SMEs -TAKE CONTROL OF YOUR SUPPLY CHAINS
Some companies, regardless of their industry or size, do well. They are successful with low value merchandise or with fashionable merchandise or whatever product. Other firms struggle or so it seems. The difference, when you drill down, is often how well a firm executes supply chain management.
Supply chain excellence does not happen by accident. Firms with outstanding supply chains have made it a part of their strategy and operations. They know that it is good business to be a leader in supply chain management (SCM). These companies understand what supply chain management can do to position and to differentiate themselves in the market and against competitors. They know that it can drive sales, profits, and market share.
Supply chain management is a complex responsibility. There are supply chains within supply chain. Supply chains are not linear from one customer to one supplier. They involve multiple customers and multiple suppliers each of whom has a supply chain. Compound that with presence of three different supply chains -- product, information and financial.
This conundrum applies to companies regardless of size, regardless of industry, market and regardless of what country the businesses are located. It is especially difficult for Small-Medium Enterprises (SMEs). These firms battle against large companies who have leverage and resource advantages. Less-than-outstanding supply chain management only compounds the problems for these small-medium companies.
They do not look at their supply chains in their entirety nor do they view them as processes that flow across the entire firms. Instead, they look at freight, warehousing and other cost and functional areas. As a result, their supply chains control them; they do not control their supply chains. These are significant differences with supply chain and market leaders.
Such firms are also reactive. They imitate, or try to imitate, what leaders do. Because they do not understand and do not commit to supply chain management, they are not successful with replicating what others are successfully doing.
Despite the scope and complexity, supply chain management is often not vital for many SMEs. The impact to such companies of their treatment of supply chain management has handicapped its effectiveness and limited growth and profitability resulting in:
- Wasted capital and resources
- Increased costs to perform activities and transactions
- Lost customer sales and poor customer service
- Sacrificed opportunities to create competitive advantage
Companies are in a survival mode trying to deal with and get through the global economic slowdown. As firms work through the difficulties, will change come for those companies have not properly performed supply chain management? There will be change because many firms will not make it through the global recession. What other changes will occur?
Will firms try to bully their way through the economy with broad brush approaches with arbitrary inventory reductions and costs reductions? How many firms will validate Einstein’s definition of insanity by doing the same things over and over and expecting different results? Will there be change from the revived economies or will companies repeat the mistakes of the past with regards to supply chain management? How will firms deal with the permanent changes that come from the global recession?
Will they choose to have lower costs; better customer service; faster capital velocity, for inventory and, in turn, cash; and increased competitiveness, even advantage? Growth, even survival, may depend on the answer.
The answer should be to change. Not changing is to repeat the mistakes of the past and can be considered as lunacy-doing the same thing over and over and expecting different results. Many company business models are outdated; more will join that with the global economy that emerges from the global recession. SMEs should:
- Work together to combine volumes of multiple SMEs and to leverage procurement of similar commodities using technology and approach as major corporations utilize
- Manage supply chains and suppliers as large companies do using technology and process to drive efficiencies across the supply chain from suppliers through to customers
- Determine and differentiate what the company needs from its supply chain with regards to competitive advantage, market positioning, cycle time, capital required for inventory and other applications, service, revenue, profitability and growth.
- Segment and assess present supply chain performance and process as to customers, markets, industries, distribution channels and products. Analyze the process based on customer and market requirements and on competition. Depending on the assessment results, supply chain redesign from the customer and market perspectives is preferable to trying to fix the present operation. Utilize different tactics for higher risk, higher complexity, high volume, fast moving, profitable products, customer and markets than for ones that are marginal.
SMEs must break the cycle of inefficiency that limits profits, growth and return. Change is difficult, but not impossible. Opportunities will come from the new economy. They must change. Standing pat is not a viable option. The changes from the global economy will create opportunities for those prepared to take advantage of them.
Companies that view themselves as dynamic and as global see the prospects for themselves. They have value propositions that separate them from competitors; they know that value propositions are about the customers-and not about what the firms do. They understand trends; they lead. These firms understand what supply chain management can do to not only create service advantage but to be a catalyst for new business.
