What Business Owners Need to Know About Global Supply Chains
Most business owners don’t think of a supply chain as a function of customer service, but when they really look closely at all of the elements involved in the manufacture or delivery of a product, they see that it all boils down to creating a positive customer experience. And now that supply chain management systems can analyze the immense volume of data generated by supply chain processes and deliver it to business owners in real time, the ability to maximize the CX (customer experience) while also maximizing profits is greater than ever.
Supply chains have existed since before the days of the Silk Road but owing to pandemic pressures and the outbreak of conflicts, it has never been as important to manage production cycles in order for eCommerce owners to remain competitive in a global market. In other words, the importance of supply chain management has never been greater and the possibilities for creating a successful supply chain network have never been easier to achieve.
But What is a Supply Chain?
A supply chain definition by authors with individual and extensive industry experiences can be summarized as a detailed network of resources, people, organizations, information, and activities involved in the creation and delivery of a product or service to a consumer. Each is a link on the chain that starts with an order. Supply chains most often involve the sourcing of raw materials or parts, the production of a finished product, transportation to warehouses, distribution centers or point of purchase retail stores, or delivery directly to the customer. Supply chain functions include product development, operations, marketing, finance, distribution and of course, customer service.
In a supply chain, individual related suppliers are often categorized by their proximity to the final product. These organizations form the tiers, effectively “links” in the chain. The most common designations refer to Tier-1 suppliers with direct contact to the end-product producer and Tier-2 serving the Tier-1s. The more extended the “chain”, the more tiers.
A supply chain can be fairly simple, or incredibly complex, as in the manufacture of a passenger aircraft, that is composed of six million parts. Each step in the manufacturing process, or in other words, each link in the chain can involve multiple sources for raw materials, multiple manufacturers, and transportation of each of the components multiple times to different facilities. The supply chain can also involve the recycling of items that have residual value, as well as the return of products from end-users.
To ease the complexity of modern supply chains, experienced end-to end supply chain providers have eliminated the siloed functioning of a traditional supply chain and integrated all functions. This improves efficiency, reduces costs and results in customer journey optimization. For example, end-to-end supply chain providers can deal with the varied layers of biological, ecological and political regulations involved with the resourcing of raw materials, while simultaneously (and efficiently) assessing the best transportation and warehousing of those materials.
What Are the Different Types of Supply Chains?
There are many types of supply chain models, but they basically fall into three categories.
The Continuous Flow Model is a traditional supply chain model that works best for companies that produce a limited number of products that involve little or no variation. Tight control of inventory is essential in a continuous flow model as a streamlined production line is necessary to optimize profits. Any disruption in the replenishment of raw materials results in bottlenecks and higher manufacturing costs.
The Fast Chain Model was developed to work for businesses that create trendy products. This model can get products to market quickly, taking advantage of the latest chic trend. This supply chain allows companies to ramp up quickly from prototyping to production and then to the consumer.
The Flexible Model is often used by companies that have surges in demand, such as those that produce seasonal merchandise. The Flexible Model specializes in extremely accurate forecasting to ensure quick start ups and shut-downs. Holiday merchandise is an example of the type of product that relies on the flexible model.
However, some experts say that there are actually 4 types of supply chain models and possibly even more. Other model types referenced include the following.
The Efficient Model is primarily used by companies serving markets where commodity pricing is dominant. This model is very dependent on extremely accurate forecasting, as it is driven by intense market competition.
The Agile Model was created for businesses that manufacture unique products, so materials and processes are designed for small batch production.
The Custom Configured Model is most often used for the manufacture of products such as autos, in which companies can configure “custom” products by combining various parts or sub-assemblies.
What Are the Key Functions of a Supply Chain?
A simplified overview may be stated by a six-part supply chain analysis.
- Planning – The inventory and manufacturing processes must be researched and determined to ensure that supply is in balance with demand.
- Resourcing – The raw or refined materials must be on-hand in a timely manner to manufacture the product.
- Assembly – Parts must be created, assembled and tested.
- Packaging – The packaging of the product for shipment, and/or warehousing completes the manufacturing process.
- Transportation/Delivery – The finished products are delivered to a distributor, retailer or directly to a consumer.
- Customer Service Support – This step provides the necessary reverse logistics services involved with customer returns.
So, these are the main steps that must be put in place to create a manufacturing supply chain, but how does a business interlink all of these disparate processes and form a smooth running supply chain that will maximize profits?
This is where supply chain management comes in.
What is Supply Chain management?
