Supply chain refers to all the processes a manufacturer uses to turn raw materials into the products or services it sells to its customers. The raw materials or commodities could be crops, timber, gold, animals, or other natural resources. These raw materials go to the manufacturer, and their transformation into finished goods involves many steps and locations oftentimes in different countries.
The finished products can then go to wholesalers, retailers, or the consumers directly. Some manufacturers are able to cut costs by bypassing retailers and selling to consumers online or through catalogs. The supply chain includes all businesses and individual contributors that take part in these processes. Logistics is closely linked to the supply chain, but it's a specialized field on its own. It involves transportation, warehousing, inventory management, vendor sourcing, ERP optimization, and distribution.
As we mentioned, since we're living in a global economy, supply chain management often entails forming business relationships with companies and individual contributors from different countries. These international business relationships require knowledge and involvement in politics, quality control, trade, and traffic laws, which brings us to our next point.
The COVID-19 pandemic has negatively affected the global supply chain, with 30% of small business owners from the United States reporting a disruption in their supply chain even in June 2020, several months after we first heard news of the breakout. Supply chain disruptions hurt a company's bottom line because they cause production issues, cut into the market share, inflate costs, and reduce revenue.
In this article, we will discuss a few things you should know about supply chain optimization in general and during a disruption.
Supplier Management
A good way to evaluate your supply chain and figure out where you can make improvements is to think of each link on the chain in terms of time and money. Your aim is to reduce the amount of time it takes to deliver products to your customers while also reducing the amount of money needed for the process.
But where do you begin making improvements? With a few questions, you need to ask yourself:
- What does my supply chain look like now?
- How far up the supply chain do I have control?
- Do I have any power over who my suppliers get their raw materials from (Tier II suppliers)?
- Are my customers getting what they want when they want it?
- Am I getting this done at the lowest cost possible?
If you haven't mapped out your supply chain yet, you should start with that. To get an accurate picture of what you're working with, you'll need to get feedback from your logistic teams, sales and manufacturing teams, current suppliers, and customers.
Ideally, your map should incorporate Tier II suppliers – the suppliers of your Tier I suppliers. If you don't know where your Tier I suppliers get their materials, components, and services, you need to find out because you might be able to lower your cost and reduce lead times by negotiating with Tier II suppliers. You'll often discover that one Tier II supplier works with several of your Tier I suppliers.
Let's assume you don't have any power over your Tier II suppliers, and your cost begins with the purchase price you've negotiated with your Tier I suppliers. To simplify things further, we'll say that your product's purchase price is $1 – that's your starting point but not your total product cost.
You'll also have to consider how much it cost to move that product from your Tier I supplier to you. Even if they lived next door, you'd still have to pay to move the product to your warehouse. Most likely, your supplier is in another country. The COVID-19 pandemic has made the vulnerabilities in our complex global supply chains hard to deny. Once factories in China had to close, manufacturers from all over the world had to shut down their operations because they didn't have any back-up suppliers. To mitigate this risk in the future, we'll need to look at other possibilities, such as manufacturing hubs in Vietnam or Mexico, as well as doing part of the manufacturing domestically.
Luckily, technological advancements such as AI (Artificial Intelligence) have made it easier to switch to other providers when faced with disruptions. A supply chain consultant can also evaluate your supply chain and see where you can cut costs and make improvements. They can help you negotiate freight and logistic costs, optimize your inventories, and demand planning.
Inventory Management
You can be sure that your Tier I suppliers are also doing their best to get you what you want, when you want it and for as little cost to them as possible. One important thing we need to note is that if you are not exchanging demand information, there's a risk that they won't have enough inventory to accommodate your orders. If they carry too much inventory, they risk spending too much money on manufacturing to meet their estimate of your demand, and most likely, they will pass that cost onto you (whether you are aware or not) to protect their bottom line.
All this means is that you need to communicate demand information to your suppliers so that they can optimize their inventory and do their own demand planning. This can be done through forecasts that are turned into orders and blanket orders. Since this implies a financial commitment, you will need to have as close to 100% inventory accuracy as possible by implementing a cycle count program. You'll also want to consider your suppliers' lead times and, if you're a small business, to try to take advantage of delays in bigger companies like Amazon. As online shopping has increased considerably with the pandemic and social distancing measure, a strong online presence has never been as important.
Logistics
Order fulfillment is an essential component to the supply chain and success of any company, so you and your management team will have to make some strategic decisions in this area. Your $1 product that we discussed earlier can cost between $1.0 and $1.50 by the time it reaches your warehouse. By optimizing your transportation modes, warehouses, and distribution centers, you can increase your profit.
Poor planning will affect the performance of your supply chain and keep in mind that every day that product sits in your warehouse costs you money. You need to keep things moving.
In order to keep pace with the flexibility of the supply chain, any company has to develop and optimize a logistics strategy. This allows them to estimate the impact of disruptions and make the necessary organizational and functional changes to deliver the same service levels.
Ask yourself when was the last time you inspected your pick-and-pack operation to identify any flows in the process. Sometimes optimization requires drastic changes, but most often, a few details can significantly increase efficiency.
