The 5 Key – Key Drivers
And now in Part 4, we take a look at the ‘key drivers’ in Supply Chain.
If you can understand these, you are well on your way to recognising opportunities to improve your own Supply Chain in terms of cost and service.
I call this my Supply Chain ‘Wheel of Fortune’. OK it does not include all elements of the Supply Chain. It’s not intended to. But it shows what I believe to be the ‘key drivers’ of Supply Chain performance.
Think about your own Supply Chain and consider each of these ‘segments’ in turn.
How do your customers influence your Supply Chain costs and service? Most organisations have a vast mix of customers of varying sizes (in buying terms), in different locations (rural and metro), who have different service needs and who vary in how easy they are to do business with!
Then do the same for your products. How do you source them? What are the supplier lead times and do they require special handling? Do some of your products have substitutes in case of stock out?
Again, these dimensions or characteristics will drive very different costs and service challenges into your organisation. Which ones drive the highest costs, and why?
What could you do to reduce those costs?
Then look at your major Supply Chain costs. The largest costs are likely to be around procurement (buying, sourcing) inbound transport, storage and maintenance and then outbound ‘customer delivery’ transport. What are some of the obvious cost reduction opportunities? And take care to recognise the ‘end to end’ impact of any changes.
As a simple example, buying from supplier in larger quantities will generally reduce the unit cost for products. But it will also increase storage and handling costs due to higher inventory levels. This is a common trade-off that many people get wrong. Because often, buying in smaller quantities actually reduces the end to end or ‘total’ cost.
Then there is the ‘options’ segment. These highlight some of the options or trade offs that exist in most Supply Chains. Stocking points will often be dictated by customer service requirements. But can you utilise lower cost transport modes or rates? Do you need to own storage and transport assets? And can you collaborate in some way with other organisations that service similar customers with compatible products? The economies of scale in storage and higher density distribution can often result in lower overall costs for all parties involved.
And finally we need to think about the consequences of ‘playing around’ with these key drivers. We need to understand the implications on our customers to ensure that we don’t lose sales, customers, market share or profits! Or this can be a fast track to business ruin…
In this version of the ‘wheel’ I’ve highlighted 2 key factors against each segment.
So for example, the easiest way to reduce supply chain costs in the customer segment is to encourage customers to order larger quantities less frequently. Yes, easier said than done. But it ca be done with the right incentives.
Then against the products segment I’ve highlighted that product ranging and managing suppliers effectively can have the greatest impact.
Tools and Techniques
One of the best tools that I have seen to identify and quantify Supply Chain opportunities is cost to serve. I could write a book on the topic (in fact I have) but let me explain the basic concept.
All organisations have a variety of customers that are willing to pay varying prices for different levels of service.
The classic example is an Airline. There are on average about 14 different airline fare types. And depending how much you are willing to pay, you will get more flexibility in seat selection (within your fare price), meal choice, baggage allowance and the ability to change the flight.
And of course you will get a very large difference in the actual seat, on board service and baggage allowance, if you choose to fly 1st Class or Business Class.
Now think about your own organisation and the different types of customers that you have. What if you could break down the ‘cost of servicing’ all those different types of customers, with all the different types of products that you provide?
That would give you the ability to a) Understand which customers and products were costing more to service, so that you could focus on reducing costs, and b) Create differentiated service offers at different service price points.
A simple example being, that all customers might get a standard delivery lead time of 3 days, but if they need same-day service they can have this, at an additional cost.
Interestingly what often happens, is that customers become more relaxed about a slower service lead time and are quite prepared to pay a premium for faster delivery, when they need it.
In summary, take a look at your own Supply Chain and see if you can:
- Identify your main cost and service drivers. (Are some unique to your organisation?)
- Minimise inventory and movement. (Includes reducing ‘touches’)
- Differentiate your service offer. (Not all products and customers are the same)
In the last and final part, Part 5, we take a look at performance measurement.
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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.