In an economic environment rife with uncertainty, globalized competition, and disruption lurking at every turn, it’s no longer enough to simply keep your business under control and hope that your suppliers will do the same. The demand for excellent and expeditious customer service, value, and competitive pricing is higher than ever, and the health of any organization with customers relies on their ability to meet that demand. This cannot be done by internal business tweaks alone. You must optimize your entire supply chain.
“The benefits to be gained from developing formal relationships and collaborative partnerships with key suppliers and customers throughout the supply chain are too significant to be ignored; optimized supply chains deliver best-in-class service at half the cost.” – The Oliver Wightpaper Series – Supply Chain Design and Optimization
Common Supply Chain Challenges and Mistakes
While most organizations regularly examine their supply chain in an effort to cut costs and improve efficiency, all too often, they are unable to sustain any real supply chain cost reductions.
A great many factors can cause the supply chain to breakdown, causing costs to balloon and killing efficiency. Poor decisions due to lack of communication and analysis, over/under fulfillment of actual customer needs, and failing to maintain an adequate supply chain footprint are all common culprits. As are overstock, small production lots, and excess, non-utilized capacities, assets, and stocks.
One of the most common missteps is also one of the simplest to correct: a lack of end-to-end thinking. People, even at the C-Level, often talk about supplier relations in terms of first-tier suppliers. This is a quick way to miss out on opportunities for improvement. A single piece of the supply chain generally has a negligible effect on your business, but the cumulative effect of one or two small problems can be enormous. Added cost and complexity in the form of inefficiencies or redundancies compound to have a bull-whip effect across the entire supply chain.
By consciously shifting your paradigm to end-to-end thinking and encouraging this shift throughout your organization, you are more likely to catch small problems before they escalate. By considering your supply chain in its entirety, from customer to factory, you are also better positioned to meet customer needs and identify areas ripe for negotiation and savings.
You Can’t Manage What You Can’t Measure
To successfully optimize your supply chain, you must start by collecting and analyzing data to make informed decisions in the development of your strategy. The first step is to conduct a comprehensive, end-to-end analysis of your supply chain from consumer to retailer to DC to factory. The goal is to identify and assess the factors that influence the performance of your extended supply chain.
Some companies will do this internally while others opt to bring in specialists to assist in the data gathering and analysis and guide them through the process using proven methods. Cayuga Partners is one of those firms. Their secondary objective in this phase is often “to extend the strategic planning process to comprehend and include the critical operational dynamics among forecast accuracy, production capacity, inventories, and customer service.”
According to Oliver Wight managing partner Stewart Kelly, “supply chain collaboration reduces operating costs by up to 50 percent.” And “can have an enormous impact on an organization’s ability to service customers effectively and profitably, as improved communication and integration inevitably allows organizations to more effectively meet demand.” Unfortunately, collaboration is often viewed as a simple exchange of data at best and “traitorous cooperation with an enemy”; an underhanded way to keep tabs on a business partner at worst.
True, effective collaboration, Kelly insists, relies strongly on trust. It requires working together as a team for a common objective. Organizations that partner and collaborate don’t have to share the same goals, but to work collaborators must be invested in optimizing the supply chain. The best way to ensure this is through clear communication. All parties must understand the benefits of working together.
Optimization at Work
It’s one thing to speak in broad terms about uploading and analyzing ERP data, optimize inventories, developing metrics, and supply chain audits. It’s something else entirely to see how other companies have successfully optimized their respective supply chains.
When Intel brought its low-cost Atom chip to market, they found they needed to reduce their supply chain expenditure significantly to maintain their margins. Service trade-offs weren’t an option because that might compromise quality and functionality. The packaging had already been reduced to a minimum, so the only area they could leverage was inventory.
Levels had to be kept high to support a nine-week order cycle, so Intel realized they had to bring this cycle time down to reduce inventory. The strategy they settled on was “make to order”; an unusual choice for this industry. Through a process of iteration, they were able to seek out and eliminate supply chain redundancies and inefficiencies, thus reducing the order time. They also cut the chip assembly test window from five days to two, introduced a formal S&OP planning process, and moved to vendor-managed models wherever possible.
The result was an order cycle of two weeks instead of nine, which gave them a supply chain cost reduction of more than $4 per unit, a significant improvement over the original $5.50 figure for the chip, which sells for only $20.
In 2007 and 2008, Starbucks was having trouble supplying its 16,700 stores. As with most commercial sectors at the time, sales were falling, but their supply chain costs rose by over $75 million. Upon investigation, leadership found that fewer than 50 percent of deliveries to outlets were on time, poor outsourcing decisions had led to excessive 3PL expenses, and the supply chain overall had become unwieldy and unnecessarily complicated.
To improve performance and reduce supply chain costs, Starbucks’ leadership set out to reorganize their entire supply chain, reduce the cost to serve, and clearly map out what their supply chain would look like in the future.
“To meet these objectives, Starbucks divided all its supply chain functions into three main groups, known as “plan” “make” and “deliver”. It also opened a new production facility, bringing the total number of U.S. plants to four.” – 7 Mini Case Studies: Successful Supply Chain Cost Reduction and Management
From there, they ended partnerships with all but the most effective 3PLs and managed those remaining using a weekly scorecard system aligned with renewed service level agreements.
The result was a savings of over $500 million over the next two years, a large portion of which came directly out of their supply chain.
There are Millions Hiding in Your Supply Chain
Successfully optimizing your supply chain can result in enormous savings to your business. If you start by analyzing your supply chain, develop a strategy, and implement the processes needed to integrate that strategy into your overall business plan, the potential for cost and time savings is enormous.