Why Your Business’ Success Depends Upon Your Supply Chain (Part 2)

Read the first part of Why Your Business’ Success Depends Upon Your Supply Chain here.

4. Supply Chain Costs

The cost of meeting demand is one of the most telling ways in which the supply chain matters to business success. Supply chain outlay can make up a large proportion of product costs, while excessive inventory in the system can tie up working capital and stifle cash flow.

Investigating the costs of serving customers is one way to understand the way supply chain costs affect business success. The use of a methodology known as “cost to serve analysis” often reveals shocking realities about supply chain costs.

By understanding which of your customers are unprofitable, or yield minimal profits, you can take steps to reduce the cost of serving them. The same applies to certain products in your range, some of which will inevitably incur more costs than others in the process of manufacturing or buying, storage, and delivery to customers.

In all this, it’s essential to recognise that the line between appropriate and excessive supply chain cost-cutting is a fine one. Indeed, rather than focusing only on cost-reduction, your emphasis should be on trimming away processes and activities which add no value. Some of the ways by which poorly managed supply chain expenditure can inflate product costs are listed below:

• High transportation costs
• Procurement costs
• Inventory and storage costs
• Waste in the supply chain
• Inadequate inventory management
• Poor forecast accuracy

These are all areas to examine in detail if you want your supply chain to support rather than hinder overall business success. A great deal of cost can be saved not by making cuts per se, but by improving, streamlining, and optimising the supply chain.

In case you think this an idle assertion, the results of a 2014 survey conducted by PwC support it. They revealed that businesses with optimal supply chains have 15% lower supply chain costs, less than 50% of the inventory holdings, and cash-to-cash cycles at least three times faster than those not focused on supply chain optimization.

5. Supplier Performance

The supply chain, as its name suggests, is only as strong as its weakest link. Unfortunately, some of the links are unlikely to be under the direct control of your business organisation. To some extent, your suppliers hold your business success (or lack thereof) in their hands. That’s why it’s essential to work in collaboration, at least with primary suppliers, to try and minimise supply chain uncertainty.

Uncertainty in the supply chain costs money and impacts customer service, making it a particularly disruptive factor in overall business performance. Collaboration between your organisation and its key suppliers is the only sure protection against supply bottlenecks and inventory shortages, both of which can otherwise get in the way of business success.

At the same time, there is also a need to manage supplier/buyer contracts and agreements effectively.

Remember that in your customers’ eyes, there is no distinction between your suppliers’ performance and that of your own company. Best-in-class companies have recognised this fact for a while now and have responded accordingly with positive results. Not only have these organisations leveraged supplier management to maintain exemplary service standards, but they have also achieved reductions in supply chain costs.

According to a study conducted by Aberdeen group in 2013, top-performing companies that implemented supplier performance management initiatives have achieved average cost savings of around 12%.

Supplier performance and relationship management today though, extends beyond maintaining availability and streamlining the flow of materials through your supply chain. There is also the question of ethical procurement and purchasing to consider.

6. Ethical Procurement and Corporate Responsibility

Recent times have seen a significant uptick in the number of commercial brands suffering tarnished reputations and revenue-loss because of unethical practices among their suppliers. Moreover, corporate responsibility issues like this can affect any business, even if unethical supplier practices exist way down in tier 2 or tier 3 of the supply chain.

If yours is a small or young enterprise trying to find its feet, public knowledge of association with unethical suppliers might very well lead to financial disaster and business failure, as customers react to what they perceive as your wrongdoings.

If your supply chain operates across international borders, out of sight must never be out of mind as far as supplier management is concerned. Any performance management program you implement should therefore focus on the integrity and ethical responsibilities of your suppliers’ sources, as well as on service performance and collaborative initiatives.

People, Robots and Our Changing Industry – What’s next in Manufacturing?

Like all of the supply chain success factors described in this post, this is an area in which particular knowledge and skillsets are required to drive improvement. If you’re concerned that your company lacks the necessary resources, it can be well worthwhile to enlist help from external experts.

5 Examples of Supplier Ethics Scandals

To reinforce the fact that no company can afford to neglect matters of ethics in procurement, here are five examples of brands that were harmed by the negligent or unethical behaviour of their suppliers:

• In 2014, McDonalds’ fast food sales in Asia fell by 7% after one of its Chinese suppliers was found to be selling expired meat.
• In 2016, ASOS, Marks & Spencer, and Uniqlo were all implicated in scandals relating to unsafe working practices and child labour in their supply chains.
• Also in 2016, Coles and Woolworths in Australia were both named as purchasers of fruit from Australian farmers engaged in the employment of illegal workers from overseas.
• In 2015, Nestlé discovered that fish products it was procuring from Thailand for use in its cat food brands were sourced from suppliers engaging in forced and slave labour.
• In 2017, Justice, a girls’ clothing retail chain, had to react swiftly after a media investigation alleged that one of its makeup products contained traces of four different heavy metals, as well as asbestos.

