The 5 Key – Supply Chain Flow
Now let’s look at how product physically ‘flows’ through the Supply Chain. Understanding this better, allows you to not only improve customer service, but dramatically reduce costs too.
FLOW is really impacted by these things. Because they INFLUENCE where we hold stock, HOW much we hold and HOW we move it…
- Service Lead time. Because this dictates how close we need to hold stock to our customers and in turn how many stock locations are required.
- Supply Reliability. Because inconsistent supply means we have to hold additional stock.
- Demand Consistency. Because inconsistent demand also means we need to hold extra stock.
- Buying (Replenishment) Quantities. Because the more frequently we buy, the less ‘lumpy’ our stock levels will be.
In an Ideal World
In an ideal World of course, we would not hold any stock, but merely ship direct from our production line (or our suppliers) to our customers. But very few businesses have this luxury. Can you think of any? Dell perhaps?
The reason so few businesses have this luxury is that supply lead times, production lead times, customer service expectations, customer delivery lead times and of course customer demand patterns all conspire against us! And so for most businesses, we need to hold some stock, ready to meet customer demand.
Typical Network Trade Offs
This slide shows typical trade offs related to a physical distribution network. I’d say that 50% of businesses get this wrong and end up with the wrong number of stocking locations, in the wrong place, holding the wrong product with the wrong service to customers. The cost of getting this wrong can be as much as 5% – 15% of distribution costs.
And much of this is counter intuitive. For example, we’ve all heard the real estate ‘Mantra’ of Location, Location, Location. Meaning that the value of a property is all tied up in the attractiveness of its location.
But how many times are warehouse locations selected on land or building costs? In my experience, the land cost is very rarely a major factor in selecting the ideal warehouse location. The location’s impact on total Supply chain cost needs to be understood. And in most cases the impact in inbound and outbound transport costs has a far greater ‘overall’ cost impact than the range of land costs available.
Our Reporter in Thailand.
Here’s an example of network costs to get you thinking.
Whilst it’s useful to observe and study what other organisations do in other countries, just be wary of copying too much. We have our own unique challenges of geography and demography where ever we happen to be operating. Here’s an example comparing the UK to Australia.
Indeed, Milton Keynes is not only fairly much the population centre of gravity in the UK, but is a natural ‘Hub’ for National Distribution being on major road and rail links. And Yes, it has many many distribution centres built around the area.
I’m not sure anyone wants to build warehouses in Hilston…
So whilst Hillston is the theoretical centre of gravity of demand in Australia. Our population is NOT evenly dispersed like the UK. Most is on the EAST Coast, near the Coast, in 3 major cities…
Supply Chain flow is a complex subject and we can only touch on it briefly here, but in my mind the key messages are these:
- To improve Supply Chain ‘flow’ you must take an end to end view, from Supply to Customer. Don’t be ‘blinkered’ with silo thinking. That expensive warehouse location might actually offer the best cost and service option when you take a total end to end perspective.
- Appreciate that your supplier performance and customer service ‘offer’ are the two essential ‘bookends’ that dictate the physical structure and flow of your Supply Chain. The faster service you offer customers, generally, the higher your inventory and number of stock locations.
- Don’t just copy. Certainly follow market leaders and learn from what they have done or plan to do. But make sure you understand how those lessons can improve or even damage your business.
In Part 4 of this series of ‘5 Levers’ we’ll look at ‘Key Drivers’ of Supply Chain Performance.
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I hope you find this information of value. Feel free to let me know what tips you would like to hear about in our future Bulletins.