Improving Supply Chain Efficiency to Cut Costs
Businesses must construct responsive supply chains. They need a reliable path for delivering the right products to the specified customer at the scheduled time. That’s the primary goal of any supply chain. However, a responsive supply chain does not guarantee an efficient one.
When organizations have trouble fulfilling and delivering orders promptly, they may turn to more expensive channels to ensure timely delivery. Unexpected delays compound the problem, resulting in higher transportation costs. These inefficiencies eat away at profit margins.
Businesses need a strategic plan for creating and sustaining a responsive and efficient supply chain. Without a plan, they are unable to respond to economic fluctuations, changing customer behavior, and geopolitical disruptions. They need a strategic partner, such as a third-party logistics (3PL) provider, who can help ensure their supply chain is effective, responsive, and efficient.
What is Supply Chain Efficiency?
Supply chain efficiency is the ability to deliver the correct products to the right customers on time and at the lowest possible cost. Organizations analyze processes and optimize resources to improve operational efficiencies. Tracking key performance indicators (KPIs) can help.
For example, the fill rate identifies the percentage of items on a first shipment. The rate may be calculated based on orders, order lines, or items. Totaling the individual values measures in-full performance. The metric shows how efficient your supply chain is in order delivery.
Identifying Key Performance Indicators
Fill rate is not the only KPI for identifying inefficiencies that can impact profitability. Other KPIs include the following:
Inventory Turnover. This KPI measures the number of times the entire inventory is sold over time. The longer it takes to clear inventory, the lower the effectiveness of business operations and the longer the return on investment (ROI).
Gross Margin ROI. This KPI focuses on profitability. It identifies how much money was made from selected inventory. Making this a monthly KPI can highlight slow-moving inventory so adjustments can be made for improved profitability.
Cash to Cash Cycle Time. The metric shows how long it takes from receipt and payment of raw materials to delivery and payment for finished goods. The lower the value, the more efficient the operation. Cash flow improves as there’s less time between expenditure and payment.
Monitoring critical supply chain KPIs allows organizations to adjust strategies to improve efficiency for a better bottom line.
Reducing Costs
Knowing how well a supply chain performs allows organizations to address inefficiencies that cost money. Suppose Company XYZ has a cash-to-cash cycle time of 90 days. Its competitor (Company Q) has a cycle time of 60 days. Let’s assume both companies purchase raw materials and sell finished goods for the same price.
Both companies spend $10,000 on raw materials and receive $15,000 in revenue after selling their finished goods. Subtracting the cost of the raw materials from the $15,000 of revenue gives Company XYZ an additional $5,000 every three months or $20,000 a year. Company Q, with a cycle time of two months, will receive $30,000. By reducing its cycle time by 30 days, Company Q had an added $10,000 in operating capital to spend on more inventory or loan repayment.
Because of its reduced cash flow, Company XYZ had to use its line of credit to cover expenses, which increased its monthly expenditures by the repayment amount. Not only did Company XYZ have less operating capital because of its inefficient cash-to-cash cycle time, but it also incurred added expenses to compensate for a weak cash flow.
Without measurements, businesses often overlook inefficiencies in supply chain processes that ripple through their organization. How many businesses would connect poor cycle times to weak cash flow that results in using a line of credit and paying interest that eats into profits?
What are Common Areas of Supply Chain Inefficiencies?
Before companies can eliminate inefficiencies, they must first identify them. Although every supply chain is unique, inefficiencies tend to appear in the following areas.
Inventory Management
Inaccurate inventory makes for company-wide inefficiencies. Production stops if raw materials are unavailable. Purchasing more inventory of a slow-moving product takes up valuable warehouse space and uses money that should be spent on low-stock items. These scenarios happen when inventory numbers are incorrect.
If inventory numbers are maintained in multiple systems, updated numbers may not filter down to all users. Faulty inventory management makes it difficult to control inventory or pivot when markets change.
Warehouse Management
Like inventory management, poorly managed warehouses waste valuable resources. Warehouse management involves optimizing warehouse space and maximizing resources. Waiting until pallets arrive to decide where to place them can create chaos in a warehouse where multiple deliveries may occur simultaneously.
Not having enough labor to fulfill orders can cause delays in packaging and delivery. Rushing to complete orders often leads to errors, resulting in costly returns. A well-managed warehouse operates with minimal disruptions for more efficient order processing.