Supply chain management is the coordination and optimization of all steps in the supply chain through the use of eight basic business processes:
Customer Relationship Management (CRM) is a technology that helps companies to develop and maintain relationships with their customers. This system allows companies to gather and store data in one location, giving an allover view of any interactions with a customers or prospect. From initial marketing efforts to first sale, the sales journey of every client can be documented and used to forecast sales, optimize marketing campaigns, and improve the customer experience. Customers and groups of customers can be identified and tracked across their customer life cycles, reporting all marketing, sales, ecommerce and customer service interaction. These reports can reveal the likes and dislikes of key customers, to access their profitability and reduce non value-added activities.
Supplier Relationship Management is a similar technology that tracks the interactions of a company with its suppliers. Good supplier relationships are essential to the manufacturing process, and this system helps companies to maximize supplier cooperation and trade agreements.
Customer Service Management acts as the customer interface – providing customers with information on orders, such as shipping dates and availability of
product. It can also be a key point of contact for the administration of Product Service Agreements (PSA).
Demand Management allows companies to more effectively match supply and demand. This help to increase flexibility and reduce demand variability.
Order Fulfillment seems straightforward and simple, but in reality this step of supply chain management involves much more than just filling orders. Ideally, the company wants to design a process that lets it meet customer requirements while minimizing costs. It needs the coordination of key suppliers and customers and requires cross-functional implementation in order to develop a seamless process flow.
Manufacturing Flow Management involves all of the processes required to move goods through the production cycle. This necessarily involves the entire supply chain, not just planning and execution, in order to achieve the desired level of manufacturing flexibility that allows the company to produce products at the lowest possible cost.
Product Development enables product development teams to use CRM data to identify client needs, whether articulated or not. They select the required materials and suppliers using the Supplier Relationship Management process, then develop any necessary manufacturing technology to produce the product.
Returns Management is the supply chain management step that helps to efficiently reverse the product flow process necessitated by product returns. Effective management of returns helps to recognize opportunities that may reduce unwanted returns and control reusable resources such as containers.
What Are the Basic Objectives of Supply Chain Management?
- Maximize Profits
- Identify Sources of both New Revenues and Impending Costs
- Reduce Current Costs
- Improve Process Efficiencies
- Improve Labor, Equipment and Space Efficiencies
- Implement Proactive Schedules for when to Replenish Materials or Parts (Optimize inventories pre-and post-production inventories.)
- Improve Products Regularly
- Achieve Higher Customer Satisfaction
- Maintain High Awareness of Supply Chain Dynamics
- Optimize Cost-to-Quality Balance
- Speed Deliveries
- Reduce Lead Times
- Achieve World Class Recognition
- Maximize both Flexibility & Control
- Minimize Transportation & Distribution Costs
- Make Better Decisions by assisting management
What Are Supply Chain Management Best Practices?
To attain superior objectives stringent attention to meeting and maintaining best practices must be followed. With cloud efficiencies, new technologies and innovative tools, coordinating and monitoring all of these functions is easier than ever. Excellence of outcome through controllable practices is a very real role of supply chain management.
Recruit & Develop Supply Chain Professionals – To overcome a shortage of skilled workers, it is increasingly important for companies to actively work with universities, trade schools and staffing companies, and to create intern programs and professional development programs that attract and retain new talent.
- Align the Supply Chain Team – In order to avoid siloed processes and functions within the supply chain and to maintain timely communications between all processes, it is vital that companies create a role for a person who will ensure that team leaders are in alignment with standardized company goals and practices. Each group can then put the processes into practice, making sure that all staff has input to encourage continuous innovation. This is especially important in a complex supply chain that may span several continents, numerous time zones, and have varying individual goals for each individual unit.
- Purchase Materials in Volume to Reduce Costs – Through the use of bulk purchases, companies can take advantage of economies-of-scale which can reduce costs with volume discounts. Businesses can make one-time bulk purchases or use Standing Orders or Blanket Orders for high-volume purchases. Standing Orders establish a set price and quantity for raw materials or parts with a supplier who delivers them at pre-determined dates within a certain time period. Blanket Orders also set prices and quantities for goods delivered, but the orders are placed as needed. Blanket Orders ensure pricing, often for up to a year at a time, and they provide more flexibility than Standing Orders.
- Create Alliances with Suppliers – Companies who closely vet suppliers and build strong relationships with them usually enjoy the most success in their supply chain. Suppliers who share the same values and principles and treat the relationship more as a partnership often prove to be the most reliable arrangement helping both parties reduce expenses. Issues such as social responsibility and environmental sustainability or labor law violations can have damaging consequences for both parties.
- Diversify Supplier Relationships – Many supply chain disruptions are caused by supplier-side delays. These may be caused by a variety of issues, such as unavailability of raw materials, natural disasters, political troubles, regulatory problems, severe weather – indeed, any unpredictable event that could cause a bottleneck in the supply chain. If strong alliances with suppliers have been put in place, communications between companies can mitigate problems or even avoid delays.
