While the integration of your external supply chain is critical, companies should first make sure that their internal supply chain is truly integrated and collaborative to reach the full benefits of a lean supply chain.
While there has been much talk over the past 10 years or so about “collaboration,” much of it has been focused on external supply chain collaboration. It seems that many companies neglected to get their own houses in order before looking outside their own supply chains, according to a University of Tennessee report entitled, “Bending the Chain: The Surprising Challenge of Integrating Purchasing and Logistics.”
The report states that “organizations that closely integrate their purchasing and logistics functions deliver better business results… [but] many firms fail to capitalize on this opportunity and have supply chains where purchasing and logistics operate in ‘silos’ with little cohesion.”
Even though 50% to 70% of an organization’s costs come from logistics and purchasing (and have a major impact on up to 80% of its working capital through inventory and accounts payable), logistics and purchasing often won’t collaborate with each other.
The report points out that “when the purchasing and logistics functions are merged together, companies may realize increased levels of functional and financial performance such as greater efficiency, reduced complexity and lower operating expenses, cost of goods sold, and inventory.”
From their survey of 180 professionals, the UT researchers found that:
- “While purchasing and logistics are both typically found in a supply chain or operations organization, they are disconnected and operate separately.”
- “Both purchasing and logistics are well aligned to the business unit’s strategy and activities, but not nearly as well aligned to each other.”
- “Despite formal organizational links between purchasing and logistics, their interaction is typically informal and unstructured.”
- “Maintaining open lines of communication is the most widely used technique to foster integration.”
Best practices to avoid these pitfalls include:
- Having common metrics throughout the supply chain organization.
- Offering Incentives for everyone to not only understand their function but others’ functions within the supply chain.
- Using interdisciplinary teams with processes and systems that support those activities.
To be truly effective and lean, the supply chain organization not only needs collaboration, which refers to the frequency at which a member of a key function actively works on issues with members from the other key functions, but also requires internal integration, which also requires:
- Integrated systems and proper organization.
- Shared goals—the extent to which the manager of each key function (purchasing, operations and logistics) is familiar with the strategic goals of each of the other two focal functions.
- Cooperation, which is measured by the frequency of requests from other focal functions fulfilled by the members of each focal function.
So, while the integration of your external supply chain with customers, partners and suppliers is critical in today’s global competitive environment, companies should first make sure that their internal supply chain is truly integrated and collaborative to reach the full benefits of a lean, efficient and effective supply chain.