Using Best Practices to Optimize the Supply Chain

• Innovation is King – leading companies use modern technology including, automation, AI, machine learning, and augmented reality to improve supply chain processes
• Commitment to Reduction in Non-Value-Added Tasks – automation through predictive analytics, artificial intelligence and self-service which reduce non-value-added tasks
• Invest Only in Needed Inventory – companies like Amazon, reduce inventory investments by using an as needed inventory system to reduce overstocking
• End-to-End Visibility Access – leading companies have integrated systems and processes that enable end-to-end visibility across the supply chain for quick decision-making

A good starting point for supply chain optimization is to go through a comprehensive bench-marking process, perhaps using something like the following;

The Drucker Institute, a unit of Claremont Graduate University, has developed a holistic company ranking

The Drucker Institute ranking is based on 5 key performance parameters (ranked on a scale of 1 to 5 stars (5 being the maximum possible rating):

1. Customer Satisfaction
2. Employee Engagement & Development
3. Innovation
4. Social Responsibility
5. Financial Strength

These scores are accumulated to give an overall “Effectiveness” score with 100 being the highest.

Here are some key areas to focus on as part of the overall optimization process;

Set up a supply chain council

Without an internal council of leaders or some type of executive steering committee in place, the 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 business goals if the organization doesn’t have a governing body to synchronize the two.

By supporting the supply chain with a council of executive leadership and lower level management, this council can improve cross-functional communication and demonstrate the value of an organized supply chain — these are the two key barriers to success that often hinder operations without a supply chain council.

Establish an appropriate and thoughtfully staffed supply chain structure

Ideally, the supply chain should be staffed and structured in a way that maximizes effectiveness as well as efficiency in order to bring the most benefit to the organization as a whole. 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 the supply chain, the organization must focus on strategy rather than simply transactional ability with the executive 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.

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 the supply chain is a key concern when selecting software and technology, it’s backwards to structure the processes around technology.

Instead, review processes that are producing below standard outcomes to determine areas where technology could help to improve them. Then select the right software solutions that most fit those needs.

Maintain healthy supplier relationships

An important indicator of success in this management discipline is the health of the relationships with the organizations suppliers. These connections should be maintained and cultivated on an ongoing basis, beyond the finalization of the purchasing contract alone.

The best supplier relationships are the ones with two-way communication between the buyer and seller. Objectives should include mechanism(s) not only to maintain the health of the relationship, and have predetermined goals for continuous improvement and value, performance measurement (KPI’s) and a robust platform for objective conflict resolution.

In procurement, look at total cost of ownership rather than purely price

It is worthwhile following the example of best-in-class companies, and moving away from the procurement practice of selecting a supplier based completely on price.

Instead, strategic sourcing involves understanding the Total Cost of Ownership (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% of the TCO, while the rest is comprised of operating, warehousing, and transportation costs. Not surprisingly, procurement teams will need to be more collaborative with their suppliers in order to determine an accurate TCO.

Source suppliers strategically and collaborate with them

The 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, taking sourcing beyond the purchasing department to engage with suppliers in the decision-making process. Soliciting suppliers feedback in all areas of internal business processes or functions are what successful continuous improvement programs are all about.

The overall aim is to strengthen the relationship and build a strategic partnership which results in a “win-win” for both of the parties involved, this also has the effect of improving communication and trust on both sides.

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 while mitigating risk.

Optimize inventory to reduce costs

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 focus on optimizing inventory levels, without impacting the ability to service the customers demand.

There’s a very real cost of holding and storing inventory, and it’s almost always higher than the generally assumed 20% to 25%. In fact, “Research reveals that inventory holding costs could represent up to 60% of the cost of an item that is held in inventory for 12 months,” as reported by Supply Chain Quarterly. To optimize supply chain inventory effectively it must include forecasting and demand planning and the measurement thereof.

Establish regular reviews to ensure efficiency and to mitigate risk proactively

Supply chain councils 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, etc.

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.

Supply Chain KPI’s

Effective Supply Chain KPI’s is an extremely important part of the overall ongoing supply chain optimization process. Keep in mind that optimization and continuous improvement go hand-in-hand as the objective is to achieve industry best practice and world-class standards.

• Cash-to-cash Time Cycle
• Freight Bill Accuracy
• Perfect Order Rate
• Days Sales Outstanding (DSO)
• Inventory Turnover
• Gross Margin Return On Investment (GMROI)
• On-time Shipping
• Return Reason
• Inventory Velocity (IV)
• Inventory Days Of Supply