Supply Chain Management Best Practices

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.