On-going supply-chain constraints driven by shortages in basic supply materials have made headlines daily due to their impact on an already bumpy economic recovery from global distancing measures. To manage through such time, maximizing supply chain efficiency becomes more important than ever.
Improving supply chain efficiency by following these 5 critical steps is key to not only winning but also increasing market share in the current economic environment
Supply chain and the importance of efficiency
A supply chain is a process of making products to sell. It includes all stages from sourcing the materials to delivering the finished goods.
Business leaders’ ability to anticipate customer demand for products and factors impacting supply constraints are crucial in fulfilling orders at the most cost efficiency while providing the best leveraged competitive advantages.
Efficient supply chain management is a critical element of inventory management as part of the overall business strategy. Every stage of the supply chain management leaves room for cost savings, better customer loyalty, and improvement of competitive advantages by providing in-demand products on time.
5 steps to improve supply chain efficiency
Step 1: Establish an effective supply chain KPI
Like any other business factor, having an effective KPI can help to identify potential problems on a timely basis to allow quick adjustments of undesired performance.
While every company will have different priorities, a number of metrics can be used to measure supply chain efficiency. Commonly used metrics include the following: Days Sales Outstanding (DSO), Days of Inventory (DOI), Cash Conversion Cycle (CCC), and Perfect Order Measurement (POM).
Among those, one of the most used KPIs is DOI (Days of Inventory). It is a calculation of the number of days your inventory can provide for sales. It helps to balance the cost of inventory and supply shortage risk. The cost of inventory consists typically of the cost of funds used in inventory purchase and “excess and obsolete” (E&O) risk, which is the potential write-offs in the case of not being able to sell through inventory products.
For example, if your average sales are 200 glasses each day and you have 1000 glasses in the inventory, then DOI = 1000 / 200 = 5 days.
Let’s say you spent $10,000 to purchase those 1,000 glasses for a year of sales and your average interest rate is 5%, then the cost of fund is $10,000 * 5% = $500
Further, if after a year of sales, there are still 20 glasses left that cannot be sold and you are forced to write off such inventory, the cost of such write-off (or E&O) is $20*10=$200
Based on the above, the total cost of inventory is $500 + 200 = $700
As you can see, the less inventory, the lower the cost of inventory. Supply chains benefit from the optimal balance of such inventory cost and sales.
Step 2: Measure DOI performance
Now we established DOI metrics. Naturally, we want to track DOI and decide if DOI data shows a potential risk of supply and demand fulfillments. To correctly measure performance, we need to analyze customer demand planning coupled with lead time analysis.
We may assume a DOI of 10 days has been working well in getting the inventory to the business as well as fulfilling customer orders on time. This metric, however, could change drastically during seasonal sales if not integrated with a forward-looking analysis.
For example, if data shows that during a July 4th holiday in the U.S., the sales of your products in flag colors are double (400 per day) of the normal run rate sales (200 per day), you will want to allow your DOI to ramp up twice for this particular product compared to regular color products.
Now that you know how many products you need, the next step is to decide when you would like to see DOI increase. This is called lead time analysis. Taking the same example, if sales on the same product in the past start picking up 2 weeks before the holiday due to the shipping time needed, and it takes 1 week for your supplier to get raw material in increased production, this means the procurement should start at least 3 weeks in advance to keep DOI intact.
Step 3: Build robust demand planning
Demand planning is the most important factor in establishing an effective DOI strategy. It is a process used to understand customer demand considering both internal and external factors.
Two major steps in demand forecasting are internal sales data to understand run rates and seasonality and external industry data that may impact sales and shift the market demand for your products.
Driving an accurate sales forecast has the most impact on subsequent inventory planning. Contrary to some salespeople who think it is “just another distraction from selling,” it is the backbone process that ensures product availability customized to the demand. This requires sales representatives to maintain strong and accurate data on deals and opportunities, and being accountable for such forecasting accuracy builds fundamental supply accuracy.
External economic shift data should be part of overall assessments as well. As geoeconomics develops, analyzing the upcoming potential risks can help to bring a solution before it gets too late. A simple example that we are all aware of is the shipment delay due to quarantine policies. Those who seek multiple sourcing with increased inventory had a chance to win the market share due to supply strategic planning. At Alibaba.com, you can have a real-time check of the Freight Market Update to learn upcoming potential risks, which will help you be well positioned in managing supply risk.
Step 4: Translate sales forecast into a supply plan
Now that we have collected both internal and external data, we are ready to analyze and translate it into a supply plan so that procurement can take action to get products into the sales channel.
What sales forecast gives us is the finished product needs. Based on the product families driven by variables or configurations, a demand volume and variability will be determined. Seasonality analysis drives a monthly demand breakdown. Other factors such as shelving measures and zone spaces will be included in the inventory calculations.
Taking the same example from above, sales forecasts will include 1,000 glasses with a mix of color, shape, and other variables information. With such a demand plan, a supply plan of such expectations will be formed. By incorporating the lead time, procurement takes the next step to drive the purchasing actions.
To ensure the business’s continued success, a continuous pipeline should be put in place throughout all functions of the company. This pipeline will identify the potential spikes and lost deals to increase the accuracy
Step 5: Choose effective suppliers for strong relationships
When choosing a supplier, the following assessments should be conducted to measure their performance and determine if they meet the organizational needs.
- Product quality
- Customer services
- Lead time
- Technical ability
- Financial strength
- Environmental regulation compliance
- Management approach
Such evaluation of suppliers is necessary to ensure the best contracts in terms of quality, costs, flexibility, and reliability.
Once the supplier relationship is established, continuing to strengthen such relationships can play a significant role in the case of supply constraints or sudden demand change.
When establishing a supplier relationship, choose those suppliers that share your goal and vision. This will motivate your suppliers to be collaborative and trusted due to a shared mindset. If your growth and your supplier growth are tied together, it is more likely that you are headed to a win-win situation. To be successful, your and your suppliers’ goals should be aligned.
To continue a strategic partnership with your suppliers, continued collaboration and systems are a must. This can include promoting a clear and consistent communication channel to drive understanding, establishing a platform that enables users to share information timely with transparency, building strong credibility in front of your suppliers through honoring the contractual obligations, and having a review system to track performance with periodic discussion on continuous improvement.
The 2020 global restrictions have had many small businesses struggling with supply shortages. Those who had closest relationships with suppliers or who had multiple supplier relationships have been able to overcome such extreme factors and keep business continued.
Start taking action today
Supply chain management is an ongoing business strategy. Even if it has brought proven success to an organization in the past, continuous measurement and examination are still necessary to ensure strategy and execution can manage through new dynamics.
Establish KPIs, drive end-to-end demand planning processes, practices, policies, and procedures, and strengthen strategic partnerships with suppliers from today to improve your business profitability and improve customer loyalty. Building long-term sales pipelines, forecasts, and supplier relationships are crucial in business continuation with the ability to raise alarm for any potential concerns. In the end, a well-managed supply chain ultimately brings in competitive advantages against other companies in the industry.