In none of the above cases was the retail brand intentionally purchasing from unethical or negligent suppliers. Nevertheless, merely being named in connection with the malpractices was harmful enough, illustrating why due diligence in procurement is such a critical factor in supply chain and business success.

7. Inventory Management

Few are the businesses that don’t rely on inventory. Even if you operate a service, rather than a product-oriented enterprise, the chances are that you have some need to move items through a supply chain.

It might be spare parts, consumable items, or perhaps equipment, but if it’s something you need to store and transport, then it requires treating as inventory and managing accordingly. Of course, if your company is providing products, the need to manage inventory efficiently is paramount. Just as customers are something on which your business depends, so is inventory.

In the last section of this post, we looked at the importance of suppliers as a factor for business success. However, effective management of inventory once it passes from suppliers’ hands to yours, will also make a massive difference to the fortunes of your business as a whole.

Why is inventory management so important? Primarily because it can dramatically affect working capital and potentially, cash flow too. If you want to reduce working capital within your business, you should undoubtedly take the time to investigate inventory management and ask the following questions:

• Is it possible to improve forecast accuracy to reduce the need for holding safety stock?
• Can you find a way to reduce inventory holding costs?
• Are you taking sufficient steps to prevent the costs of inventory obsolescence?
• Are you achieving the shortest possible lead times from suppliers?
• Can you speed up customer delivery lead times?
• Are you losing money as a result of inventory shrinkage?

The answers to these and similar questions will help you to secure business success by improving your working capital situation. You should also find that improvements in these areas will support increased levels of customer service and make your business more profitable.

8. Returns Can’t Return Without a Supply Chain

Like it or not, the ecommerce explosion has increased the likelihood that your enterprise, especially if you are a retailer, will experience far more returns from customers than it might have a decade or two ago. Without an adequately effective supply chain operation, how will you accept those returns and process them, or extract the value remaining in the products?

For this, your supply chain is essential and, more to the point, its design and performance impact every facet of the returns process, including customer experience, cost, and, as mentioned, value recovery.

Let’s take a look at how each of these elements depends upon an effective and efficient reverse supply chain.

Customer Experience

Your reverse logistics process must allow your customers to return unwanted, incorrect, or faulty products with ease. That typically means your operation must include the collection of returns from customers’ homes, or at least allow the customer to drop off the returning product at a facility in her locality.

You may be able to have customers package their returns and send them through the postal network, but that’s still a supply chain consideration, and you still have to decide where your business will receive and process them.

Of course, the mailing of returns is not an option for every enterprise. If you sell large items of equipment to other businesses, or large appliances to consumers, for instance, you must either have access to in-house transportation assets or a partner with the necessary expertise. These types of returns might involve uninstallation, disassembly, or the ability to use on-site mechanical handling equipment.

Reverse Logistics Cost

Given that 79% of consumers expect merchants to foot the bill for shipping product returns, the cost-effectiveness of your reverse supply chain will matter a great deal to your business’ bottom line.

Remember that unlike outbound logistics, opportunities for process optimisation are scarce when it comes to returns, since they are unplanned and erratic in frequency. Keeping costs under control is a challenge, meaning you will need some talented minds in your reverse supply chain management team.

Value Recovery

What will happen to your product returns when they are handed over by the customer? Your reverse supply chain must include processes to route returns to specific locations, dependent on the reasons for return.

For instance, if a customer returns a product because it is unwanted, you might want to bring it back to your fulfilment centre and reintegrate it into your sales inventory, while a damaged product might need routing to a factory for reconditioning or repair.

Some products might need writing off and sending to an appropriate facility for disposal, while you may want to resell others through secondary markets.

Whenever returning products are likely to be resold, either with or without some restorative process, it will be critical to ensure that your reverse logistics solution will protect them and make sure you receive them in the best condition possible. That might not be an issue if you operate from distribution centres close to your markets, but will require much more thought if you are an ecommerce merchant selling across borders.

Get Your Hands on the Wheel and Drive Business Success

If you want to be sure your business will be not just surviving, but thriving over the next five years and beyond, your supply chain must be at the centre of management attention.

If you can honestly answer “yes” to the following questions, you have little cause for concern:

• Do you have closely aligned supply chain and business strategies?
• Do you regularly review and optimise your supply chain network?
• Are you continuously and actively seeking supply chain service improvements?
• Do you have visibility and control of supply chain costs?
• Have you implemented a supplier performance management program?
• Are you taking steps to mitigate risk in your supply chain?
• Is your inventory being managed effectively?
• Do you have adequate, efficient processes for product returns?

In reality, few companies, even those long-established, can unequivocally answer all these questions in the affirmative. That’s no slight toward the professional capabilities of their leaders. Developing a best-in-class supply chain is no easy task, and it takes time.

The time is worth taking though, and investments worth making, even if you need to supplement the skills within your organisation with those of external experts to address some of your supply chain issues and challenges.

So If you had to honestly say “no” in answer to any of the questions above, you probably have some golden opportunities to improve your supply chain operation—and drive your business toward a bright and prosperous future.