Supply Chain and Logistics Strategy
The right Supply Chain or Logistics Strategy will drive reduced costs, better customer service and improved profits.Our recent surveys have shown that:
61% of businesses do not have a documented Supply Chain strategy yet.
Of those businesses, most believe their business performance suffers as a consequence.
The Supply Chain strategies that do exist are generally not well understood across the business.So ask yourself:
- Is your Supply Chain and Logistics Strategy effective?
- Does it support your business strategy?
- Is it well understood across your business?
- Do you even have a Supply Chain strategy?
If you answer No to any of these questions, then your Supply Chain is under performing and impacting on your business bottom line!
Supply Chain Strategy is really NOT that Hard to Get Right
At the Logistics Bureau we have experience of effectively developing and implementing Supply Chain strategies across many countries and many industries including Retail, FMCG, Pharmaceutical, Industrial and many others.
Our senior staff are able to work with you to develop the right Supply Chain strategies to achieve your business goals, as well as ensuring engagement and commitment from your management team.
Contact a senior staff member at Logistics Bureau using the form to the right or call them directly here.
Below you will find a useful Supply Chain Strategy Article.The Outcomes
In developing and implementing an effective Supply Chain strategy for you, our pragmatic approach will aim to deliver:
- A clear Supply Chain strategy that supports the business strategy and goals.
- A Supply Chain strategy that is well understood and supported by all key business functions.
- A Supply Chain strategy that maintains a clear focus on the required outcomes and can easily be tracked and adjusted to maintain Supply Chain performance.
- And most important! A Supply Chain strategy that reduces costs and improves customer service.
We will guarantee the results!Our Focus
The focus of this work involves aligning a company's supply chain strategy to its business strategy. In situations of high growth, companies need a flexible supply chain to ensure that their growth plans can be absorbed at an incremental cost. In more certain demand situations companies should aim to ensure that their supply chain operates to optimum levels, with balance between service and cost.
This work often features:
- Overall development of Supply Chain Strategy
- Alignment of customers and suppliers to internal company operations
- Alignment of marketing and sales plans to supply chain strategy
- Alignment of capital expenditure to supply chain operations
- Alignment of HR strategy to supply chain operations
- Alignment of supply chain strategy to meet investment aims
- Alignment of supply chain strategy to meet growth targets
- Optimisation of supply chain to meet wider business goals
Supply Chain Strategy Development
As part of our work, we often assist companies in developing and documenting a Supply Chain Strategy, Logistics Strategy or Distribution Strategy.
This normally takes place as a series of facilitated planning workshops, with a senior cross functional team involved. At the completion of the workshops, the company has a documented Supply Chain Strategy, with objectives, actions plans, timelines and responsibilities.
Whilst the workshops are tailored to the specific needs of the company, in simple terms, they tend to go through the following stages, if using an issues based approach:
- Review of overall business strategy
- Develop Supply Chain Vision and Mission
- Review of existing Supply Chain and known issues
- Further issue identification
- Develop issue themes
- Prioritise issues
- Creation of issue teams
- Development of objectives, strategies and tactics
- Implementation planning
This planning approach has proved highly successful and is structured so as to enhance team participation and commitment.
The focus of our planning approach, is to ensure that the Supply Chain strategy is clearly focused on the end game needs of the business, rather than the enabling 'means'. This ensures , particularly in large and multi divisional businesses, that all parts of the business are focused on achieving the objectives, rather than sub optimising individual change projects.
Supply Chain Strategy Development (presented at recent Logistics Bureau event)
Effective supply chain strategies are essential to the performance of most businesses. Surprisingly, many businesses, even at the top end of town, have supply chain strategies that are misaligned to the business goals or have strategies that are poorly articulated and communicated within the business. This just drives poor business performance.
This article will take a pragmatic approach and provide insights for developing a supply chain strategy that not only meets the needs of your business, but also drives real service and bottom line improvement.
Building and Implementing Supply Chain Strategies that Work
Firstly, we need to appreciate that the supply chain strategy forms only one part of the overall business strategy and takes its place along side other strategies such as; marketing, new product development, human resources, information technology and finance. However, these strategies must all link directly to and support the overall business strategy.