An alert from a supplier about a potential problem can give a company the chance to check on-hand inventories and source alternative suppliers if necessary, thus averting a potential delay or other supply chain issues.
- Invest in Environmental and Social Sustainability – This best practice ties in with the previous one, but it takes a step further in the process. Beyond forming alliances with, and purchasing from environmentally-friendly suppliers, companies that create their own supply chain sustainability initiatives are successful in other ways. Besides complying with any existing regulations, a company can also elevate its brand value with its customer base. Surveys reveal that product sales grow 5.6 times faster if they are marketed as sustainably manufactured than those that are not. Surveys also found that 43% of consumers expect businesses to be accountable for their environmental impact. B2C (business to consumer) and B2B (business to business) customers are increasingly environmentally conscious and focused on sustainability.
A company that involves its workforce in supply chain sustainability issues might also find an innovative solution to environmental impact that could increase efficiencies or reduce costs.
- Improve Demand Forecasting – Inaccurate demand forecasting can cause the costly issue of too much or too little product in stock. Whether sales are up but supplies are lagging, or sales are down, and inventory isn’t moving, (or the company miscalculated and manufactured too much), forecasting errors can significantly affect the bottom line. Too little inventory causes missed revenue opportunities. And research shows that a 15% improvement in forecast accuracy can yield a 3% or higher gain in pre-tax revenue.
- Optimize Inventory Management – Inventory management, in conjunction with improved demand forecasting, is another critical factor in the operation of an efficient supply chain. Software that can accurately track inventory in real time provides the data necessary for accurate demand planning. It gives a company the inventory visibility required to develop replenishment best practices. And it provides the insight needed to correct or adjust any step in the operation to better align with supply chain objectives. From lowering the cost of ownership, to accelerating the order-to-pay cycle, optimized inventory management helps management to make more informed decisions.
- Practice Risk Mitigation and Compliance – Supply chain risks come in two categories – known and unknown. Known risks can be identified, measured and managed making it possible to quantify their impact. Known risks may include demand fluctuations, supplier issues, distribution limitations or regulatory non-compliance. Unknown risks, such as natural disasters or geopolitical events, are difficult, if not impossible, to predict or control, making them a challenge to quantify. Advanced predictive analytics are some of the management tools that can predict and/or mitigate known and unknown risks, giving companies more options to create strategies that deal with the risks. Compliance mitigation provides companies with access to the up-to-the-minute legal and regulatory changes so necessary to avoid compliance risks.
- Increase Supply Chain Visibility – More than ever, the need for true end-to-end supply chain visibility is vital in order to make (and keep) a business globally competitive. A bird’s eye view of the entire supply chain is crucial to its efficiency. The constant communication and real-time data sharing that supply chain management affords is fundamental to an efficient supply chain and can even affect the customer experience by including the instant tracking of deliveries.
- Centralize Document Management – A supply chain solution that can create a central hub for all of the supply chain documentation is imperative, as otherwise, the management of paperwork from multiple business units can create confusion and errors. The separate and siloed goals of different processes make the management of paperwork from each process complicated. A comprehensive management system can simplify the process, reducing confusion across all channels. This centralized hub can also spot any discrepancies between purchase orders and bills of lading or customs paperwork, thus alerting personnel to any problems within the supply chain, allowing for quick responses to errors that might otherwise go unnoticed in a sea of paperwork.
- Improve Order-to-Pay Process – The order-to-pay or procure-to-pay process includes every step involved in the order cycle, from requisition to final payment. Since the process usually involves several departments across the company such as warehousing, logistics, finance, and sales, it is important to ensure that all systems are in sync to avoid data discrepancies and misalignment of activities. A unified platform will simplify the order-to-pay process and boost efficiency.
- Focus on Total Cost of Ownership – The total cost of ownership (TCO) deals with the expenditures of every step in the supply chain. It lets the business account for the cost of each activity. It allows companies to make better informed strategic decisions. For example, cutting costs in one department or supply chain node might not help overall savings, as it may cause consequences that incur much higher costs in another department.
- Invest in Technology and Software – When different parts of a supply chain are using different programs and manual processes, it can affect the access of real-time information and analytics that is vital to its ability to function efficiently. A comprehensive supply chain management solution is essential to the operation of a successful supply chain and a successful business.
- Track Supply Chain Metrics – These are the ratios, reports or other metrics that help a company quantify supply chain performance, or KPIs (Key Performance Indicators). KPIs enable businesses to identify and analyze strengths and inefficiencies in supply chain execution. The following are the key performance indicators most often monitored to determine whether or not a company’s supply chain is performing at a high level:
Inventory Turnover – This metric measures the number of times inventory is sold during a specific time period. A high turnover rate indicates that a product is in high demand and sells out quickly. A company may be overstocking if the inventory turnover rate is below industry benchmarks.
