Supply Chain Fundamentals

So many people are focused these days on the new emerging technologies and systems and some of the businesses are ready to embrace them but here’s a tip: Don’t forget the fundamentals. Let’s run through 6 things that you’ll want to make sure of if you’re

1. Making sure your distribution network is aligned appropriately

Getting your distribution network right starts with understanding your service radius – the maximum distance you can ship while meeting customer delivery requirements. Most companies aim for next-day delivery within 500 miles of their DCs, though this varies by industry. E-commerce usually needs tighter ranges of 250-300 miles for same-day delivery windows.

Your network density matters enormously. I’ve seen companies waste millions running too many small warehouses when they could consolidate into fewer, larger facilities. The sweet spot is usually 3-5 regional DCs for national coverage in the US, unless you’re handling frozen goods or other special requirements. Each DC should handle at least $50M in annual throughput to justify the fixed costs.

Inbound freight often gets overlooked, but it’s crucial. Your DCs need to be positioned near your major suppliers or ports of entry. We typically see inbound transportation costs eat up 3-4% of revenue – and that number jumps to 6-7% when DCs are poorly located. Getting raw materials to your facilities efficiently is just as important as shipping finished goods out.

The key metrics to track here are:

• Average outbound miles per shipment (target under 300)
• Percentage of customers served next-day (target 85%+)
• Transportation cost as percentage of revenue (target 4-5%)
• DC utilization rate (target 85-90%)

You also need to factor in seasonal peaks. Your network needs 15-20% capacity headroom to handle volume spikes. I’ve seen too many companies build networks that work great 10 months of the year but completely break down during peak season. This means either building extra capacity into your own facilities or having overflow agreements with 3PLs.

One last point – don’t forget about reverse logistics. Returns typically flow through different channels than outbound shipments. You need designated return centers or specific areas in your DCs to handle returns efficiently. The standard these days is processing returns within 48 hours of receipt.

2. Making sure you got a supply chain strategy that’s appropriate and works and is understood

Start with your cost-to-serve model. You need to know exactly what it costs to service each customer segment. Most companies I work with find that 20% of their customers drive 80% of their profitability – but they’re treating all customers the same. Your strategy needs different service levels for different segments.

Your network design needs to match your business model. If you’re competing on speed, you’ll need more DCs and higher inventory levels. If you’re competing on cost, you’ll want fewer, larger facilities. Running a high-service network typically costs 15-20% more than a basic one – make sure your margins support that.

Technology investments matter hugely. Basic WMS and TMS systems aren’t optional anymore – they’re table stakes. But I see too many companies waste money on fancy AI solutions before they’ve got their basic data clean. Start with accurate inventory and order data, then build up.

You need clear KPIs that everyone understands:

• Perfect Order Rate (target 95%+)
• On-Time Delivery (target 98%+)
• Inventory Turns (varies by industry, but 8-12 is typical)
• Cost as Percentage of Sales (target 8-10% for most industries)

The strategy needs buy-in from Sales and Finance. Sales needs to understand why you can’t offer next-day delivery to every customer. Finance needs to understand why you need safety stock. Without alignment here, your strategy will fail.

Finally, build in flexibility. Fixed networks break under pressure. You need overflow capacity, backup suppliers, and alternative transportation modes. I typically recommend 20% capacity buffer – yes, it costs more, but it’s cheaper than emergency air freight when things go wrong.

4. Making sure that you are adopting good sales and operation planning processes

Monthly S&OP Cycles need to follow a strict calendar. Week 1 is demand planning, Week 2 is supply planning, Week 3 is pre-S&OP meetings, and Week 4 is executive S&OP. Skip steps or rush the process and you’ll get garbage outputs. I see too many companies trying to cram everything into one meeting – it never works.

Your Demand Planning needs real input from sales. Historical averages aren’t enough. Get sales teams to commit to numbers by customer and product family. Make them explain major swings – a 20% increase in forecast needs solid justification. Track forecast accuracy at the product family level and hold people accountable.

Supply Planning requires input from operations, procurement, and manufacturing. Look at capacity constraints, material availability, and lead times. Build scenarios for different demand levels. Your supply plan needs to account for supplier lead times – I typically see companies need 8-12 weeks to adjust capacity up or down.

Key metrics to track:

• Forecast accuracy (target 80%+ at family level)
• Bias (keep within +/- 5%)
• Plan adherence (target 90%+)
• Inventory turns (industry dependent)

Executive S&OP meetings need teeth. They’re for making decisions, not sharing updates. Focus on gaps between demand and supply, capacity constraints, and major customer issues. Every meeting should end with clear actions and owners.

Common failure points:

• Poor data quality
• Lack of sales commitment to forecasts
• No clear process owner
• Missing executive support
• Skipping pre-S&OP alignment

5. Managing your inventory correctly

Start with ABC Classification of your inventory. But do it right – most companies just look at volume, but you need to consider both usage and value:

• A items: 15-20% of SKUs, 70-80% of value
• B items: 30% of SKUs, 15-20% of value
• C items: 50-60% of SKUs, 5-10% of value

Your Safety Stock levels need to match your service requirements. I typically see companies holding too much safety stock on C items and not enough on A items. Calculate based on lead time variability and demand variability – don’t just use rules of thumb.

Cycle Counting beats annual inventory counts every time. Set up a schedule:

• A items: Count monthly
• B items: Count quarterly
• C items: Count semi-annually

Watch your Slow-Moving Inventory. Anything without movement in 180 days needs attention. I’ve seen warehouse spaces filled with 30-40% dead stock – that’s cash you can’t use. Set up regular obsolescence reviews and be aggressive about clearance.

Key metrics to track daily:

• Fill rate by SKU class
• Days of inventory
• Pick accuracy
• Put-away accuracy
• Stock turns by category

Order Points need regular review. Most companies set them once and forget them. Review A items monthly, B items quarterly. Factor in supplier lead times – I see too many companies using historical averages that don’t reflect current conditions.

Your WMS needs to support all this. Basic systems won’t cut it anymore. You need slotting optimization, real-time inventory visibility, and automated replenishment triggers. Make sure your system can handle lot tracking and expiration dates if you need them.

6. Managing your outsourcing contracts correctly

Performance Metrics need to be crystal clear. Typical KPIs include:

• On-time delivery: 98%+
• Order accuracy: 99.5%+
• Inventory accuracy: 99.9%+
• Put-away within 24 hours: 95%+
• Claims-free shipments: 99.8%+

Your Rate Structure needs flexibility. Build in volume bands – don’t get locked into rates based on your peak volume. I typically see contracts with +/- 20% volume flexibility before rate adjustments kick in. Include fuel surcharge tables and annual rate escalators tied to CPI.

Service Level Agreements must have teeth. Include financial penalties for missing KPIs, but make them realistic. A 0.5% penalty of monthly billing for missing targets is standard. Include cure periods – give providers 30-60 days to fix issues before penalties kick in.

Watch out for Hidden Costs:

• System integration fees
• Special project labor rates
• Peak season surcharges
• Accessorial charges
• Account management fees

Contract Length matters. Three years is standard – anything shorter and you won’t get good rates, anything longer and you’re too locked in. Include early termination clauses with 90-120 days notice.

Transition Planning is crucial. I’ve seen too many contracts fail in the first 90 days. You need detailed implementation plans covering:

• IT integration timelines
• Staff training requirements
• Equipment installation schedules
• Inventory transfer procedures

A number of businesses that I come across day-to-day still have big gaps in all of these fundamentals. If you want your supply chain to stay healthy, make sure that you have these 6 fundamentals in place!