Transportation Optimization
Inefficient transportation usage can increase the costs of moving goods or materials through a supply chain. Planning routes before departure helps identify the most cost-effective paths based on potential construction, weather conditions, and traffic patterns. It can also help consolidate shipments to avoid unnecessary trips.
Optimizing transportation also means maximizing vehicle usage. Tracing trucks for routine maintenance minimizes the chance of a breakdown that delays shipments and leads to repair costs. Delays lower customer satisfaction and may disrupt the entire supply chain.
Collaboration and Communication
Maintaining a positive relationship with vendors in your supply chain keeps communications open. Effective communication allows everyone in the supply chain to report potential issues before they impact deliveries. It will enable collaboration to identify inefficiencies that can affect supply chain performance.
Whether it’s adjustments to inventory reporting or alternative routes because of border closures, collaboration across the supply chain can solve problems faster and correct inefficiencies sooner. Building solid relationships is one of the best strategies for increasing supply chain efficiency.
Technology
Supply chains often suffer from a lack of technology that can improve operational efficiencies. Take Nike as an example. Like most retailers, Nike suffered supply chain disruptions during the pandemic; however, the company achieved a 99.9% inventory readability with its radio-frequency identification (RFID) technology. Nike leveraged inventory visibility to take advantage of changes in demand across stores and online. The RFID technology combined with predictive analytics enabled Nike to forecast demand so inventory could be warehoused as close to the consumer as possible.
Strategies to Address Supply Chain Inefficiencies
End-to-end visibility of a supply chain is a critical strategy for reducing operational inefficiencies. Knowing how a supply chain performs from start to finish allows organizations to make informed decisions on how to create effective, responsive, and efficient systems.
Visibility begins with technology. Supply chains are too complex to be managed manually. Inventory and warehouse management systems help organizations optimize operations. Logistics solutions can help plan routes and track vehicles for optimal performance. Collaboration tools enable suppliers to update inventory directly for real-time reporting.
Inventory and Warehouse Management
Adopting just-in-time (JIT) inventory management can improve supply chain efficiency. JIT inventory strategies are designed to have inventory arrive as needed but no sooner. It reduces the amount of dead or obsolete inventory. It increases inventory turnover and improves inventory-related KPIs.
Receiving goods or materials when needed reduces inventory costs. Minimal inventory requires less working capital and warehouse space. Large production runs may not be needed, lowering the cost of raw materials. For JIT inventory (and warehouse) management, businesses need accurate demand forecasting and strong working relationships with suppliers.
Transportation Optimization
Fleet management systems can map the optimal route for on-time delivery. With integrated GPS capabilities, the systems can update drivers on changes such as accidents or construction that may cause delays. The systems can also log vehicle data to ensure that tires are changed and maintenance performed to avoid unexpected delays.
Sensors can be placed with cargo to maintain the correct environmental controls for temperature-sensitive shipments. When shipments arrive on time and in pristine condition, supply chains perform effectively and efficiently. Software systems can also help consolidate freight for optimal use of resources for improved productivity.
Collaboration
Collaborative tools allow suppliers to keep everyone in the supply chain informed on shipment or inventory status. Warehousing portals let vendors report changes in available space. Sharing demand forecasting data can help others in the supply chain adjust to changes in production or inventory.
Technology Adoption
Supply chain visibility needs technology to be successful. Tracking solutions such as RFID can help maintain accurate inventory. Deploying more Internet of Things (IoT) devices provides a clearer picture of what happens at different points in the process. With inventory, warehousing, and transportation management solutions, organizations can operate more efficiently and collect essential data for predictive analytics.
Strategic Partner
Finding a strategic 3PL partner can help maximize operational efficiencies. Collaborating with a 3PL partner with the technology and expertise in supply chain management ensures a more effective, responsive, and efficient supply chain. Symbia Logistics is one of those partners with a national network of warehousing and fulfillment centers located in Reno, Denver, Kansas City, Chicago, and Houston. For more information on how Symbia Logistics partners with clients, contact our team to start building an efficient supply chain.
Sources:
https://www.ey.com/en_us/coo/rapid-supply-chain-cost-reduction-strategies
https://kpmg.com/xx/en/home/insights/2023/12/supply-chain-trends-2024.html
