If you Google "supply chain optimization," you'll see over 39 billion results. Recently, supply chain optimization has become an increasingly hot topic among industry professionals. But what does that term really mean? More importantly, how does it apply to your business?
To break it down, the term “supply chain optimization” means operating a supply chain at peak efficiency. This is based on key performance indicators including total operating expenses and gross margin return on inventory invested. The goal is to deliver products to customers at the lowest total cost with the highest level of profit. In order to meet these goals, managers must balance the costs of manufacturing, inventory, transportation, fulfillment and customer service expectations.
Given the complexity involved, supply chain optimization is a business activity that you might consider a marathon, not a sprint. The supply chain configuration that is currently the best mix of cost and service may change over time. This could be due to fluctuations in material costs, carrier changes, customer demographics or other factors that require continuous oversight.
Companies often consider supply chain optimization when there's a significant event, such as a merger or acquisition, or when there are concerns surrounding financial results. Perhaps transportation costs are rising, or service levels are falling, and other members of your supply chain are complaining. As suppliers expand meet changing expectations, supply chains have begun to grow in an ad hoc fashion. Response to e-commerce demand has led companies to bolt on direct-sales capabilities without integrating them into other channels, eventually leading to higher costs and fragmented management.
The process for a supply chain optimization typically starts with a thorough analysis based on forecast demand, followed by the development of a production and inventory plan to meet the forecast. The study includes inbound raw materials or components, manufacturing, transportation and distribution. It's also an opportunity to examine the possibilities for better integrating e-commerce through an omnichannel strategy.
Typically, companies partner with consultants and their service providers to help manage the optimization process and implement technology and organizational changes to ensure the results that will survive in the real world.
Best Practices for Supply Chain Optimization
There are generally no easy answers when it comes to optimization. The best answers depend on a deep dive based on a company's specific situation, including suppliers, production and customers. While there are some tried-and-true supply chain optimization techniques, you can rest assured that there is no “one-size-fits-all” approach to optimizing your supply chain.
A strategic network analysis will allow you to look at a wide range of metrics including physical facilities and inventories, costs for warehousing, transportation and labor, and distribution networks. The supply chain optimization initiative will typically use the company's data to create various "what if" scenarios to uncover the best solutions for creating and storing inventory within the supply chain to minimize operating costs.
One of the goals of the optimization process is to understand the most efficient placement for inventory in the supply chain. This analysis includes balance costs for manufacturing, transportation and distribution. Your company may be able to reduce inventories due to better forecasting or just-in-time manufacturing capabilities.
A common starting point for the optimization process is looking at the reasons for creating and holding inventories under the current system. Perhaps your organization feels it needs a lot of safety stock due to inconsistent transportation or uncertain customer demand. The optimization analysis can lead your organization to develop a balance between frequently ordering small quantities or infrequently ordering large quantities. Ordering too often can lead to higher shipping costs while ordering large quantities can result in high inventory costs.
The supply chain is no longer a collection of cost centers that are an appendage to the company's core business. Today, the supply chain is a key source of strategic advantage. Cross-functional planning and communication are essential to ensure the strategy is understood and followed by all departments, backed ownership of the supply chain at executive suite level.
Academic models are useful in framing and conducting the analysis. However, the process must also take into account the realities of fluctuating materials costs, labor, transportation costs and so on. A successful optimization process requires real-world experience to guide decisions, and a commitment to continue the process. Depending on the size of the organization, the optimization plan could be revisited annually, or for a larger organization, it's an ongoing, essentially real-time process.
Keep in mind that customer requirements drive today's supply chain. As a result of the “Amazon Effect”, customers now expect shorter lead times and more responsive service, regardless of the industry. Optimal supply chain solutions aren't targeted at securing the lowest cost any more. Meeting customer expectations — within reason — is one of the main reasons for supply chain optimization.
Supply Chain Optimization Techniques
Strategic review of your supply chain network will result in a series of plans for the organization with a horizon from immediate to about five years in the future.
These plans will cover the business strategy as well as the tactical and operational implementation of the optimization plans. Of course, there should be contingency plans in place to respond to emergencies, such as material and labor shortages. These plans will help your company move from a more reactive to a proactive supply chain approach.
Strategic Planning: This process defines the overall approach for the company's goals. This step is where the inventory management, production, transportation and distribution goals are set and aligned with technology and customer service. At this level, management can examine organizational structures and areas for investment. The strategy should include forecasting customer demand to allocate resources throughout the supply chain.
This strategy must be shared across all functions. For example, if the strategy includes procuring smaller raw materials quantities more frequently, the purchasing department shouldn't invest in a year's supply so they can get better pricing.
For many companies, the pace of change is outrunning their ability to keep up. Adopting new or evolved business models requires a high level of corporate agility and an appetite for change. Significant changes to an organization's structure and capabilities could have far-reaching implications for the culture.
Tactical Planning: The tactical plan should cover one to two years to support the long-term strategy by allocating resources, including the workforce. The tactical plan should include timing for each step, specific skills required and any capital requirements such as new warehouse space. The plan should also include provisions for outside resources such as consultants or service providers.
Operational Planning: This segment translates the strategy into day-to-day activities such as policies, plans and programs. The plan allocates resources and performance measurements in order to improve operating efficiency. Depending on the activity, operational planning encompasses daily, weekly or monthly activities to schedule and monitor the daily routine of conducting your business.
Contingency Planning: The contingency plan encompasses the worst-case scenarios for your business, such as severe weather events, labor problems, loss of major suppliers and vendors. Contingency plans should include any circumstance that could send shockwaves throughout your organization. The goal is to think through your response before an event occurs, helping to shorten your response time. Another goal is to minimize the disruptions internally and for your customers. Some events may occur almost daily — transportation delays, material shortages — so your responses may already be well honed.
Begin your analysis by identifying the current state of the supply chain, including facilities, transportation costs and relationships, inventory levels and locations, and customer distribution facilities and practices. This is the baseline for the rest of the analysis, so it's essential that it be as detailed and accurate as possible.
Computer models run alternatives to compare costs and capabilities for various options. Keep in mind the potential for growth when choosing facilities and inventories. You don't want to constrain your ability to serve customers in the near future.
Consider risk factors such as impact on customer service, ease of implementation, profitability and cash flow implications. Be sensitive to the potential for pricing increases and other factors that could throw off the ROI of the plan. If a low-cost warehouse raises its prices three years into a five-year contract, your strategy could be in jeopardy.
Partner with a 3PL for Your Supply Chain Optimization Strategy
For your company, an optimization initiative doesn't happen often. But for an experienced third-party logistics provider, it's just another day in the office. You can tap into their hard-won experience and apply it to your organization. While there aren't easy answers, the process used to find the solutions can be reused, and there are some techniques that do carry over among companies. For example, building relationships with transportation carriers and warehouse providers is a proven strategy for better results regardless of the industry.
Relationships between shippers and 3PLs are moving from a transactional nature to collaborative nature, resulting in improved services and optimized supply chains. A 3PL can help optimize your network to create a dynamic and responsive supply chain. Warehouse Anywhere can act as a 3PL to assist shippers with analyzing their inventory needs and develop creative solutions to move products closer to customers and reduce operating costs. These solutions can help solve your last-mile delivery challenges as well as position your company for greater participation in the e‑commerce channel. Our solutions help speed your products to market and scale your distribution footprint based on demand.
When you're ready to find out more about the benefits of supply chain optimization, contact myself or one of Warehouse Anywhere's experts. My team and I are prepared to help your company perform better through optimization.