5 Effective Ways to Improve Supply Chain Efficiency

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Introduction

Supply Chain Management is a management of business operations that processes raw materials into finished goods, deliver the goods to the final intended customer, and everything in between and beyond. Proper supply chain management is what makes or breaks a company, and one of the deciding factors whether a company is profitable or not. Hence, the importance of maintaining an efficient supply chain is very important. Although supply chain management is a diverse topic, here in this article we compiled the 5 most effective ways to improve supply chain efficiency.

1.     Invest in Quality Human Resources

In any businesses, the human factor is the most common denominator.

We elaborated this at length that the success of Walmart’s logistics system was a factor of appointing the right people for the right tasks.

Sam Walton has a knack for picking the right person for the right job, unlike his competitor in Kmart which opted to hire from within by promoting storekeepers.

Royce Chamber was IBM’s tech prodigy before being coaxed to Walmart to implement supply chain computerization. This proved to be a masterstroke as had Walmart fully utilized the Universal Product Code (UPC) system.

Additional Reading: How Walmart Logistics System Work

Studies in Mexico also support that the role of managers is a contributing factor to supply chain efficiency. That study is conducted with a sample size of 326 manufacturing companies that varies from automotive to textile in the Mexican region.

Through various statistical model evaluation, it is evident that the role of managerial efficiency has a direct effect on supply chain performance.

Having a strong managerial team will inevitably have a domino effect on other aspects that will improve supply chain efficiency. In particular, strong managerial team will elevated employee efficacy and competence as well. This is displayed in the same study of Mexican manufacturing companies.

We know that this may appear to be common sense to hire great people to make great businesses, but we emphasize this fact is because it is simply not easy to attract the right people.  

Nevertheless, in all seriousness, before pursuing other ways of improving supply chain efficiency, a competent captain is required first to steer the ship.

2.     Supply Chain Risk Management

Supply Chain risks are uncertain situations in which an event may negatively impact the operation of a company. Countless studies are dedicated to understanding the function of supply chain risk management.

To a certain extent, supply chain risk management is actually against the pursuit of supply chain efficiency. If a manufacturing company is too hellbent in mitigating supply chain risks, they cannot logically operate at full capacity.

Having a proper risk management method set up is, however still a necessity, to prevent extraordinary events from happening. A stable environment is the best kind of environment for the efficient supply chain management.

Here are the methods of risk management that helps the efficiency of the supply chains.

Risk Identification

The first step in risk management is to determine the actors of the risk. We cannot solve any problem if we did not correctly ascertain what the problem was in the first place.

Risk identification has to perform systematically, with a level of foresight to which nodes of the supply chain may pose a significant risk in the future.

The quality of risk identification is only as good as the person conducting the risk identification, which is why it is very important in the first place to have competent personnel in place. Some techniques used to identify risk in the supply chain are: –

  1. Semi-structured interviews
  2. Questionnaires
  3. Checklist
  4. Delphi method
The Delphi Method of Risk Identification

Out of the methods of risk identification above, we will look at the Delphi method as an example: –

Delphi method is a structured technique of interactive forecasting which relies on a panel of experts. These panels of experts are anonymous to each other in order to reduce one panel expert’s influence over the other.

With the help of a facilitator, the panel of expert’s questionnaires is collected and curated for the second round of feedback, until there is a consensus from all panel experts have been reached.  

Risk assessment and prioritization

Once a list of supply chain risks has been identified, we have to determine the magnitude of the effect of each risk towards the supply chain.

Similar to risk identification, there are many ways one can go about prioritizing the identified risk. Some companies even use mathematical models such as stochastic programming, impact probability matrix, and multi-objective programming to help with supply chain management decisions.

All that matters is that a strategy is clearly defined and established first before diving head on in tackling the issue.

Risk Management and Monitoring

Once supply chain risks are objectively assessed and prioritized, managing and monitoring these supply chain risks comes easy.

Here are examples of supply chain risks exposures that may emerge: –

  1. RFID labeling errors
  2. Shortage of forklifts during peak periods
  3. Generating inaccurate delivery reports
  4. Insufficient space for merchandise storage
  5. Communication delay between supply chain vendors
  6. Delivery Timeliness

Each and every risk point have different solutions to it.

In summary, ascertaining the potential supply chain risks and addressing them by order of priority is important to improve supply chain efficiency.

3.     Create More Supply Chain Channels

In essence, supply chain management is the movement of goods, to the right place, at the right amount, and at the right time.

The supply chain element in the business connects the supply with the demand. Multinational companies such as Toyota, Apple, Dell, IBM, etc… have complex supply chain management that essentially moves goods from the supplier to the buyer.

Therefore, it stands to reason that the more consistent the flow of goods, the more revenue a business stands to gain.

Take Apple for example, in pursuit of supply chain consistency from the supply side and the delivery side, Apple has diversified its supply chain by procuring parts from multiple vendors. This helps Apple mitigate supply chain delays from disruptions.

Foxconn, an electronics manufacturer responsible for 40% of all consumer electronics sold in the world, maintains supply chain consistency by building manufacturing sites in multiple countries. That way, Foxconn could shift manufacturing projects from one site to another more competitive locations at a moment’s notice.

