The impact of supply chain performance on the success of a business is significant, but often underestimated, even within companies well-versed in supply chain management.
Supply chain mistakes like the five common examples I’m about to reveal, all have the potential to handicap business performance—which is why your company should avoid them (or address them if it’s too late for avoidance).
If your business is currently falling victim to any of the following supply chain mistakes, corrective action will undoubtedly deliver improvements in cost, revenue, customer service and numerous other business performance factors.
Look for the signs, recognise the symptoms and if you need it, get some help to fix these important supply chain issues.h2>
Is Your Company Making These 5 Supply Chain Mistakes?
1. Overlooking/Misunderstanding Cost-to-serve
Supply chain Cost-to-serve is a key element of business performance, but is not well-understood in some organisations and in others, is simply overlooked. Try your cost-to-serve knowledge out by answering the following questions:
- Do you know which of your company’s customers provide you with the greatest and conversely, the least profit?
- Do you have customers which aren’t profitable at all?
- Do you supply certain products to certain customers at a loss?
Strange as it may seem, many business leaders don’t have the answers to these questions, because they’ve never conducted an exercise to understand the costs involved with supplying their customers.
Most of those costs will be generated within the supply chain but can remain invisible, or hidden within more general “cost of goods sold” accounting reports, where they constrain business performance by their very presence on the bottom line.
While measuring cost-to-serve can be quite a complex venture, failing to do so is one of the most common and costly supply chain mistakes made by today’s manufacturing and sales enterprises.
If you don’t understand the real costs involved in supplying all your customers, you are missing out on a number of golden opportunities, which include:
- Knowledge of which customers contribute the most (and the least) to your business revenue
- The transformation of unprofitable customers, products, and processes into profitable ones
- Development of profitable strategies for customer or product segmentation
- Extraction of additional value from the supply chain
After completing a full cost-to-serve (CTS) analysis, most companies are able to differentiate between products and customers which for the sake of simplicity (and a little levity), might be classified as follows:
- Low CTS/high revenue yield – worthy of worship
- Low CTS/low revenue yield – bread and butter
- High CTS/high revenue yield – love to hate
- High CTS/low revenue yield – WHAT?
While each of these categories of product, customer, or combinations of both, demand different strategies, it’s clearly those in the “WHAT?” group which require the most attention.
If your company has never evaluated cost-to-serve, the “WHAT?” label will be very apt, since you’ll probably be shocked to find that at least some customers or products in this group will actually be revealed as totally unprofitable.
Once you know about unprofitable customers and/or products though, you can take steps to improve their profitability and hence, their contribution to business performance.
If improvement is impossible, you might even choose to part company with them, although divorcing customers should always be a very last resort. Needless to say, remaining ignorant of these hidden cash hogs is a supply chain mistake—one worth getting some help to rectify if you don’t have the resources or expertise for an extensive cost-to-serve project.
2. Failing to Develop Effective S&OP Process
Poor or non-existent sales and operations planning (S&OP) is another common and costly supply chain mistakes. Plenty of companies implement S&OP, only to find anticipated business performance improvements failing to materialise.
In our consulting experience (and we’ve helped a great number of companies to improve S&OP), this generally comes down to a lack of S&OP effectiveness caused by:
- Failure to follow a properly structured process
- Failure of senior leaders to get involved in S&OP
- A lack of empowerment among S&OP participants
- Inadequate technology tools used to support the process
If your company wants to benefit from S&OP, the need for investment in both human and technological resources can’t be overlooked, and neither can the time and attention which must be invested by senior chiefs or at the very least, representatives empowered to make independent decisions.
When it’s done properly, S&OP is a powerful supply chain management tool, but if you get it wrong, business performance will suffer.
Consequences of poor sales and operations planning typically include:
- A lack of faith and belief in demand projections
- Late inputs to the sales and operations process
- Misleading projections (often resulting in finger pointing and apportioning of blame)
- Increases in obsolete and/or excess inventory
- Lost sales and missed marketing opportunities
As the old adage suggests, if a job’s worth doing, it’s worth doing well, so if your company is running an S&OP program (and it really should be), try to make sure that a solid process is in place, executive commitment is secured, and that the right technology is implemented to streamline the planning cycle.
