Guilty or Not Guilty?
Have you noticed how similar some top performing supply chains look? Markets and organisations may differ, but the supply chains apply a common set of principles to achieve results and avoid problems.
It is when one or more of those principles is ignored that supply chain sin sets in. The penalty to be paid can vary.
It can be anything from evaporating profits and mounting job dissatisfaction to bankruptcy and liquidation. Better products or services won’t help an enterprise get out of the abyss if the kinks in the chain are too big or too many.
Stellar performance is possible for any supply chain. Perfection is another matter. Supply chains are often complex assemblages of moving parts, in which gains in one area must be balanced against sacrifices in another.
A better aim is to achieve overall excellence, with outstanding performance in selected areas particularly appreciated by your customers. Nevertheless, there are minimum standards to be respected in the other areas too. We made a list below of the supply chain sins that we often see degrading overall performance.
Which ones might apply to your enterprise or organisation?
1. Lack of Practical Focus and Direction
All the time you spend on building a brilliant business strategy is wasted if you do not convert it into profitable results. When Lou Gerstner stepped in to solve IT vendor IBM’s problems in 1993, he declared “the last thing IBM needs right now is a vision”.
“Excuses fall silent behind self control, focus and direction.” Lorii Myers
What he meant was that the vision already existed. The critical thing missing for the company (and which led to its successful turn-around) was effective direction and execution.
Supply chains too need both good strategy and practical focus. Too many times, businesses are champions at strategizing, but weak on actually making their supply chain do what it should. This is the biggest supply chain sin of all those listed here.
You can push for improvement in the other areas until you are blue in the face, but no real progress can be made unless you turn ideas in actions.
2. Treating All Customers the Same
This is a notion that is sometimes delicate but always important to put across. We are not talking about treating customers unfairly.
What we mean is that your supply chain should service your clients according to the expectations they have of your organisation. There is no point in insisting on 4 hour delivery service for customers who are just as satisfied if they receive their goods or service the next day.
At Logistics Bureau, we have helped many companies to stop throwing money out of the window and sacrificing customer loyalty. More often than not, they were simultaneously going overboard for customers who neither expected nor valued the extra service, and failing to meet the expectations of others.
An analysis of the Cost to Serve (CTS) for different customers sometimes comes as a shock when it reveals the impact of current service levels compared to the sales revenue generated. Trying to ‘forgive’ this sin by claiming overall profitability is no solution either. You punish yourself with overall higher costs and less efficient use of your resources.
3. Careless Inventory Handling
Sound inventory management can have an immense positive impact on reducing costs and increasing the quality of service perceived by customers.
Inventory levels, deployment and replenishment need to be correctly handled. But many enterprises skimp on the resources required in terms of people, processes and systems.
This is short-sighted at best. Inventory mismanagement will bite you back in costs and lost profits as materials remain unused or products unsold. Productivity is derailed as employees are forced to spend time searching for items that are ‘in there somewhere’.
Paperwork piles up as disorganization delays payments and leads to oversupply and returns, or stock-outs. Customers leave never to come back. US retailer Kmart found this out when it offered shoppers too many ‘hot deals’ for products that it failed to deliver correctly to its supermarkets.
4. Inadequate Performance Measurement
While judgment and experience play important roles in tuning the performance of a supply chain, hard data about factors that count are essential.
In 1988, the US Navy ran one of the most expensive and unsuccessful projects of all time to improve supply chain operations. In the post-mortem after the acknowledgement of failure, the Government Accountability Office (GOA) noted there was “no marked improvement in the Navy’s day-to-day operations”.
However, any change would have been impossible to measure. There were no metrics in place to allow any before and after comparison.
Organisations must identify the critical information they need, in order to know how well their supply chain is doing. There is a balance to be found between too little data and too much or ‘not being able to see the wood for the trees’. KPIs or key performance indicators should represent the happy medium.