Inventory Accuracy – This measures the accuracy of a company’s inventory by comparing the physical inventory with that recorded within the company’s database. The goal is an inventory accuracy rate of between 95% and 99%. Maintaining an accurate inventory can help to reduce inventory carrying cost and stock outages. Inventory accuracy can be improved by establishing good inventory naming and labeling practices, and by leveraging warehouse and inventory management systems. This eliminates manual data entry which reduces human error.
Order Fill Rate – The order fill rate is the number of customers a business can immediately ship from available stock. This metric helps a business to gauge how well they are meeting customer demand. It also measures the efficiency of its delivery service. Proper demand forecasting practices can improve a low order fill rate. Providing alternatives for out-of-stock items in inventory and setting inventory replenishment parameters to prevent out-of-stock issues can also improve a low order fill rate.
Perfect Order Rate – This measures a supply chain’s ability to deliver error-free orders. Error-free means that four factors must be achieved: the order must arrive on-time, it must be complete, undamaged and contain the correct items with correct documentation. This metric helps to track storage and delivery operations, manage costs and gauge customer satisfaction. It is one of the most important metrics and because it directly affects customer satisfaction and retention, has one of the biggest impacts on a company’s bottom line.
On-Time Shipping – This metric measures the ratio of orders that have been shipped on or before the requested ship date. It helps to track delivery performance. A high on-time shipping rate is an indication of an efficient supply chain process and is key to ensuring customer satisfaction.
Backorder – This measures the orders that cannot be filled at the time the customer places it. A consistently large backorder rate that include long wait times, is an indication that something in the supply chain is not functioning properly. This is where the use of an inventory system with real-time data on stock levels is essential, so that products are automatically re-ordered before stocks are depleted.
Order Cycle Time – This metric is sometimes referenced as Inventory Cycle Time. It measures the average cycle time it takes for a customer to receive a product after an order has been placed. Short order cycle times are an indication that the business is responsive to customer orders while long order cycle times signal that all supply chain operations are not sufficiently synchronized. A review of order picking and shipping processes is indicated, and any processes that can be automated should be.
Inventory Days On-Hand – This measures the average number of days that it takes for a company to sell off inventory. It is an important metric that indicates when it’s time to restock inventory levels. A high rate may mean that inventory is not being properly managed or that certain stock is difficult to sell.
Order Picking Accuracy – This metric lets a business know the percentage of orders that are accurately picked for shipping. Incorrect picks result in incorrect or delayed shipments, incorrect inventory, but worst of all – unhappy customers. The following practices will help to increase picking accuracy: picking by item code, use of automation wherever possible, and grouping of similar items.
Rate of Return – This measures the rate at which shipped items are returned to the company. An accurate appraisal of the reasons that customers are returning products will indicate where the weaknesses in the supply chain are and how to correct them.
What is Supply Chain Optimization?
Supply chain optimization involves making the necessary changes to your supply chain that will ensure that it is as efficient as possible. Those changes can range from changes in packaging (in order to use warehouse space more effectively) to changes in logistics.
Which brings up a question –
What is the difference between a supply chain and logistics?
Supply Chain versus Logistics
The difference is straight-forward: Logistics is a segment (a very important segment) of the total Supply Chain dealing with efficient movement, tracking, storage, and protection of deliverables.
Supply Chains, on the other hand, have greater scopes that entail the overall sequence including initial materials research through finished product delivery. It covers such elements as sourcing, processing, final delivery of the goods, accurate tracking, responsive service for the end customer, plus efficient return support and more.
Logistics has a tighter focus – the moving (often multiple moves for any given commodity) and storing of goods between different stages and locales along the path of product development and production to final destination.
Specifically, logistics is concerned with that part of the supply chain process that plans, implements and controls the efficient, effective forward and often reverse flow and storage of goods, services and related information. Logistics is essential to good supply chain performance and is a major part of the end-to-end process. Each leg of logistics must operate smoothly, but every point-to-point operation is only responsible for a unique and self-contained part of the supply chain totality.
Adapting to match the needs of clients to provide the most advantageous solutions for optimum supply chain performance is key to a successful partnership that can grow and prosper under prevailing and ensuing conditions.
A partnership with a full-service and experienced organization allows for global market expansion. A complete complement of services and solutions for emerging opportunities maintains continuity and confidence in a smooth process of adjustment.
Similarly, a well-structured Supply Chain service company with broad capabilities and wide global knowledge can and will deliver the targeted support to augment an organization needing specialized assistance.
ModusLink is that versatile, adaptable, and competent professional resource for multi-national and multi-regional growth. ModusLink is the Supply Chain partner that you need to succeed in today’s competitive global market. Call now and find out how you can scale up your global supply chain with ModusLink.