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Supply Chain Management Best Practices

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by Tom Craig, LTD Management, Logistics / Supply Chain Consulting

There are issues that are driving and will drive supply chains.  Some companies, regardless of their industry or size, do well. They are successful with low value merchandise or with fashionable merchandise or whatever product. Other firms struggle or so it seems. The difference, when you drill down, is often how well a firm executes supply chain management.

Supply chain excellence does not happen by accident. Firms with outstanding supply chains have made it a part of their strategy and operations. They know that it is good business to be a leading firm in supply chain management (SCM). These companies understand what supply chain management can do to position and to differentiate themselves in the market and against competitors. They know that it can drive sales, profits, market share and capital expenditures with inventory.

Many retailers experience wide swings during economic changes. When the economy is strong, they focus on getting sales or orders out the door. Then when the economy gets weak, they are unsure what to do.  Often in the good times, sales could have been stronger; and in bad times, they did not have to soften as much as they did. One consistency with these firms is that supply chain management (SCM) is not a dominant factor in their strategy or operations in good times or bad times.

It is easy to identify firms that do not excel at supply chain management. In good times or bad times, they cannot tell you how well their supply chain operates beyond some anecdotal stories. Supply chain management is discussed in terms of freight cost. You can see the amount of dust collected on many products in their warehouses. They struggle to tell you how often their inventory turns; and if they can.

They do not have an ABC breakdown of inventory or can distinguish turns for products that are domestically purchased versus those that are sourced offshore. They have too much capital tied up inventory with low turns and, yet, have product stock outs and cannot meet all customer demand or fill timely, complete orders. Without a viable, strong supply chain, they repeat the same mistakes and yet expect different results. They have the supply chain they designed and deserve.

Firms with supply chain best excellences have that capability because they recognize that SCM drives sales, profits and market share. These retailers do not experience as significant down swings in sales and in profits during economic changes. Supply chain excellence does not shield them from the economic realities. However they do know and use SCM to drive increased sales, profits and market share. They have the supply chain they designed and deserve.

Conversely, the best in supply chain management have consistent best practices that set them apart. These practices include-

Strategy. This is where it starts. Firms with best supply chains often have valid corporate strategy that the supply chain organization builds on and around. This drives planning, tactical design, milestones and other steps in strategy development and implementation.

You must have a direction to what you are doing to deal in the global business environment. The best have a supply chain management strategy that enables them to plan the tactical operations and to prioritize suppliers, customers and products. Strategy sets the platform for supply chain execution.

Metrics. Results matter. But the right measures matter too. They know how well their supply chain is or is not performing because they have key performance indicators to tell them. Financial measures are poor ways to evaluate, direct and manage supply chains. For overall evaluation, good supply chain executives look at select metrics, such as the perfect order, for both customers and for suppliers. Namely it is an order that is delivered complete, on time and accurate. They also focus on a key enemy of all business-time. International sourcing has created opportunities for lower-cost products. However it has also created challenges as to lead-times, reliability and resultant impact on inventory levels, potential out of stock conditions and logistics costs.

Lean. The best know that lean supply chain management is more than warehouses and transport topics. It must include the total supply chain, both domestic and, especially, international. They stay focused on adding value as defined by customer, using the pull which complements SCM, keeping a customer focus, and removing the two wastes of inventory and time.

Inventory velocity and cycle time compression.   Similar to lean SCM is the emphasis on how quickly inventory moves through the supply chain—from suppliers factories through to stores.  Days of inventory are reduced, and inventory turns are increased.  Compress the cycle from the time that more inventory is needed until it is available for customers.  The impact of these two efforts is with inventory yield maximization.  SCM leaders understand there is a window of opportunity when inventory is at its highest sales value and maximum profit benefit.  They know not to miss that window and then have to sell products at lower prices.

Supplier performance. They understand that supply chain success depends on supplier performance. Supplier performance, or the lack of, can create havoc on revenue, inventory and profitability. Companies and their supply chains must control suppliers, and not let suppliers control their business.

This is the issue where the effort of lean to reduce the waste of inventory and time begins. It is critical to align performance with demand planning. Otherwise too much of the demand planning horizon is frozen by long lead times and too much variability in performance.

Reducing the number of suppliers—or not using too many suppliers because they offer what seems to be low prices but have poor performance that impacts sales, customer service, and inventory—is important.  It is a step in better performance and control of the buying process.

Segmented supply chains.  The best companies know that there is not one supply chain approach to manage the flows.  One-size-fits-all is a monolithic and inadequate method.  They have multiple supply chains based on product category, item profit contribution, market sector or other segmentation.  They may use existing distribution centers for these segmented supply chains.  But they design and manage the respective pieces differently.

Technology. They use technology as a process enabler. They know that without a strong process, many of the benefits of technology are lost or lessened. Technology is vital for supply chain execution to provide exception management, complete supply chain visibility from purchase orders placed in other countries to delivery orders.  This is much more than using some “track and trace” application.   It is seeing and managing the complex, global supply chain.

Integration and collaboration. They recognize the supply chain process requires integration throughout the organization and beyond with suppliers and customers Otherwise gaps and blind spots in the supply chain are created that can significantly hinder results. They use collaboration with key supply chain participants to provide additional focus and resources to the total supply chain.
Other. They also are involved with-

Risk mitigation. They assess the entire supply chain to identify critical areas, including suppliers, logistics service providers, ports and other potential risks that could disrupt the company's supply chain.

Green. They are working to reduce the carbon footprint whether it is energy consumption, packaging or other areas that negatively impact the environment. They see the benefits, both social and economic.
All these practices create agility and responsiveness to better adjust to changing market conditions. It shows in the bottom line while controlling capital tied up in inventory and improving sales and customer satisfaction.

Is your company among the best in supply chain management? Are you working to be among the best? If you are not, then ask why not? Increased market share, higher sales, greater profitability, compressed cycle time, improved inventory turns and reduced capital investment are good reasons to be outstanding in supply chain management.

If you want to transform from your present supply chain to develop a best-in-class program, then you must objectively assess what you are doing. Bring in outside help, if needed. Doing nothing and maintaining the status quo is a recipe for continuing problems, crises and shareholder and investor unrest. Or a Shakespeare said—

Nothing will come of nothing
King Lear
Act 1, Scene 1

Tom Craig with LTD Management, a logistics and supply chain management consulting firm, has been selected to be a member of the Expert Committee by the Lean Six Sigma Institute based in China.  Tom has written articles on lean logistics and has assisted and trained manufacturers, retailers and logistics service providers with lean. Questions on any aspect of supply chain management can be directed to him at tomc@ltdmgmt.com.

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