Opportunity in Chaos: A Better Path to Supply Chain Excellence

Aug. 4, 2017
A winning strategy is to focus on driving just the supply chain improvements that truly matter to your customers and your bottom line.

Abe Lincoln once told a story about a frontiersman who had lost his way in an uninhabited region on a dark and stormy night. The rain was torrential and was accompanied by terrible thunder and lightning that encased the evening sky like an electric spider web. To increase his trouble his horse halted, being exhausted with fatigue and fright. Just then a bolt of lightning struck a neighboring tree, and the ensuing crash finally brought the man to his knees. He was not an expert in prayer, but his appeal was short and to the point: “Oh, good Lord, if it is all the same to you… give us a little more light, and a little less noise.”

Small to mid-size manufacturing companies sense they are in trouble. Customers want more—more variety, more convenience, more flexibility and more service. Yet satisfying them adds even more cost and complexity at a time when pressures are felt from tight labor and increasing raw material prices. Big players have steadily acquired new skills needed to identify and capture the difficult improvements. But with fewer resources, smaller companies aren’t always able to run the business and keep up with the competition at the same time.

To make matters worse, the manufacturing industry is awash with wonky jargon that serves to complicate and intimidate as much as it does educate. Businesses without legions of in-house resources must worry about how to adopt “circular economy” business models, migrate to “smart” manufacturing, leverage Industry 4.0 technologies, and harness the Internet of Things. Whitepapers by consulting firms swirl about in a never-ending vortex looking for a desk to land on.

In short, there is a lot of noise out there, but not so much light.

The companies that continue to achieve competitive distance do so because they drive only those supply chain improvements that truly matter to the customer and the bottom line. Those that are falling behind don’t necessarily need to “digitize” their supply chains as much as they need to stop making tradeoffs between functional competencies. For example, heads of manufacturing try to rationalize overcapacity issues in their plants, procurement officers consolidate their purchasing to leverage scale, and logistics managers seek to cut costs and improve delivery rates at their scattered warehouses. Such piecemeal efforts, however, won’t make much difference unless they’re part of a broader operational-improvement effort.

Too often, improvement in one area translates into chaos in another.

The answers for small operators who don’t have the resources to keep up with the Joneses lie not in adopting management fads but in shoring up common areas of opportunity that are ripe in value. Businesses that can execute these supply chain strategies have an opportunity to become the overall market leaders.

Minimize Self-imposed Volatility

If there is one common headache shared across all businesses, it is missed forecasts. There are, as the old joke goes, two methods to get an accurate forecast, but neither one works. A big reason for this is that forecasts are typically cannonballed by two forces of volatility: one that is market-driven and the other that is self-induced. Companies that have straightened out their forecasting woes have rooted out their own volatility drivers.

One real example: Company A discovered that 30% of its forecasting problems stemmed from stockouts. Upon further review, the underlying reason for the outages was the plants had no knowledge of sales promotions and thus had little reason to create inventory. The takeaway was to minimize the self-inflicted chaos and then invest in reactive measures like production flexibility to handle the rest.

Prioritize Key Customer/Product Combinations

Collaborations between customer and manufacturer have proliferated in recent years as supply chain improvements have become exponentially harder to come by. Companies without a sales and operations planning group can barely find the time to find the right mix of products and services to protect their customer bases.

However, in a short amount of time (at little to no investment), an operator of any size can implement a “consumer value” approach, which means that customers are prioritized based on profitability and strategic importance while also sorting products on volume demand variability. The “sweet spot” focus for the business is found at the intersection of these products and customers, which should then be serviced at the highest priority.

Periodically Redesign Your Logistics Network

Conventional wisdom states that concentrating inventory in fewer distribution centers leads to inventory savings. However, centralization usually increases logistics costs from underutilized capacity and longer distances. Given the significant position of transport costs on most P&Ls, suppliers can’t afford to ignore inefficiencies in their logistics operations. A company should periodically design its network (every few years) based on precise knowledge of what customer types need and which activities add value.

To maximize on the optimum profitability, businesses intending to compete must lean on a robust model that incorporates all relevant variables and constraints. Supply chains can typically reduce logistics costs by up to 7% while maintaining or even raising service levels with an in-house linear program model.

The pace at which supply chains have been incorporating new business models has greatly accelerated over the past 10 years as gains in technology have boomed. Now more than ever, supply chain management is evolving into a cross-functional activity. Teams will have to interact more closely with other functional areas to identify the factors that influence self-induced volatility, customer profitability and network hemorrhaging, and agree on actions to manage them better.

The answer in this era is not subscribing to complicated precepts but being able to translate information into action and using language that is easy to understand.

Take it from Honest Abe.

Ryan Brown is the founding consultant at Next Level Essentials LLC., a profit improvement practice that seeks to help operations minimize landed costs, maximize margins and streamline the problem-solving process.

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