Not every business has that kind of access to expand its supply chain network (yet), but there are other ways of diversifying supply chain channels that are relatively cheaper.

One of the solutions is to engage with logistics service providers.

Technically, there is no limit to how much you can outsource your logistics needs to a third party. Moreover, there is also no limit to how many service providers you engage with as well.

For example, if it makes sense for the business to outsource warehouse storage services, it can engage with multiple warehouses in order to diversify its supply chain. Since location is a deciding factor for logistics cost, merchandises can be stored in multiple strategic locations.

Not only that, multiple warehouse storages can also help mitigate supply chain disruptions by re-routing orders from one warehouse to the other.

In other words, having multiple supply chain channels does not only mean to use multiple modes of transportation for delivery, it also means that we diversify our supply chain management to various service providers to improve supply chain efficiency.

4.     Identify Supply Chain Failures

The best way to encapsulate this idea to increase supply chain efficiency is with a case study example.

There is a 7-month long case study conducted in Mexico, which targets the furniture industry.

A short article such as this will not do justice to the magnitude of work that researches go through the study. If you are interested to learn more. Check out the referenced study below.

The reason why the furniture market in Mexico is chosen as a subject of study is due to the industry’s rise and fall within such a short period. The furniture industry in Mexico was once the third-largest supplier in the world during the 90s.

Surely, external factors such as globalization and economic fluctuations are major contributors. But, the research approach problem from within the business itself.

The research listed down supply chain failures, here is what they found: –

  1. Delay in supply of materials by suppliers
  2. Payment delays from client
  3. Inefficient quality control
  4. Material Defects
  5. Warehouse Inventory review delays
  6. Product Quality Failures
  7. Shipment delays
  8. Competition
  9. Budgeting errors
  10. Purchase Forecasting Issues
  11. External Quality Failure

In extension, the 3 most common failures are

  1. Internal Communication Error (misunderstanding purchase orders)
  2. Payment Collection issues
  3. Lack of Quality Control

a problem well-stated is half solved.

Competent managers (as we mentioned in Tip 1) are capable of ascertaining the root problems in the supply chain. As the scope of supply chain management gets wider and wider, proper risk management and failure detection are important for a business to adjust its course.

Frankly, every business environment is unique, but the top three failures discovered in the research above (Quality Control, Receivables collection, and mismanagement of information) are human elements

So, apart from identifying supply chain failures before it is too late, a business can preemptively prepare for potential failures above.

5.     Maintaining an Effective Order Forecasting Method

Insofar, we have talked about supply chain management from the perspective of the supply side only. But equally as important, the demand side of the supply chain needs the same attention as well.

Production that is not synchronised with demand will overburden the supply chain, and increase production cost in all stages of the supply chain.

Consumer demands are not consistent, it ebbs and flows with a high degree of variance. The consequences of extreme surges or drops will disrupt product procurement.

Especially in this day in age, manufacturers are stressed to maintain a large variety of SKUs for one similar product, particularly in the textile industry.

Therefore, manufacturers are shifting its attention from the “Push Principle” to the “Pull Principle” process flow.

This means that whatever the manufacturer produces, it pushes through its supply chain to supply the consumers.  In contrast, the pull principle relies on current buyer’s behaviour to inform the suppliers what exactly should they produce.

ECR – Efficient Consumer Response, Source: Collaborative Planning, Forecasting, and Replenishment (Dirk Seifert)

Major Corporations such as Coca-Cola are already well-versed with this collaborative method of supply chain management. “Collaborative” in the sense that supply chain management is optimized by maximum collaboration between all stakeholders of the supply chain, with an emphasis on the consumer as part of the supply chain.

So, how do we do demand forecasting?

Countless supply chain management books have sophisticated mathematical models, data collection techniques, and forecasting methods to predict consumer behaviors.

It has become easier these days especially when the purchasing experience is moving from the physical towards the digital.

As consumers, we leave digital footprints, and these are religiously collected by major corporations and analyzed with sophisticated mathematical prediction models.

But, let us dial down on the sophistication and distil what demand forecasting means.

Basically, it is a form of pattern recognition, based on past purchase histories.  

Any form of forecasting relies on past purchase history. Period.

Predictive models can be as complicated and multivariate, but it all relies upon the quality of the data collected.

Any business can collect purchase history data: –

  1. Season
  2. Time of Purchase
  3. Amount purchased
  4. Consumer demographic
  5. Related purchases

Therefore, regardless of how large or small the business enterprise is, the key to an effective supply chain forecasting model is not the mathematical model used, but the quality of the data collected.

So, to summarize, shifting the supply chain from a “Push Principle” to a “Pull Principle” is an effective way to improve supply chain efficiency; The most important factor for an effective forecasting model is the quality of the data collected, and the quality of its interpretation.

Conclusion

If there is only one key takeaway from this article, let it be the fact that the first tip is the most important, which is to invest heavily in human resources, and making sure to hire the most competent person for the role of maintaining and improving supply chain efficiency.

Resources

Techniques, Tools, and Methodologies Applied to Global Supply Chain Ecosystems, Intelligent Systems Reference Library, Vol. 166, Jorge Luis Garcia-Alcaraz et. al.
Collaborative Planning, Forecasting, and Replenishment – How to Create a Supply Chain Advantage, America Management Association, Dirk Seifert

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