How Effective Supply Chain Management Gives Your Company the Competitive Advantage

Einar Karl Þórhallsson, Chief Operations Officer, details the top five ways that effective supply chain management will give your company a competitive advantage in its business sector. If you have any questions or comments regarding this blog, feel free to leave a comment below or send us a tweet @AGRDynamics.

Effective logistics and supply chain management can provide a major source of competitive advantage in today’s marketplace. Put very simply, successful companies either have a cost advantage or they have a value advantage, or – even better – a combination of the two.

Cost advantage gives a lower cost profile and the value advantage gives the product or offering a differential ‘plus’ over competitive offerings. In practice, what we find is that successful companies will often seek to achieve a position based upon both of these advantages.

Through the use of five different logistics and supply chain management tools, companies have the potential to achieve a position of both cost advantage and value advantage over their competition.

1. The essence of assortment planning and item categorization

Challenge:

Most business organisations find that the range of products that they offer to the market has a tendency to grow rather than reduce. The rate of introduction items seems to outpace the rate at which existing products are eliminated. The general effect of this mushrooming is to extend the ‘long tail’ of the Pareto distribution (i.e. more C items than A items).

In retail: Typically as more variants are added to the range the demand per variant will reduce with a subsequent impact on forecast accuracy leading to large inventory build up.

Other consequence of the mushrooming can be:

1. Lower performance in warehouse (efficient storage, picking)
2. More manual work in purchasing (maintaining data, review proposals, less quality in forecasts)
3. Buyers overwhelmed with data; Overview lost and no focus
4. Higher inventory cost

One of the keystones in an effective supply chain is to have a properly defined product range that is in agreement with the general vision of the company.

To put in place ongoing processes to monitor/control your product range can be a highly effective way to improve your supply chain, especially if coupled with systematic inventory level analysis.

Tips and tools:

1. Categorize items by importance (grading)
   • ABC analysis (rule of thumb)
     • Have a big set as possible without being comparing disparate items
     • Keep it as simple as possible
     • Be consistent. Don’t have many different ABC analyses, e.g. different for sales and purchasing.
     • Mark D items that have not sold in period
   •  Apply different purchasing methods for important vs. non-important items
   • Items can be important irrelevant of ABC grading
2. Analyse closed/open items by stock availability and sales
   • Use it as input to discontinue items.
   • Identify overstock items
3. Put in place systematic process to monitor the product range.
   • Implement a simple but strict process on opening or closing items in ERP system
     • Retail: have a fixed number of items in each store (new item means you need to close an items)
4. Get rid of dead stock – focus on the long tail
   • Utilize promotions to get ride of these items
   • Grade by importance
5. Do an ABC analysis per store
   • E.g. items that are A items in all store but one. Investigate:
     • Not on display in that store
     • Should be taken out of the range (not a fit because of location), etc.
   • Use it to help define what should be in core product range (i.e. in sale in all locations)

2. Effective procedures for supplier evaluation

Challenge:

Many people are probably familiar with having a combative relationship between suppliers and vendors, which can lead to all variety of problems. Furthermore the size of the supplier base can add to supply chain complexity by increasing the number of relationships that need to be managed, as well as increasing total transaction costs.

The harsh reality is that it makes no difference in which business sector you are. Suppliers and vendors play a key role in your company’s success (and generally you are stuck with them). Having a formalised system in place to track and evaluate supplier and vendor performance can be effective in achieving superior customer value at less cost. It also opens the door for higher level of collaboration with your supplier.

Tips and tools:

1. Use the company’s overall supply chain management vision as basis for the supplier evaluation work.
   • Is the focus on many vendors and low price?
   • Is the focus on few vendors long-term relationship based on quality and reliability?
2. Try to understand what value-add is a given vendor bringing to your company
3. Ask yourself how evaluation is going to be used? Before the system is devised. Here are examples:
   • Aim: To decrease number of vendors (increase focus). Use it to identify weak links to cut loose.
   • Aim: To increase partnership, long term relationships. Use it to be able to give feedback to suppliers and to identify improvement areas that can be done in partnership with the vendors. Best way to gain trust is to show interest.
   • Aim: To help decision making in closing vendors and product range definitions. E.g. similar products from many vendors.
   • Aim: To improve the quality data that is used e.g. in order qty calculation, e.g. vendor lead time definition.
   • Aim: To monitor supplier performance.
4. Important to have backing from top down
   • Involve top level in the work
   • Should not be a pet project from one department. Ownership is important but must involve many departments.
5. Keep in mind there are many ways to do a supplier evaluation.
   • Do not try to cut corners and copy from another company.
   • Needs to fit requirements and reality the company.
6. Define performance indicators based on the company needs (and your customers)
   • Set a frame reference from what you expect from the supplier.
   • Usually requires introspection (self-examination) to find out what are actual needs and expectation of the company and your customers.
   • Then you can define what to evaluate and how.
7. Start as soon as possible and remember this not a one time project but needs continuous improvement
   • When you have the methodology, frequency, and tools ready, you can start.
   • Needs continuous improvement to be successful
   • Start with key suppliers and key indicators go from there
8. What is the role of the supplier in the process?
   • Is it a one-way street or do you want to get feedback from the vendor?
   • Turn the vendor into partner. Examples of questions:
     • Are we paying our bills on time?
     • How is the communication between the two sides?
     • Do they understand our expectations?