They are a handful of metrics that cover what an enterprise really needs to know: no more and no less. The challenge is to pick the right indicators. Once they are chosen, there is usually no problem in measuring them.
If you need any further info on this subject, click on the link below to download a free book chapter about Performance Measurement “how to do it the right way”.
5. Ignoring Key Cost Drivers
This sin is tinged with sadness. It’s the sadness of seeing how organisations leave money on the table by ignoring easy opportunities to improve profitability.
How can this be? It’s simple. While people may be experts in optimising their own functional area of a supply chain, they do not look at the entire end-to-end process. Call it blinkered or silo thinking if you like, but nobody joins up the dots.
This may lead to ignoring smaller changes in one area that may appear unimportant on their own, but that may enable larger positive changes elsewhere. Conversely, a change made to achieve local improvement in one department may translate into a global degradation in performance.
Inventory levels are a classic example. Accounting may want to save money by reducing inventory to near zero. However, that may then mean that manufacturing cannot react quickly enough to fulfil customer demand.
6. Failing to Invest in People
Can you calculate the return on the investment that an organisation makes in its employees?
In certain supply chain situations, absolutely. In some organisations, staff cannot accomplish supply chain tasks properly for lack of training. Their knowledge gaps have a known, negative impact on productivity and profitability.
The return on investment in a suitable training session can then be calculated by comparing the value of the improvement with the cost of the training.
There is a longer term version of this sin as well. If a company wants to do well in a world where supply chain performance has become a major competitive differentiator, it will need to attract and develop the skills of new employees.
This is particularly important in logistics, where the workforce in general is older than that of many other functional sectors. A company that does not invest in making working conditions and career prospects appealing for its supply chain roles will gradually but inexorably sink in terms of supply chain performance and therefore competitiveness.
Can the return on this investment be measured? Look for the answer in changes in your key performance indicators or in a comparison with benchmark/best-in-class values for industry.
7. Poor Asset Utilisation
The right resources in the right place at the right time – ideally, that’s how every supply chain should work.
As market demands and business needs may change rapidly, asset utilisation also needs to be flexible as well as optimized. That applies to the workforce, warehousing, vehicles, systems and inventory, as well as distribution hubs and networks.
However too many organisations let their supply chains fossilise. What was well-adapted a few years ago may be out of alignment with today’s conditions.
New technology may help, but effective solutions are often to be found in rethinking and re-articulating the links in the supply chain to build in nimbleness. Toyota gained a strong competitive advantage over rival GM in the 1980’s automobile market by avoiding the siren calls of new robot technology in favour of low-tech lean manufacturing and supply chain techniques – in other words by using its existing assets better.
So – does the list above make your organisation a supply chain saint or sinner? Perhaps your enterprise is somewhere in between: striving to be great, doing well in some aspects and not quite as well as you want in others.
Real improvement starts with meaningful measurement and comparison. The Supply-Chain Operations Reference Model SCOR (revised in 2012) helps organisations compare their performance with industry benchmarks. It can give useful pointers about items to be addressed at overall and at more detailed operational levels.
Doing well across the board can be tough for several reasons. It requires good overall understanding of supply chains and clear thinking.
Companies can also benefit from an objective analysis from the outside about the situation, coupled with action-oriented experience in successfully enhancing performance in different industry sectors. Compromises are sometimes necessary, perhaps temporarily leaving some areas with less than optimal performance, while critical issues are resolved in others.
But if you keep this list in mind and make continual improvements, you will be on the right path for moving out of supply chain sin and into a supply chain state of grace!
We are giving away a free chapter about Asset Utilisation from the book “7 Supply Chain Keys” By Rob O’Byrne. Just click on the link below.
P.S. We are running some Free Seminars on these topic’s in the next couple of months in Sydney, and Melbourne. Click on the city that is appropriate for you to claim your seat early before they run out.
As always you are welcome to comment below, I read and answer all the comments personally.