Continuous improvement can mean long-term supply chain savings
In today’s supply chains best practices, it is your strategy that drives your supply chain. A successful supply chain not only drives operational tactics—it determines the success overall for your company.
Why can I say this with confidence? Think about it—if you know what your customers want, even if they don’t know that yet, it means you are able to anticipate your customer’s demand. The company that forecasts customer demand best is the company that is best positioned to dominate in that market.
The more unpredictable and unreliable your supply network is, the more inventory you need to cushion against that uncertainty. And that excess inventory means increased costs to store, manage and ship, be it inventory owned by you or your suppliers, not to mention possible excess inventory that has to be written off.
Most companies set a goal, such as a forecast metric. The most commonly used forecast metric is the mean average percent error or MAPE, which measures the size of the error in percentage terms, that is, the measure of prediction accuracy of forecasting in statistics.
To show this in an example, let’s say your company holds $200M in inventory. Let’s assume that 25% of that total is safety stock to guard against the uncertainty in forecasting demand. That means you’re holding $50M just in safety stock. A reduction of 10 points in MAPE will result in a reduction of $10M in safety stock, that is, a 10 point MAPE reduction equals a 20% reduction in safety stock.
How does this benefit your company? Using this same example, it’s a savings of $10M assuming an average MAPE of 50%. If your inventory carrying cost ranges from 12% to 40% per year that means a $10M reduction in inventory could result in a bottom line improvement of $1.2M (at 12% carrying cost) to $4M (40%).
To use MAPE effectively you’ll need to set a goal above and beyond your baseline performance. Setting realistic goals for improvement starts with a complete understanding of the company’s current performance and using the correct KPIs. Once you understand your company’s baseline performance, you can measure any improvement on the baseline toward meeting target goals.
You’ll know if you have good supply chain KPIs when everyone understands how these KPIs help track improvement, and they don’t conflict with adjoining departments. KPIs need to be both easy to understand and consistent across all departments—everyone working synergistically to fulfill the same KPIs that align with the company’s strategy
Continuous improvement in supply chain processes—even as small as 1% or 2% improved forecast accuracy, for example—will keep yielding cost savings with a larger impact that one might imagine with such a small percentage improvement. It’s not just a one-time improvement cost – it’s long-term savings from continuous improvement.