Leaders know that orders--whether they are replenishment, customer, or new products-- must be delivered complete, accurate and on-time. This must be done consistently. Uncertainty is a sign of a struggling supply chain. Conversely, reliability is a hallmark of best-in-class supply chains. The privileged supply chain practitioner use best practices to effectively manage their supply chains. Best practices reduce time and inventory and improve competitive positioning and profitability.
Supply Chain Best Practices are--
- Increase inventory velocity
- Implement lean logistics / supply chain management
- Improve supplier performance
- Compress cycle time
- Utilize meaningful metrics
- Segment the supply chain
- Employ supply chain technology
Products sold into a competitive market, fast moving products, products with short product life cycles, products with seasonality--all must utilize best supply chain practices. It is not a choice; it is a requirement.
Time and inventory are two important, interrelated issues that drive the need for best practices. Success with these practices also creates inventory yield maximization opportunities. There is a window of opportunity to get the maximum price and the maximum yield for products. Hit that window, and companies enjoy higher pricing and profit margins. Leaders understand this in using best practices.
Increase inventory velocity. Inventory management is the Gordian Knot of supply chain management. No one knows how to untie it, and it cannot be cut. The inventory quandary applies to all inventories-finished goods, raw materials, parts and components, MRO and work-in-process. It includes new products and existing products. It covers all types of businesses-manufacturers, distributors, wholesalers, retailers and others in about every industry.
There is a dichotomy of views. Sales wants 100% customer satisfaction and to make sure that there is always inventory on hand to meet each order. Finance wants to carry fewer inventories to free up capital for other needs. Given the vagaries of sales patterns, supplier lead times, and production sizes, the "answer" is dynamic. When sales are booming, inventory may not be as scrutinized as it is when sales are slow and inventory is sitting in warehouses and plants.
As a result, inventory creep can occur. Studies have shown that manufacturers and wholesalers have over 60 days of inventory and that retailers have over 90 days of inventory capital tied up. These times do not include the entire inbound inventory in the supply chain. Real supply chain inventory is likely 25% higher. This is a very significant amount of capital tied up in inventory.
Too many companies do not know how fast inventory turns and do not really manage it well. Poor turns are signs of many problems. Inventory must move quickly; turns should be high. Inventory that sits and does not sell consumes available working capital and limits applying that capital to the business. Products must flow from suppliers or manufacturing sites to customers. Being inventory rich and cash poor is not a sound approach.
Inventory is key to profitability. Inventory velocity turns assets into profits. The faster inventory moves and turns, the greater the profitability. Inventory is the key issue to supply chain management success. Customers demand that their orders be shipped complete, accurate and on-time. That means having the right inventory at the right place at the right time.
Implement lean logistics / supply chain management. Lean complements supply chain management. Both emphasize pulling, not pushing, products through the supply chain. Both recognize the waste, or non-value, created by excess inventory and excess time.
A lean supply chain process is streamlined to reduce and eliminate waste or non-value added activities to the total supply chain flow and to the products moving within the supply chain. Waste can be measured in time, inventory and unnecessary costs. Value added activities are those that contribute to efficiently placing the final product at the customer or at the store. The supply chain and the inventory contained in the chain should flow. Any activity that stops the flow should create value. Any activity that touches inventory should create value.
The best know that lean supply chain management is more than warehouses and transport topics. It must include the total supply chain, both domestic and, especially, international. They stay focused on adding value as defined by customer, using the pull which complements SCM, keeping a customer focus, and removing the waste of inventory and time.
Improve supplier performance. Success begins with supplier performance. They must deliver quality items and do it complete, accurate and on time. Otherwise problems ripple across the supply chain, the company and its customers and impact sales, profits and capital tied up in inventories. Whether the products are finished goods or materials for factories, the need for strong supplier performance is there.
Leaders analyze spend and identify suppliers as to importance based on risk, volume, profit margin, lead-time, criticality, stringent specifications or other criteria important to their businesses and industries.
They differentiate how to work with critical suppliers from non-critical ones. This includes understanding what suppliers want and implementing supplier relationship management.
Compress cycle time. Supply chain cycle time runs from the time the need for a product--new or replenished--is determined and goes until it is delivered to the customer or to the store. The length of global supply chains adds to time and the challenge to compress. Safety stock inventories are a buffer against uncertainty. Long cycle times add to the uncertainty-and in turn the amount of inventories carried and working capital tied up.
