Productivity is a deceptively simple concept. For a supply chain, as for other functions, productivity is the ratio of what you get out to what you put in. This “output versus input” definition covers achievements of the workforce, results from the use of equipment, time spent (as in the hours needed to manufacture a product) and return on capital. However, output must also be valuable, generating value in its own right or helping an organization to achieve a valid objective.
It is at this point that differences between productivity and cost control appear. Cost control seeks first and foremost to avoid excessive costs or to reduce them. However, working to control the costs of supply chain assets that support inherently unprofitable operations may not yield any positive change in productivity. On the other hand, boosting useful results from an asset without changing costs is also a way to increase productivity. Cost reduction and productivity overlap, but they do not coincide. There is a stronger correlation between productivity and profitability.
The Pitfalls of Aggregated Productivity Figures
While overall productivity figures can help enterprise and supply chain management, using these to the exclusion of more detailed productivity data can be bad for business health. This phenomenon can already be seen in profitability, which is linked with productivity. In many cases, only a modest proportion (less than 50 percent) of an enterprise’s business is profitable. The loss-making rest is hidden in an overall figure for profitability. Rooting out unprofitable parts of the business and fixing them or eliminating would clearly help overall profitability. Loss-makers can be detected by comparing output with input, i.e. measuring the productivity of individual activities.
The onus is then on each supply chain manager in an enterprise to assess the productivity (valuable output versus input) of the individual assets he or she manages, whether people, machines or funds. As a further example, there is a considerable difference between finding a cheaper provider of materials or shipping, and understanding whether the activity served by those materials or freight services is really helping generate value. Attention to internal cost control and reduction is still necessary, especially as C-level executives often expect a supply chain to continually seek out and achieve savings. However, for productivity, supply chain managers will need to look further, possibly beyond the boundaries of their supply chain or even their enterprise.
Productivity, Cost to Serve and Reengineering
A granular approach to supply chain productivity, pushing responsibility for productivity down the enterprise hierarchy, has echoes in other management techniques. Cost to serve analysis is one example. By calculating how much it really costs to serve a particular customer, an enterprise can see where profit or loss is being made, account by account. Cost to serve is a granular approach too, designed to avoid the trap of aggregated costs that look acceptable, but do not tell the whole story. Business reengineering with its “don’t automate, obliterate” credo is another example. It drives enterprises to check they are doing the right things, not just that they are doing things right. It also encourages teams “at the sharp end”, for instance on the production line or at the loading bays, to analyse and take appropriate action by themselves to improve processes and productivity.
Managing Motivation to be More Productive
Before delving into approaches and tools to boost supply chain productivity, it is worth discussing motivation. People produce results according to the encouragement they receive from their enterprise. So, for improved productivity, companies must point their employees towards the behaviour and the results required, and measure and compensate accordingly.
In many cases, supply chain productivity is best improved by engaging in business activities that fit more closely with supply chain capabilities. Remembering the link between productivity and profitability, the activities with good profitability are retained and increased. Those with poor profitability or that make losses are changed, replaced or discarded. This may mean reducing costs, but it may also mean increasing costs to achieve disproportionately more revenue and profit.
Yet companies do not necessarily have systems of compensation or recognition in place for such changes. There may only be a bonus system for total dollars saved, without attention paid to value created. Compensation for salespeople may be determined solely by total revenue or (less frequently) by total profit. If sales orders drive supply chains on this basis, poor productivity will probably be the result. In fact, a large part of poor productivity in supply chains is rooted in such misaligned sales compensation methods.
If an organisation wants its supply chain managers to become responsible for supply chain productivity on an individual basis, it must ensure that the right motivators are in place for those managers and also for those (like the sales force) that impinge in their own way on supply chain productivity.
Steps for Boosting Productivity in Supply Chains
Individual supply chain manager accountability is crucial to improving productivity at a micro level, so that the overall macro result is boosted too. Each individual concerned should:
- Receive any necessary training. This includes training in the importance of productivity improvements, the productivity details to be monitored, the scope of the productivity improvements sought (see below), change management techniques to be used, and how incentives will be applied.
- Collect productivity data. For different activities, including the levels of inventory kept per individual product, order and customer, together with the revenue and net profit generated by each.
- Decide where to focus. Recommend which activities to keep, change, replace, or eliminate.
- Determine optimal operating methods. Also, define adequate productivity performance measures for different assets and resources used.
- Coordinate with counterparts. These are the people in other departments, whose actions affect supply chain productivity. In particular, agree with the sales department about the accounts to be addressed, and in each case the type of sales process and relationship, the order cycle and product inventory to be held.
- Monitor and ensure good productivity performance.
Each of steps 1 to 4 may require a month or more to be accomplished, meaning several months for putting a productivity improvement program into action. Steps 5 and 6 are continual processes. Step 5 in particular relies on supply chain managers proactively seeking out their counterparts. Sitting and hoping that others see the light will not work, nor will trying to hand off the responsibility for boosting supply chain productivity!
