What are the objectives of your supply chain management? What should they be? In short, the following four capture all that an optimally run supply chain can achieve.
- Cost (Lean): The supply chain management processes cover a wide scope of execution operations from managing replenishment orders to transportation and warehousing activities. Depending on the industry, the percentage of these operational costs towards the cost of goods sold can be anywhere up to 20%. Following the processes based on supply chain best practices can directly reduce these costs through better planning, optimization, and execution. Some of the supply chain planning processes also impact costs such as inventory planning. Well planned inventories can not only reduce the amount of inventory in the system thus reducing operational cash-flow requirements, they can also reduce costs by reducing obsolescence, having the right product at the right place, and by reducing the need for clearance pricing. In fact, all supply chain processes either directly impact the COGS or impact the operating cash requirements. And, in most cases, the impact of a better deployed process, automation, or optimization can be specifically calculated for obtaining financial return on the investments made.
- Flexibility (Agile): This is the second objective for the supply chain processes. Agility provides a supply chain the capability to react to the changes in demand or supply in an optimal fashion so as to maintain the service-levels and therefore, the top-line revenues. There are several processes that create such agility in the supply chains: cross-docking made famous by Wal-mart is one of them. Ability to push the selection of the destination of the inventory-in-transit to the last possible minute is the underlying concept that enables agility in a flow-based supply chain. This can manifest itself through several possible processes such as consolidation and de-consolidation centers, regional and local distribution centers, cross-docking and so on. Other processes that add to the capability of agility are sourcing and replenishment where the agility can be achieved through better visibility and collaboration among the partners in the inter-company supply chains.
- Risk: Supply chains must manage the uncertainties beyond the volatility of demand and supplies. Risk is primarily the disruption in the supply chain that is not attributable to the natural demand/supply volatility. While the probability of such disruptions is low, their consequences remain disastrous. Risk increases as the supply chains become longer, global, and need several independent corporate partners. Supply chains typically manage risk through better collaboration, visibility, and finally by developing backup plans for alternate sources of supplies if the primary supplies fail.
- Visibility: While visibility for its own sake is not an objective of supply chain management — this is a capability that must be developed to support the three primary objectives mentioned above. Visibility can help reduce costs by detecting the most inefficient processes, provide agility through showing available alternatives, and manage risk better by identifying the most critical supply paths and the impact of their failure.
Evaluating your supply chain processes can expose inefficiencies and gaps that can help achieve or enhance the results in any of above four categories. Metrics can be set to measure the improvements: while the cost reductions can be measured more precisely, the impact of improvements due to increased agility and reduced risk can also be measured by comparing the results to the historical performance of the supply chain.
© Vivek Sehgal, 2009, All Rights Reserved.
Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.