3. A Lack of Freight-cost Knowledge
You might be surprised at the number of manufacturing and sales organisations that lack understanding of the freight transport market, especially the factors which drive carriers’ costs and hence the rates they charge their clients.
Why is this a supply chain mistake though? It’s because an understanding of freight service providers’ costs and rates is essential if you don’t want to pay over the odds for shipping your company’s products.
Knowing the cost drivers will help you choose the right transport providers, and put you in a stronger position to negotiate for appropriate rates.
When companies don’t fully appreciate carriers’ rate structures and the rationale behind them, you probably don’t need me to tell you which party holds the greatest advantage in price negotiations or transactions.
For example, your company could be:
A) Paying unnecessarily for pallet spaces which might then be used for another shipper’s pallets.
This often happens when carriers charge by the pallet, and shippers pack their goods on pallets which could realistically be double-stacked on a trailer. If the carrier can find another customer shipping half-height pallets, of course they will charge that shipper for pallet spaces too, while loading both your shipments together to fill a trailer.
There’s nothing underhanded about this practice, but if you know your pallets will have others stacked on top of them, you can certainly push the carrier to charge you at only half the rate for a full pallet.
B) Using the wrong carrier and paying more for your freight than you need to.
Imagine your company typically ships pallets which aren’t suitable for double-stacking on a trailer. So you contract with a service provider that charges a per-pallet rate. The cost-efficiency achieved will depend a lot on the weight per pallet.
If your pallet weights are relatively low, you would probably have been able to reduce your transportation costs significantly by using a carrier that charges by the kilogram, rather than by the pallet.
The above scenarios illustrate how a lack of freight-cost understanding can be expensive for your company. Transport costs make up a large part of supply chain expenditure, so it’s worth making sure those responsible for transport procurement in your company are well clued-in to carriers’ cost drivers and rate structures.
4. Missing Customer Service Clarity
Your company probably has a clear policy for customer service delivery, but do you have one specifically for your supply chain and logistics organisation?
Many companies fail to clearly define how customer service will be delivered by business functions involved with logistics and transportation. But without such an internal policy, how can you ensure your supply chain effectively supports the overall customer service promise?
While it may seem obvious that without a supply chain customer service policy, customer satisfaction is at risk, business leaders often fail to appreciate the many ways in which this supply chain mistake can directly impact the bottom line.
As an example, let’s assume you have no clear supply chain customer service policy, which means nobody in your logistics team knows how to react to customer requests or complaints.
At the same time, your company’s service policy is to provide shipping as a service which customers pay for, perhaps on a tiered-scale according to specified lead times (customers pay more for delivery within 24 hours than for 48-hour delivery, for instance).
So what happens when an issue in your supply chain arises, leading to problems fulfilling 24-hour lead times?
- Should your customer service representatives inform the customer that the 48-hour delivery charge will apply instead?
- Should your distribution manager implement unusual processes to expedite deliveries and meet the 24-hour deadline at any cost?
- Should the delivery fee be waived completely?
- Should your customers be invited to choose from the solutions above, or should one solution be applied in all cases?
Can you see the dilemma here? With no clear supply chain customer service policy in place, there’s no way to ensure a consistent response to a given situation.
For example:
- Customers don’t know what to expect
- Management doesn’t know how to act
- Poor decisions can compound problems and contribute to excessive logistics costs
On the other hand, if a clear customer service policy is developed and communicated to all stakeholders, your logistics teams will be able to react immediately and appropriately to resolve issues, and your customers will know what reparations they are entitled to.
Most importantly, arbitrary measures will not be necessary, so your supply chain and logistics operation will be able to support your customer service promise in a consistent and transparent manner.
Of course a supply chain customer service policy will cover much more than guidance for resolving issues. Amongst other things the policy should clearly define cycle and lead time guarantees, detail all fulfilment services that customers get for free or for a price, and specify how returns will be managed (an increasingly vital element of service differentiation).