Examples of Supply Chain Productivity Gains in Packaging
Product packaging can affect as many parts of the supply chain as the product itself. Although sometimes overlooked or simply dismissed as a necessary evil, it can offer different opportunities for increasing productivity, as the following two examples show.
In the first case, a manufacturer of consumer cleaning products was using custom packaging for different product displays destined to increase retail sales. The display production was not integrated into normal manufacturing, which had been optimised for long product runs instead. There were long lead times for the production of the custom packaging of the displays, high costs due to inefficient processes, and unprofitable use of warehouse space for storage. Increases in productivity were achieved by changing production equipment and processes so that regional distribution centres could handle product display production and transport “just in time” for local retailers, optimising asset use, eliminating storage and display packaging waste, and reducing production time and cost.
The second case concerns the UK company Tesco, one of the world’s largest retailers. Tesco’s productivity insight was that product packaging should start out as “retail ready” at the beginning of the supply chain, and not have to be transformed into “retail ready” as it made its way from production facilities to supermarkets. The company defined what it calls “The Five Easys” for its packaging:
- Easy to identify within 2 seconds in the warehouse
- Easy to open in fewer than 5 seconds
- Easy to replenish
- Easy for shoppers to take from the shelf and put in their baskets or trolleys
- Easy to collapse in 2 seconds for disposal/recycling
For many of Tesco’s products, one product packaging accomplishes all of this for the product concerned, with automatic display in an attractive way to end-customers. For example, pizzas are packaged and displayed upright, not flat. Each pizza taken by a customer is automatically replaced in the display by the next pizza, using gravity for continual display replenishment. Increases in productivity follow from increased sales and customer satisfaction, and decreased time and expense of packaging and handling.
Bringing in “Time and Motion”
Once productivity goals, incentives, planning and coordination have been properly put in place, different efficiency techniques and tools can be used. The examples here are drawn from warehousing, although many of the underlying principles apply to other parts of the supply chain too. Time and motion techniques include:
- Organising the warehouse so that the most popular products can be picked more efficiently by warehouse workers
- Interweaving tasks to prevent non-productive motion, such as transporting picked products to a dock for transport, but returning without accomplishing any other useful task
- Using advanced shipping notification so that warehouse managers can organise the right number of staff for optimal productivity in goods reception
- Picking goods directly to a shipping carton, rather than to an intermediate bin or tote.
Warehousing technologies to help reduce time and effort include radio frequency identification (RFID) for easily locating and tracking inventory and products in transit, goods-to-person technology that brings items to be picked directly to workers, and pick-to-light and pick-to-voice systems to accelerate picking and reduce errors.
IT and Automation at the Service of Supply Chain Productivity
The more repetitive a manual task is, the stronger a candidate it is for automation, assuming there are no excessive automation costs or efforts involved. Productivity benefits from automation come not only from doing things faster or more cheaply, but also more reliably and with fewer errors. For instance, a warehouse control system or WCS can handle processes that would otherwise slow down warehouse operations. Among other things, a WCS can optimise waves of picking and packing, sending picking information to pick-to-light systems, and controlling conveyors and sorting systems.
The right IT systems are important to handle the increasing amount of information about customer requirements, and remain competitive. IT helps enterprises to simplify, rationalise and accelerate their supply chains, even as markets become more complex and demand more varied. Supply chain analytics, or the crunching of market and operational data for valuable business insights, then drive the levels and types of automation that bring the best productivity.
Different software applications contributing to supply chain productivity must work together, just as people from different departments must coordinate their actions. Labour management systems should interact with warehouse management and control systems, allowing workforce requirements and performance information to be used to optimise operations. Robotics may bring further advantages and requirements for integration with IT systems, although care must be taken to ensure that technology in general is at the service of the enterprise, not vice versa. As an illustration, when Toyota moved ahead of General Motors towards the end of the last century, it was through better operational planning and management – while GM struggled and failed to make robot technology work.
Extending Supply Chain Productivity to Customers’ Operations
Customers, naturally enough, favour a supplier that helps them to enhance their own internal operations. Supply chain competitive advantage can be enhanced by knowing how customers’ internal processes work, and adapting supply to increase customers’ productivity. Pallets that are built, sorted and stacked in distribution centres can be organised in aisles that mirror the configuration in a retail outlet. Pallets are then loaded onto trucks in aisle order, so that goods can be transferred directly from truck to shelf. Walmart already uses this approach for serving its own supermarket outlets. It can be used by suppliers for their own accounts, wherever volume and location offer enough potential for increased customer productivity and loyalty back to the supplier.
Optimising supply chain productivity will often require a change of perspective. Cost control will continue to be necessary, but must be supplemented by business-oriented, outward-looking productivity management. While there are many technologies and systems available to help speed and efficiency, effective supply chain productivity will continue to be driven by clear thinking, a willingness to dig into the right details, proactivity, and a focus on business value.