When I first published this post, it was called “3 Things You Need to Know about Your Supply Chain.”
However, I recently realised that I was omitting a fourth key factor that can contribute to supply chain glitches and gremlins.
For those CEOs and other execs who don’t know much about supply Chain or logistics management, I’d like to highlight the four key areas to really keep an eye on. But first, let’s briefly explore why a company’s supply chain is so important.
Supply Chain Impact on Shareholder Value
A recent study focused on identifying the impact of supply chain glitches on over 800 companies over a nine-year period. These included things like shipping delays, production delays, stock outs, and the like.
The average fall in shareholder value is 8 percent or 180 million dollars… How could that happen?
Sadly, within many businesses, the key performance indicators being used often don’t tell the whole story. So let’s move on to the four things. And these are:
- Is our Supply Chain Efficient?
- What Does our Supply Chain Really Cost our Business?
- Where can we improve our Supply Chain to gain competitive advantage and improve the bottom line?
- Do we have the right supply chain strategy in place?
Simple questions I know, but many businesses don’t know the answers, so be prepared to ask them—or maybe it’s you that needs to have the answers ready.
Question 1: Is our Supply Chain Efficient?
Many people think they might need more buzzwords such as Lean, Agile, CRM, CPFR, Collaboration, more IT Systems, and sure, these are maybe needed, but a lot can be achieved by getting the right people focused on the right processes.
You really need to understand your customers’ service needs, because they’re not all the same. Most companies over-service some customers and under-service others. So your customers’ service requirements need to be identified and measured.
We also need to make sure that the customer service offer is realistic. Because as we all know, in most businesses, once the customer service performance reaches 90 or 95%, service costs increase exponentially.
So getting customer service right is really about understanding your different customer needs, the needs of your products and services in terms of how they’re delivered and the underlying cost drivers.
If you hear some of the following types of comments in your business, you should get worried—and yes… these are real examples.
- “All customers get two deliveries per day.” (Why? I’m sure they don’t all need it or want it)
- “We deliver to the North on Monday, the West on Tuesday, the South on Wednesday, and the East on Thursday and on Friday we do emergency deliveries.” (Just don’t have an emergency on a Monday, that’s all I’d say).
- “Only accounts that spend over a thousand dollars per annum get free delivery, but if anyone complains about poor service, we give them free delivery.”
Question 2: What Does my Supply Chain Cost?
You probably know the high level numbers, but you could be losing money on certain mixes of customer, product and geographic location, or certain processes may have a much higher cost than expected.
Costs can be measured in terms of supply chain cost as a percentage of sales or cost per order per pallet or carton, and cost should be visible as total supply chain costs, inbound costs and storage costs.
As an example, I have a customer who is a distributor. They have 10,000 stock keeping units and lots of small orders. They found 30% of their orders leave the warehouse with a negative margin. That’s just taking sales, minus cost and warehouse handling costs.
So some simple questions to ask within your business might be as follows:
- What’s our cost per pallets, per item, or per case (or whatever unit you use)?
- In terms of total supply chain cost, what’s our storage cost and our delivery cost?
- What’s our average cost per order?
- Does our average cost per order vary much by product group or customer group?
- What are our stock turns?
Question 3: Where Can we Improve our Supply Chain?
Let’s look at the revenue side first. Can we improve our delivery “in full on time” performance? If our products are not on the shelf we’ll generally lose a sale.
Can we get our products to market faster—perhaps to extend the shelf life?
Can we improve our service offer? In terms of the cost side of the equation, procurement and inventory management are big ticket items.
Many companies don’t buy with the total cost in view, particularly now with so much overseas sourcing going on. They just focus on cheaper unit cost, not the end to end total supply chain cost—and of course warehousing and transport costs are the areas to focus on.
Question 4: Do We Have the Right Strategy in Place?
Supply chain efficiency, cost, and service performance all depend on a sound strategy—but that’s something that many companies still don’t seem to “get.”
It’s been a while since we surveyed companies about supply chain strategy, but just from experience of working with our Logistics Bureau clients, I’d estimate that only around 50% of enterprises today have a real, documented, multi-year supply chain strategy. This never fails to surprise me, since everything begins with strategy.
Does your company have a robust and aligned supply chain strategy and if so, is sufficient attention being paid to ongoing strategic planning?
If you’re not certain, try answering the following seven questions.
1) Have you recently (in the last two years) asked your customers how they expect their needs to change in the future?
2) If you answered “yes” to question 1), have you established what your customers’ future needs will mean in terms of supply chain requirements?
3) Have you completed a supply chain SWOT analysis?
4) Does your company regularly assess global and national supply chain trends and how they might impact your operation?
5) Have you analysed your major competitors’ supply chains?
6) Do you have a clearly documented supply chain strategy in place?
7) Is your supply chain strategy reviewed and updated at least every three years?
If the answer to any of these questions is “no,” it will be worth taking steps to address the issue. You can simply never do enough to strengthen the strategic capabilities of your supply chain organisation.
A Summary… and a Few More Questions to Ask
It’s always a good idea to step back from the day-to-day and ask a few searching questions from time-to-time. If you’re a CEO or senior supply chain exec/manager, you should certainly know the answers to the four big questions covered in this post.
In case you’d like to make a few more enquiries though, here are some other things worth exploring with your leadership colleagues, just as food for thought…
- How do our products influence how we buy, manage and deliver them?
- How do our customers differ in their service needs?
- What do our customers really value that our supply chain can influence?
And lastly, what customer behaviours can we influence to improve our supply chain costs and asset utilisation?
The answers to these questions should give you plenty of ideas for targeting supply chain improvements, and in the case of the “big four” will help you steer clear of the gremlins and glitches that can be so costly to your business as a whole.
Editor’s Note: This post was originally published in July 2008, and has now been revamped and updated with more comprehensive information.