Industry Week recently ran an article that asked the question How does your supply chain stack up? Written by the Director of Corporate Partnerships from the University of Tennessee, the article summarized the main lesson learned by the Department of Marketing and Logistics since they started offering supply chain assessments in 2006.
To date, the department has performed eight supply chain audits for companies across a diverse range of industries that ranged from 100M in annual sales to 30B. Although the firms were very diverse, they found that, to their surprise (but not mine), that all of the firms faced exactly the same supply chain problems.
Specifically, they found the seven following commonalities:
- Too much product complexity
Too many models and lack of a good process to eliminate underperforming products.
- Too much slow-moving and obsolete inventory
Sales doesn’t want to reduce price because they’re measured on margin – but products lose value over time while incurring inventory holding costs.
- Supply chain considerations not part of the product design process
Design teams rarely consider inventory, transportation, or warehousing issues – just to name a few.
- No supply chain strategy
Many supply chain organizations are so consumed with the daily battles of cost control, inventory management, and customer service that they don’t plan for the future – sometimes with disastrous results.
- Ineffective matching of supply with demand
In most companies, sales is driven by revenue generation while operations strives to cut costs.
- Physical network problems
Many organizations do not have an optimal network design. Warehouses need to be appropriately placed and transportation optimized.
- Global issues and outsourcing problems
Outsourcing decisions are made everyday, but few firms consider the total cost of an outsourcing decision.
Addressing just one of these problems can lead to millions in savings. For example, a hard goods manufacturer achieved 600M in cash-flow improvements through inventory and asset optimization and another manufacturer found 5M to 10M in savings simply by restructuring its distribution network.
So what can you do? Lots. And even though the article stopped short of specifying what you can do, this blog entry is not. If you have these problems, you can start by looking into these potential solutions:
- Product Line Consideration
Look to today’s modern auto-companies. Instead of giving you 30 different options, and letting you choose from 2^30 or 1B different configurations, some only sell three or four standard configurations of a car: the base model, the value model, the extended model, or the luxury model. Assembly is efficient and product complexity is minimized.
- Pre-Launch Price Reduction Planning
Model the inventory holding cost up-front, analyze historical price trends, and pre-determine dates where remaining inventory will be reduced, marked down, and cleared. If the product happens to be composed largely of raw materials that are increasing in price (i.e. steel) and has a scrap value that increases over time, you can take this into account as well and determine a formula that is to be run on predefined dates to determine the appropriate price decreases. This is very important if you are in electronics, where you can predict that in 6 months the product will have lost 20% of its value – that tells you that a 10% reduction in 3 months might be better than having to fire-sale the product in 7 months.
- Include supply chain in product design
When different options have dramatically different material, inventory, warehousing, or transportation costs – supply chain can point this out.
- Sync the Plans
Every time the business plan is updated, update the supply chain plan as well to meet the goals of the business plan. Don’t have a supply chain plan? Get one!
- Forecast with Foresight
Make sure forecasting is done by an integrated Sales & Operations Planning team that includes the head of sales, the head of marketing, and the head of supply chain – and that every department works off of the same forecast.
- Network Modeling
Model your current network, and re-run the network flow model at least once, if not twice, a year to optimize flow – and do a complete network re-design exercise every three years to determine the optimal network design and if any changes need to be made.
- Outsource Intelligently
Don’t outsource anything you haven’t optimized internally first – displacing a problem doesn’t solve it, it just makes it worse. If you need help getting your house in order, bring in an expert to help you.