3. Performance measurement and communication

Challenge

It is often said that performance measurement shapes behavior. Often these measurements are based upon departmental budgets and are underpinned by objectives such as cost minimization, productivity improvement etc. Whilst the face value of these objectives may appear desirable, in reality they are not necessarily helpful in achieving superior customer value at less cost, for example high turnover can lead to increased number of stockouts.

In the past, the focus in performance measurement was primarily on efficiency, i.e. lower costs, better use of capacity reduced inventories and so on. They are still worthy goals but the priority has shifted. Today the challenge is to create strategies that enable to you to become the supplier of choice.

Tips and tools:

1. Utilize appropriate performance metrics
2. Strike a balance between cost vs. customer service
   • Select one that relates to inventory to sale (e.g. inventory turns, days of supply)
   • Select one that focuses on customer service (e.g. number of stockouts, perfect order achievement, delivery ratio)
3. Benchmarking
   • Ultimate measuring rod is the customer (customer perception of the performance is paramount).
   • Compare ourselves to the ‘best in class’
   • Not just outputs that should be measured but also the processes that produce the output.
4. Common mistake is to define too many KPI’s.
   • Difficult to monitor – too much noise
5. Use KPI’s for motivation.
   • In sales, it is common celebrate “victories”
   • Celebrate victories on operational level
6. Know what your KPI’s are – make sure they are well known

4. Building a framework for Exception Management

Challenges

Today’s marketplace is characterized by higher levels of turbulence and volatility. The wider business, economic and political environments are increasingly subjected to unexpected shocks and discontinuities. As a result, supply chains are vulnerable to disruption and, in consequence, the risk to business continuity is increased.

One way of dealing with this and minimizing risk is to build a framework for an effective exception management. This can also be of enormous help in dealing with complexities in product range mushrooming that we discussed before.

Simply put, the main purpose of Manage by Exceptions reporting in logistics and supply chain management is to bring to the attention of the managers statistically relevant anomalies in the data. If this done effectively it can greatly reduce the workload and enable managers/buyers to spend their time more effectively in areas where it will have the most impact.

Tips and tools

1. Create early warning reports to prevent problems before the occur
   • Expedite orders
2. Highlight items where there is opportunity to improve the quality of demand forecast
   • High forecast uncertainty
   • High/low selling last month
3. Use reports to bring forward business errors and oversights for further investigation and discovery of the root cause
4. Spot ineffective strategies that need to be improved and to spot business opportunities
5. Put in place a process and minimize the number of MBE reports
   • Who should review and monitor reports?
   • How often?
   • What is the expected action?

5. Continuous education and knowledge sustainability

Challenge

In recent years technology development has accelerated, which has had a significant impact on the way companies function and how people work. As professionals, we need to constantly maintain and improve our skills and knowledge to compete in the labor market and deliver results.

Training and education is an on-going life skill. It motivates us; it inspires us; it is a catalyst for change for the better. Successful companies seek solution through education and investment in their human capital.

Typical motivation scheme of business organisations is to reward the top performance with money. Interestingly, research has shown that this kind of reward does not work to motivate people to increase performance. Higher incentives do not lead to better performance unless the task is simple and straightforward.   If the task is more complicated, e.g. requiring conceptual or creative thinking, other motivational factors are much more important. One of those is Mastery, i.e. people have the urge to get better at what they do. If companies allow them to do that, it can be a much better performance motivator than a monetary reward.

Allowing your company to be a real center of excellence might just be your best bet to gain competitive advantage.

 

AGR Dynamics Academy

AGR Dynamics have been working with leading retail, wholesale, distribution and manufacturers, driving change through process and technology. Through practical experience coupled with leading course materials based on solid theoretical foundation, AGR Dynamics are able to deliver training courses based on facts as well as theory – using the best of both worlds.

AGR Dynamics regularly partners with the University of Reykjavik to provide courses in Supply Chain Management.