Navigating the supply chain to maximize profitability and sustainability
Have you ever thought about where your shoes were made? Or wondered where your IOS device was put together? They were likely made and assembled far from where you live. One thing is for sure, the products we enjoy every day have been a part of a supply chain effort.
The supply chain has gained strategic prominence as companies look to gain a competitive advantage in the markets they serve. The focus for companies is no longer on product design or facility locations. The supply chain is now responsible for adding value to customers and the company’s bottom line. Depending on industry, final product or service, and supply chain efficiency, the supply chain cost could be as much as 70-80% of the cost of goods sold (COGS).
Understanding supply chain
Before we discuss supply chain management, it’s important to have a basic understanding of the term “supply chain” itself. First, a supply chain can center around services provided rather than physical products. In this article, we’ll be focusing on physical products. So, what is the supply chain? A simple way to describe the supply chain is the process of getting a product from point A to point B.
How does the supply chain work? First, suppliers start the process through the purchase of raw materials which are shipped via boats, trucks, ships, and trains to manufacturers. Products are then shipped again with the end of goal of getting the product to stores or distribution/fulfillment centers on time and in the most cost-efficient manner for consumer use. Without this process, you will not be able to enjoy your cell phone or the shoes you wear.
As you can imagine, there is a lot of activity that takes place before your shoes get to you as a finished product. It starts from the raw material state and makes its way through the supply chain until it ultimately arrives at a physical location where you find them on the shelf or website for purchase. The efficiency and flow of raw materials to the finished pair of shoes has been impacted by supply chain management.
Supply chain management
The supply chain can be complex with many moving parts involved. This means that management of the process is critical to maintain efficiency. Efficiency is the goal of supply chain management (SCM). All stages need to be managed to attain efficiency, including suppliers, manufacturers, warehouses, and stores so the product is available at the right time, at the right locations, and at the cheapest possible price based on demand. All this must be in balance to bring the best value to the end customer.
Let’s look at what impacts the final pricing to the end user or consumer. The customer pays the retailer who pays the distributor, who pays the wholesalers, who pay the manufacturers, who pay the raw materials suppliers. If any step in the chain is inefficient in the process, pricing, or completion of the step, it can cause a significant negative financial impact.
Simply put, SCM is the control all production, shipment, and distribution of product. SCM involves keeping tight controls of inventory, production, sales, and vendor activities. The end goals of SCM are to cut unnecessary costs and deliver end products to consumers as quickly and efficiently as possible.
SCM with KPIs
SCM also involves improving productivity, quality, and efficiency of operations. This can be accomplished through setting key performance indicators (KPIs). Let’s look at a couple KPIs in supply chain management. The supply of goods industry is simple to understand. It’s about making the goods, selling the goods, and then collecting on the goods. This is why having a KPI to measure the time of paying for materials and receiving payments for products provided is a must. Turning invested funds quickly into additional cash on hand should be measured.
A second KPI should be measuring product orders rendered without error or defects. This speaks to quality control throughout the supply chain process. Having 100 IOS devices produced and sold but 30 being returned due to defects, in need of repair, or other reasons not caused by the end user is a big problem. Another KPI that should be measured is the gross profit earned on the inventory used to produce products. This speaks largely to the ability of supply chain managers in their negotiations to procure the necessary materials and inventory.
Difficulties with SCM
Supply chain management has become increasingly difficult since the Covid-19 pandemic for several reasons. First, having too much dependency on certain suppliers, logistics companies, etc. in the chain can cause major issues. Relying only on specific suppliers created a backlog of raw materials and negatively impacted the movement and production of end user products. This served as an important lesson for businesses everywhere – do not rely solely on only a few third-party companies. While relationships are important in the business world, risk assessment should also be a part of running an organization.
Second, many companies reacted to the pandemic by stockpiling materials to avoid the lack of production. Unfortunately this results in capital being tied up in materials, etc., that are not generating revenue, causing a negative impact on cash flow. This is why many companies are diversifying more than ever and investing in more robust data points with their business partners to make the best decisions for their business.
Conclusion
In conclusion, effective supply chain management is essential for maximizing profitability and sustainability in today’s competitive markets. By focusing on efficiency, setting key performance indicators, and diversifying suppliers, companies can mitigate risks and enhance the flow of goods from raw materials to end consumers. As the complexities of the global supply chain continue to evolve, businesses must remain agile and innovative to ensure they deliver value at every stage of the process. By doing so, they not only improve their bottom line but also meet the growing expectations of their customers.
