Answer me this: what percentage of your overall organizational costs are attributed to the supply chain? Most answers to this question generally fall into three broad categories:
- -We have no idea.
- -It depends on who you ask, but we have a rough idea.
- -We know exactly what these costs are at any given point in time.
According to Ernst and Young, an organization’s supply chain represents around 70% of the organization’s total costs. Based on that, the question becomes, How do I make my organization’s supply chain more cost efficient? Perhaps the answer is with a more flexible supply chain.
To that end, let’s take a closer look at what flexible supply chains are all about.
What Is Supply Chain Flexibility?
Flexibility in supply chains is having the internal capability to respond to short-term changes in demand. Likewise, flexibility allows an organization to respond to external supply chain disruptions in a way that minimizes their effect. (The Covid-19 epidemic is a classic example.) Agility combined with adaptability equates to flexibility.
Micro flexibility relates to how quickly a supply chain can detect and respond to issues and opportunities in the short term. The short term can range from anything between minutes to hours. The truck is late, demand suddenly surges, a customer needs some sort of special packaging or handling: how fast and how effectively can you manage and act upon these changes and requirements?
Macro flexibility refers to the speed at which an organization’s supply chain adapts and executes new programs to support changes in overall strategies or marketplace changes.
Elastic logistics is a way of managing the business that’s flexible and agile. A business should be able to expand or contract according to the fluctuating demands and cycles in the marketplace. This allows supply chain operations to adapt in as close to real time as possible.
The underlying goal of elastic logistics is to give organizations the ability to manage their supply chains more efficiently. What’s more, elastic logistics provide this flexibility whether fluctuations happen in supply, demand, or the marketplace as a whole.
The strategic imperative of elastic logistics is to
- -reduce overall lead times,
- -improve cycle times at both the micro and macro levels,
- -reduce supply chain and inventory holding costs to free up operational capital, and
- -respond to changes in demand faster to enable the organization to ship products faster.
This is done while maintaining or, preferably, improving customer service levels without incurring additional costs.
Key Attributes of an Agile Supply Chain
So, what are the key attributes of an agile supply chain?
Let’s start with flexibility, the ability to modify supply chain operations based on changes as and where they happen. Being able to adjust operational tactics efficiently is important for all supply chains. This type of flexibility not only enables growth but also makes it far easier to deal with the normal ebb and flow of demand that happens daily, weekly, and monthly.
Another characteristic is being swift, the ability to implement changes efficiently and easily without disrupting normal business operations.
Decisiveness is where data becomes important, as data-driven decision-making is a key component of supply chain flexibility. This makes real-time data availability critical. The organization needs to be able to see changes as they’re happening, not after they’ve already happened.
Additionally, being alert at the organizational level is another important attribute. This comes down to supply chain visibility. If an organization can’t see what’s happening as it’s happening, it won’t be able to respond as proactively as possible. This brings us back to data visibility. Yet again, a lack of real-time data equates to low visibility, which in turn makes alertness near impossible.
Making data accessible to all key supply chain stakeholders is key. They must be able to see what’s happening as it’s happening. Stakeholders should be referencing the same information or data. All those stakeholders acting on supply chain developments must have a single source of truth. Without that, all you get is misinterpretation, confusion, and disagreement, which slows everything down.
To sum up, flexible supply chains must have access to real-time data that alerts them to any changes. This ensures that the supply chain stakeholders make informed decisions that can be swiftly implemented.
What’s at the Core of Supply Chain Flexibility?
So, what’s at the core of supply chain flexibility?
You guessed it: it’s all about the data. In addition to enabling supply chain flexibility, data allows organizations to cut costs in their supply chain. Data and data analytics enable the organization to see where it’s at. The data provides a reference point or a baseline. Organizations can also get snapshots of what’s happening at any given point in time. These can give further insight into specific events.
All the key stakeholders in the supply chain need to collaborate. Such collaboration needs to include third parties such as key suppliers, transport providers, etc. In short, the players that either contribute sizable costs to the supply chain or have a significant effect on the organization’s success, performance, or profitability as a whole.
