SUPPLY CHAIN RISKS REQUIRE SAFE SOLUTIONS
The way to fix the problem permanently is to simplify customer engagement, the planning processes, and communication with suppliers. Below are six steps I recommend you take to reduce your supply chain’s risks.
1) Reduce Nonmoving Inventory
For many companies, a significant portion of their inventory is nonmoving. No one is ordering those products, but they occupy valuable warehouse space and clog the system.
It is estimated that more than 90% of the Defense Logistics Agency’s inventory is either nonmoving, meaning it had not been ordered in the last five years, or it is slow moving, meaning it has not been ordered in a year. Imagine what happens when a significant portion of the available storage space is occupied by inventory that doesn’t move and that keeps increasing every day.
Nonmoving inventory not only occupies valuable warehouse space but also represents locked-up cash that is not available for revenue generation. This could mean a decreased ability to launch new products, make investments in R&D, or upgrade manufacturing. Also, it costs money to borrow cash for inventory that no one is buying.
Scrapping nonmoving inventory is probably the best approach for recognizing the true value of inventory in the commercial world. If scrapping is not possible, inventory should be moved out of the regular supply chain’s warehousing and held at an offsite location. This will make room for goods that are selling. At the same time, there is a screaming need to stop piling up nonmoving inventory. This can be accomplished by analyzing the reasons for the nonmoving inventory buildup and then developing strategies to address them.
2) Simplify Ordering
With the advent of mobile technology and the Internet, customers can order products through multiple channels. There are two ways to manage customer orders—assisted ordering and self-help. Assisted ordering is when a customer phones a call center or visits a retail site to order products or services. Self-help is when a customer orders the product through the Internet, a mobile device, or a catalog. In terms of cost, retail is the most expensive, followed by call centers, and then self-help, which is the cheapest.
What is not commonly known is that ordering errors are far less common with self-help than assisted ordering. Error rates increase with multiple people handling documents. Ordering errors can create a significant problem for the supply chain, as it results in increased customer returns.
So why do companies still prefer to have retail sites? It allows them to cross-sell or up-sell products to customers visiting the store.
3) Simplify Delivery
The last mile of the supply chain—the delivery to customers—is probably the most expensive.
Companies employ multiple delivery methods to replenish customer demand. The likelihood of error increases rapidly as more steps are involved in the delivery process. It probably makes sense to deliver fast-moving products directly to the customer from the factory or from the vendor if manufacturing is outsourced.
Of course, you have to consider the order size and cost of shipment while making the choice. The cost of shipment may increase, but direct deliveries from the plant have shown to be cheaper for large order sizes because they remove interim handling and storage costs. Many companies are co-locating their distribution centers with a manufacturing site to make this happen.
For slow-moving items, it makes sense to consolidate shipments and then ship to customers. Once direct delivery from the factory has been implemented, it makes sense to review the network and adjust the footprint of different warehouses. It may mean removing some, adding space, or removing space in others.
4) Simplify Planning
Most companies plan shipment for a product or service by using demand forecasts based on historical data. However, forecast accuracy tends to be low, sometimes below 50%. The odds are similar to flipping a coin. Shipments based on forecasts result in inventory being dispatched to the wrong places. It is better to use real-time data to determine shipping. The information is likely to be more accurate, and inventory will reach the places where it is needed most.
A typical concern for using real-time demand information is that companies will run out of supplies if they do not correctly anticipate demand. Well, we are not talking about zero inventory and are primarily focused on short-term shipment. Companies would continue to have their medium- to long-term plans. Inventory would be maintained at the warehouses. The only change is that shipment would be made when the product is sold or consumed, so inventory would not end up in the wrong places. Similarly, plants would produce only when a product is sold, meaning incorrect products would not clog the supply chain.
5) Simplify Internal Organization Alignment
Many organizations suffer from the “too many cooks in the kitchen” problem. Everyone has an opinion, but no one is willing to do the work or be held accountable for the outcome. The supply chain spans across multiple organization silos: manufacturing, sourcing, distribution, and others. So it is important to appoint a supply chain leader who is accountable for supply chain performance across these many organizational silos. A clear chain of command ensures that any problem gets fixed quickly. This may sound elementary, but command and control structures are not that common in business anymore.
Most companies have moved to matrix organizations with multiple reporting lines, and chain of command gets confusing. Matrix organizations do not work very well in operational areas, as they obscure who is the ultimate decision maker. The leader needs to communicate goals clearly to the rest of the organization to make sure that everyone is working off of the same sheet of music. He or she also needs to require everyone to report clearly on how they have met those objectives. I have used a cascading set of metrics and their targets to link supply chain metrics with other organizational metrics.
After metrics are aligned with the team, performance needs to be tracked on a periodic basis. A dashboard is created to highlight the areas where performance is falling short of the target. A note of caution: I have found that at times some individuals may fudge numbers by changing the method of calculation to avoid looking bad to their superiors. Thus, it is important to agree on a method of calculation at the outset so that reports will be accurate.
Once bottlenecks are identified, it is important to diagnose the root cause of the issues. Techniques such as fishbone diagrams are very helpful for this effort. The next task is to develop a plan to fix the underlying problems.
6) Simplify Engagement with Suppliers
Many problems arise from the interactions between internal organizations and different logistics providers and suppliers. They inhibit a supplier’s ability to perform. While companies hire suppliers for their expertise, many internal organizations expect their own procedures to be followed by suppliers. But that is like mixing oil and water…Suppliers should be able to arrange their plans based on inventory levels and production plans at the plant. By making this change to accountability, companies can ensure that suppliers manage the firm’s inventory in a more efficient fashion.
Adapted with permission from The Supply Chain Revolution: Innovative Sourcing and Logistics for a Fiercely Competitive World by Suman Sarkar, copyright Suman Sarkar.