planning.
9. Establish regular reviews to ensure efficiency and mitigate risk. Your supply chain council and leadership team members should be constantly reviewing procedures and policies to ensure compliance, efficiency, and currency. This will help avoid process bottlenecks and help streamline operations while mitigating the risk of theft, fraud, and the like. Risk mitigation in the supply chain must adhere to some important steps: identifying all elements of risk, evaluating their probability of occurrence, estimating the financial impact in the event of an incident, and prioritizing risks for appropriate monitoring and prevention measures.
10. Be socially responsible and establish “green” initiatives. It’s no longer optional for your supply chain company to actively reduce its carbon footprint, instead, supply chain organizations must become sustainable and socially responsible if they hope to thrive or even survive. While the U.S. doesn’t yet have a carbon-trading regime, buyers are now considering environmental impact when they choose suppliers. On a more general scale, social responsibility is also becoming more and more significant in buyers’ estimation when making purchase decisions. A best-in-class supply chain organization should have a measureable framework of policies and procedures designed to improve the workplace for the greater good of employees, the organization itself, and also its community.