5. Neglecting Distribution Network Reviews/Optimisation
A few months ago, we published a full blog post on the consequences of a misaligned distribution network. That post largely focused on the cost implications of a network that for one reason or another, might not be appropriate for your business and its customers.
However, an inappropriately structured network can create other issues for your company besides those of a financial nature.
While network design problems can have many possible root causes, they often arise when changes in the business or its environment take place over time. One of the most commonly made supply chain mistakes is to overlook this possibility. If your company hasn’t reviewed its distribution network in the last five years, there’s a good chance it’s fallen below the bar in terms of optimality, economy, and efficiency. Your business could be missing opportunities to:
- Save operating costs by centralising distribution assets or functions
- Improve energy efficiency and reduce environmental impact
- Maximise utilisation of distribution assets
- Reduce freight costs
- Create a more flexible and responsive supply chain
- Make cost-to-serve savings
- Increase customer satisfaction
This list represents only a handful of possible gains that a remodelled, optimised distribution network can yield.
As supply chain mistakes go, neglecting network design analysis is possibly one of the costliest. It’s true that restructuring can be expensive and is often impractical to execute in a short timescale, but it costs little to discover where your network might need improvement.
If you don’t evaluate the effectiveness of your network, you won’t know if major changes are needed, or if there are some quick and easy wins to be be had from making relatively small modifications.
After completing a network design analysis, alternative scenarios can be assessed for improvement-impact, practicality and cost. It’s rare to find a case where significant and disruptive redesign is the only beneficial solution.
Supply Chain Mistakes or Opportunities in Disguise?
It’s perfectly fine to make supply chain mistakes. They are easy to make, but not always so obvious that they’re easily spotted. At Logistics Bureau, our consulting team is adept at identifying supply chain mistakes, but we get most of our satisfaction from helping our customers avoid or correct them. We’re only too happy to assist your supply chain team address any of the issues covered in this post. Our experienced logistics consultants can help you:
- Get a handle on your cost-to-serve
- Implement or improve a sales and operations planning process
- Understand and evaluate your freight costs
- Develop a supply chain customer service strategy and policy
- Review, model, and optimise your distribution network
If your company is challenged by any of the topics in this post, or you’d just like to know if the issues exist in your supply chain, contact Logistics Bureau today. Supply chain mistakes and challenges are really just opportunities in disguise—and we’re here to help you blow their cover.
Very good article, as usual.
I would add a sixth mistake I found it in my Supply Chain projects:
“Missing of a clear strategy in choosing a proper information system to build a right coordination and collaborative model”
SCM is cross functional and cross-firm and an efficient information handling in a SC is of the most significant importance.
Information flows connect SC participants, SC functions both vertically and horizontally and management decision levels.
Build the right coordination and collaborative model – from exchange information to an end-to-end supply chain visibility is the framework for long-term SCM success.
Very good point George!
From the practice of new SC projects will notify the seventh Supply Chain Mistakes that Handicap Business Performance:
7. Failure to selection and follow an appropriate process design of BPO supply chain.
Process structure, the basic architectural design of an organization and supply chain, is critical for competitive advantage.
If you failure to follow a properly structured process you do not have a structured way to implement improvement, management & control of your essential processes to achieve the goals defined in your Strategy.”
Thanks for your special professional approach,
PhD George Ogrinja
Supply Chain Director,
Romania
Very well written and thoughtful post. It is written in a very systemic way and I really think these mistakes can happen in any B2C company. Talking about cost to serve, this is the basic thing that needs to be considered as we only work in order to make a profit and the profit cannot be maximized if make this basic mistake.
Profit is certainly a key objective for a commercial organisation, but also customer service and market growth.
I’d also add using out of date technology. There are still plenty of companies that rely on spreadsheets to track supply chain data. The problem is that spreadsheets are prone to human error and don’t have the forecasting capabilities needed to make improvements to the process.
very insightful article. There would be many hidden costs that eats up the profits in supply chain and to maintain a cost effective supply chain, we need to clearly chart out solutions to reduce these costs.