Automated data collection and advanced analytics build more flexible and responsive supply chains. Having reliable, up-to-date, accurate master data in several key areas is incredibly important. For example, integrating SKU, supplier, and customer data with transactional data provides incredibly deep and useful insights on where you can strengthen your supply chain.
Let’s take a closer look at a few of these areas, as these are often the ones where you can significantly reduce costs.
Categorizing SKUs as fast, medium, and slow movers is very useful. To get more granular information, you can break them down further into subsegments (e.g., very fast, medium-fast, and the slowest of fast movers). It’s important to have a multidimensional view of SKU master data. For example, you might look at SKUs by their margin: high, medium, and low. Then, have a look at lead times of various categories of SKUs.
Sales Order Profiling
Another useful way to organize your data is to profile sales orders. What do the order sizes look like? Your data can track one, two, three, or more line items and the quantities thereof, order profiles by distribution channels, online orders, retail store orders, B2B (corporate) orders, etc.
For supplier performance, you can look at contract compliance, lead times, on-time deliveries, purchase order, and invoice accuracy, ease of doing business with, etc. Are suppliers properly segmented, strategic partners versus simply transactional suppliers? Are there too many, and which ones are unreliable or nonperforming that could be completely culled from the organization’s portfolio?
Transport and Distribution Costs
Data can also give you visibility into whether deliveries are in full and on time or the number of orders going out the door daily, weekly, monthly, etc. You can also track truck utilization, the average number of drops per delivery route, and delivery lead times.
Using technology to automate business processes and data collection is a smart move. Having all relevant data in a single place enables the organization to drill into this data to identify areas where it can make improvements and reduce or remove costs altogether.
The purpose of synchronizing the planning process is to keep forecasts and expected demand aligned, which, in turn, keeps inventory properly sized. Having the right quantity of inventory in the right places at the right time allows the organization’s supply chain to function efficiently.
Operational Model Design
Having the right operating model defines what resources you need to allocate for any given time frame. What skills are sourced and where work is performed is part of that model. As customer demand and their preferences change, having the right operating model can drive efficiency and productivity. Your operating model needs to allow you to enact changes quickly. Organizations looking to have a flexible supply chain need to ask themselves if they’re using the right operating model that consistently gives us optimum results.
Stretching Dollars With Flexible Supply Chains
According to McKinsey Digital, AI-powered forecasting can reduce errors between 30% and 50% in supply chain networks. This level of improved accuracy can allow you to decrease inventory out-of-stock situations and warehousing costs by around 10% to 40%. In turn, this can lead to up to a 65% reduction in lost sales.
The estimated impact of AI on the supply chain is between $1.2 trillion and $2 trillion in manufacturing and supply chain planning. Accurate demand forecasts help supply chain teams and stakeholders focus on strategic issues rather than firefighting to reduce or increase stocks and headcount to manage unexpected demand fluctuations or unexpected events.
Building out a strong analytics function on a foundation of trusted, accurate data is key to enabling your ability to intelligently remove costs from your organization’s supply chain while retaining and improving its flexibility. Simplifying and rationalizing product portfolios, rethinking sourcing strategies, improving supplier relationship management strategies, reviewing the organization’s supply chain topography and network, and tuning the organization’s operating model while synchronizing the planning will go way further than merely stretching supply chain dollars.
The traditional level of competition—company versus company—is no longer relevant. It’s supply chain versus supply chain in today’s world. With an agile, flexible supply chain, organizations have a sustainable competitive advantage and an absolute goldmine of opportunity to explore and exploit.
This post was written by Mark Vernall. Mark is a supply chain specialist with over thirty years of experience in the field, working across many industries as a consultant, advisor, and project manager. Mark has a high level of expertise in business process re-engineering, change management, and the selection and implementation of advanced supply chain systems. He is also the Senior Responsible Officer & Founder of Supply Chain Specialists 4 Hire.