Leaders recognize that there are many parties involved in the cycle time for both product and information flows. These parties, that are touching the product and information, are both internal and external. All the parties collectively add to the length of cycle time and to its variability. And this, in turn, adds to cost, inventory levels, service failures and lost sales.
The best analyze the flows and look at where products and information stop and whether value is added with each stoppage. They understand that much delay is caused internally because of organizational requirements, gaps with the supply chain process, signoffs/approvals, purchase order requirements and changes, and numerous other reasons. Drawing on lean, they improve the flow. In turn, the same is done with the external activities. With all the actions and parties, compression focus is placed on fast moving, high margin products.
Utilize meaningful metrics. It is easy to identify firms that do not excel at supply chain management. In good times or bad times, they cannot tell you how well their supply chain operates beyond some anecdotal stories.
There are numerous measures for companies and their supply chains. Some are micro-measures of various logistics activities and functions. Some have nominal value. And others are based o knee-jerk reactions to a problem that occurred.
Useful metrics go across the enterprise. They tie to the company strategy and show meaningful performance. Examples of good metrics are--
- Orders delivered complete, accurate and on time
- Time related--such as:
- days of inventory on hand
- supply chain cycle time
- time (speed/length of time)-and how well (dependability or variability)-the organization and the supply chain perform is significant to satisfying customer expectations
- purchase order to cash cycle time goes across the firm and includes supply chain time
Segment the supply chain. Too many firms have one supply chain approach for everything. This monolithic methodology handicaps performance, diverts resources, and creates static noise from external and internal sources that distract the supply chain organization. The best segment their supply chain and focus performance where it is most beneficial. Instead of practicing one-size-fits-all supply chain management, they tier based on profit margin or days of inventory or similar important criteria. Multiple segmenting can be done. Customers can be tiered, as can products.
The analysis identifies sectors that the company and supply chain should emphasize. It is actionable. The profit analysis to find large, profitable segments can be done by category, market, product, domestic/global region or other key targets for the business. Note, sectors do not reflect company structure as to divisions or business units. From that start, deeper drilling can be done into subsectors. Segmentation needs accounting recognition of the key customers and sectors so that proper tracking of the financial benefit is done.
Sectoring supply chains is a superior best practice. It works for all companies-regardless of size, industry or whether B2B or B2C. The benefits go beyond supply chain performance and very positively impact the firm in important ways. It has both master plan and operations importance and impact. Supply chain segmenting can be used by all companies, regardless of size, industry, market or type.
Employ supply chain technology. Supply chain execution technology is important to managing a supply chain. It should provide visibility throughout the entire supply chain. It is much more than tracking and tracing which misses the important factor. It is not about the container or pallet of product. It is about the purchase order or customer order.
The key issue is to manage the customer, purchase or build order through to delivery. Technology, especially when tied with an excellent supply chain process and collaboration, can provide that. SaaS and cloud combine to let all size firms use technology. It is no longer reserved for the large corporations. Leaders use technology for exception management and for event management so they can focus on what is important, reduce the occurrence of problems and manage the supply chain flow.
Best-in-class firms want visibility across entire supply chain process. They distinguish the inbound supply chain from the outbound supply chain in designing and implementing the strategy. They do not focus on domestic versus international to parse their supply chain; they assess inbound versus outbound. Otherwise, the time and resultant inventory benefits are blurred. Also, they develop multiple transport and stocking programs to reflect the management of inventory. Firms that have supply chain management as part of the core competency and strategic focus perform better in controlling inventory across the supply chain.
Conclusion. SMEs have the supply chains that they designed, either deliberately or through indifference, and deserve. Strong economic periods can mask the performance of supply chains. Weak conditions expose the true supply chain capabilities. As a result, they can compete effectively, or they cannot. Some firms realize their weaknesses and redesign supply chains. They choose to change, to take control of their supply chains and to grow and be profitable. Too many firms choose not to improve their supply chains. “Nothing comes from nothing” as Shakespeare said in King Lear. They limit what their companies can become. Good SMEs will change and will collaborate with other SMEs to gain leverage. They will use best practices because they want to position themselves for growth and success.
Tom Craig is president of LTD Management. LTD Management provides supply chain management to manufacturers, retailers and wholesalers. It also provides logistics consulting to 3PLs and other logistics service providers. This consulting is based on real-world supply chain and logistics experience.
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