Supply chain management is no longer a cost center for business. To many manufacturing companies, it is now considered the most important part of the business. By Billy Hou, February 26, 2014, Supplychain247.com
Over the past few years, manufacturing organizations have been faced with challenges to their supply chains including weather related calamities, higher customer expectations and dealing with an expanding global market to name a few.
Therefore, companies need to be able to identify improvement areas within their operations that allow them to remain competitive and adapt to changes in the marketplace.
The top five opportunities we recommend:
1) Conquering Supply Chain Complexity Complexity of any system refers to the number and variety of elements it consists of, connections between the elements and the dynamics between them. The elements of a company‘s supply chain are the products/services, suppliers, customers and the company’s own network of operational nodes.
The number and interaction between these elements determines the complexity of the supply chain. Demanding customers, competitive markets, governmental policies and regulations drive companies to adjust the number of products and channels to market which in turn complicates the interactions between the elements of the company’s supply chain. The resulting increase in complexity creates a more costly supply chain that is often not quantified accurately when making these decisions. We can approach the issue of reducing this complexity in several ways.
One such approach is the Long tail analysis of product families. It helps in identifying numerous low-volume, high-variability, low margin products and subsequent pricing changes and pruning of cost absorbing products of the supply chain.
Another approach is network optimization which involves modeling the entire supply chain in order to analyze the network and total costs. The measurement of total landed costs and the ability to optimize inventory across the entire supply chain can lead to significant efficiencies and improved customer service.
Opportunities to reduce complexity may also be found through product design, delivery methods and supply chain segmentation. But the most important part in the reduction of complexity is to understand your customer’s value proposition and your ability to satisfy that. This requires frequent adjustments of your arrangements with your suppliers as well as aligning your network with your customer network.
2) Wrangling Data The recent developments in information technology have placed a great deal of data at the hands of companies. Each and every interaction, transaction and update that takes place in any part of the supply chain generates data. It is a difficult task to consolidate, manage and generate insights from it, particularly when the supply chain is producing the information on a regular basis, across the entire system.
Effective management of data and external information helps in reducing inefficiencies and increasing productivity in the supply chain. It is often a challenging task to access the right data when you need it the most.
Many companies don’t have the same data collection methodology and naming conventions for the data across all their operational nodes. It leads to the same data being collected more than once thus creating confusion when doing analysis. There is also a mismatch between the data you want to collect and what you actually do have. The abundance of data makes rationalizing the supply chain more and more difficult, without joint effort from all nodes.
Organizations that are good at using their data will win in driving big data opportunities and will have the edge over their competitors in managing their supply chain. For that to happen, they should have discipline in collecting and using data for making decisions.
3) Deploying Supply Chain Analytics One of the most popular topics in recent years is “Big Data”. Data analytics is the essential to translate Big Data into value. Data analytics is the science of examining raw data to help draw conclusions from this information. It is widely used in many industries, in particular in the financial industry, where it is often considered a competitive advantage that differentiates one firm from the other.
This capability can also be applied to supply chain management, but it is still very much at the infant stage for many companies and will take years to mature. Companies can use advanced analytical and mathematical techniques, such as data visualization, simulation, optimization and statistical analysis, to improve the company’s performance and profitability.
If we look at inventory management, an important supply chain discipline, most companies use simple equations to set their inventory targets. Using advanced analytics, such as multi-echelon inventory optimization, companies can reduce their inventory by 20-30%. In United States, only dozens of companies are currently enjoying this competitive advantage.
Related: Principals of Inventory Management
This is not a capability gap that can be solved through an analytic software purchase. To build this capability, companies will need to invest considerable amount of resources, money, and commitment. Maybe I’m taking a leap here, but I believe supply chain analytics will become a necessity in the next five years and first movers will enjoy significant competitive advantage for the years to come. With that in mind, the question, then, is are you a first mover?
Another opportunity is supply chain risk, what if you can find out and plan for what happens if a facility or supplier fails even if you don’t know when or where it will happen? This is the process behind David Simchi-Levi’s Risk Exposure Index method . By estimating how long it will take to recover from a site failure and estimating its financial impact, you can find out where the vulnerable spots are and mitigate. This process requires a considerable amount of data about the company’s suppliers, components and facilities that can be analyzed for insight into the most critical risks.
4) Improving Supply Chain Measurements One of the most common challenges supply chain professionals face today is to identify the right Key Performance Indicators (KPIs) and more importantly Key Performance Predictors (KPPs) to monitor supply chain performance, identify risk and minimize cost. It is difficult to find the right mix of KPIs and KPPs between product lines and between functions within the company. It is even more difficult to have all the stakeholders agree on the definitions and calculation of KPIs and KPPs. However, the most difficult task is to identify the right set of KPIs and KPPs which actually impact your business.
In my past engagements, I was able to build a model which emulates the client’s supply chain characteristics using advance mathematical programing and identify which KPIs their business profitability is most effected by through the use of sensitivity analysis. Once the correct set of KPIs was identified, KPPs can be developed using statistical analysis. In many cases, my clients were surprised that some KPIs and KPPs they thought were important to their business were actually not and vice versa. Companies that can identify the right KPIs and KPPs enjoy high transparency of their supply chain, ability to prevent failures in the supply chain, and lower total landed cost.
5) Developing Supply Chain Talent It is no secret that companies with exceptional supply chain performance also achieve superior financial performance. For example, companies on the Gartner Supply Chain Top 25 list consistently outperform their competitors, financially, often by significant margin. Most manufacturing companies have recognized that supply chain can create tremendous value and competitive advantage and to do so will require capable supply chain talents.
Although supply chain management is no longer a new field of study, it is difficult to find expertise. While it is easy to fill a role in supply chain, such as a Buyer, it is very difficult to find a professional who understands the supply chain, which touches across almost every aspect of the business. Supply chain talent takes years to develop because of the broad knowledge required. Companies need to find the right people, provide continuous training and allow them to learn and develop by rotating their roles in the supply chain. This requires that companies invest a significant amount of money, time and patience to develop their own supply chain talent.
Supply chain management is no longer a cost center for business. To many manufacturing companies, it is now considered the most important part of the business. In order to stay competitive, it is critical for a company to be proactive about these five opportunities that underlie their supply chain management efforts in the next few years.