Appreciate that businesses all have different strategies and this drives the need for different supply chain strategies. By looking at examples of retailers, the picture starts to build. Some retailers might be targeting basic needs, whereas others might target high fashion and self-expression. Companies such as Zara and H&M need supply chains that are effective for very short life cycle products. Whereas solutions focused retailers such as Home Depot or Bunnings must focus on high availability and good range management. Mass retailers such as Tesco or Wal-Mart meanwhile need efficient low cost supply chains to compete in the market place.
A business’s target market and customer value proposition are clear drivers of the supply chain strategy. Looking away from retail, businesses such as Orica Mining Services, who supply bulk explosives to the mining industry, also offer services that could include providing drilling crews, survey crews and shot firing teams. Companies like Orica provide these products and services in some of the most remote parts of Australia. This indeed needs a very different supply chain strategy to maintain appropriate levels of service, whilst controlling costs.
Whilst in most businesses an appropriate balance of cost and service is the goal, in some the supply chain cost takes a clear second place to maintaining continuity of service. Clear examples of this service supremacy abound in the Healthcare sector such as the Red Cross Blood service. Here, the cost of providing a life saving blood product to remote hospitals and surgeries is almost immaterial. Saving lives and maintaining critical supplies is the primary objective. Whereas a business selling a packet of men’s socks for $8.99, must have a supply chain that is very low cost to achieve any measure of profit.
In any supply chain, there are a multitude of key functions and processes on which to concentrate. The danger to avoid is being too blinkered and losing sight of the big picture. In most businesses for example, COGS (Cost of Goods Sold) is by far the largest cost within the supply chain. So buying well stands out at a clear priority. Whilst at the customer end of the supply chain, the focus must be around service and product availability.
Good supply chain management does not focus solely on IT systems, warehouse productivity or outsourcing options. Good supply chain management focuses on the results delivered at the customer end; good operational management takes care of the details.
Strategic Supply Chain Focus
The strategic focus of any supply chain emerges from the overall business objectives with a focus on the ‘end game’. The ends, rather than the means to the ends.
The end game will vary from business to business and can be thought of in terms of the strategic imperatives for the supply chain. Once these strategic imperatives are identified and affirmed at the most senior levels of the business, developing an appropriate supply chain strategy becomes far easier.
These strategic imperatives will vary by industry and business and be guided by the business objectives, but some examples are offered here to illustrate the concept.
A Healthcare Business: (1)Service assurance (2)Best compliance (3)Best range.
A Building Products Business: (1)Delivery where you want it; (2)all your products in one place, (3)price will never be an issue.
A Mass Retailer: (1)Always in stock, (2)Lowest prices, (3)Quality products.
These strategic imperatives must be developed by the business and embraced throughout the business, so that it becomes almost a jingle or mantra within the business. Good examples are Woolworths with “the fresh food people” and Bunnings with “lowest prices are just the beginning”. These are far more than mere advertising jingles; they drive the whole focus of the business and the supply chain in an agreed direction.
Supply Chain Trade Offs
Good supply chain management requires knowledge of the key trade offs within the business and informed decision-making. With the supply chain strategic imperatives nailed down, many often silo focused decisions can be avoided, as everyone has a clear focus on the end game.
Some businesses still fall into the trap of making strategic and tactical decisions based on a one-size fits all approach to the supply chain. It is important to understand the need for flexibility and adaptability within any supply chain, but this is forgotten all too often. Evidence still abounds of standard service policies for all customers, and standard sourcing and channels to market approaches.
Value stream thinking can be useful here to illustrate the need for flexibility and adaptability. Taking a grocery retailer as an example, there are products within the range that have very different demand characteristics and management needs. These are often split into continuity products, non-continuity products and seasonal products.
Continuity products have steady predictable demand year round and are pulled through the supply chain by customer demand. Non-continuity products meanwhile might require greater life cycle management (such as in fashion), and may typically be managed with an initial push allocation, followed by pull replenishment based on sales. Finally, the seasonal products require more focus in terms of seasonal and critical path planning to ensure availability in season and minimal waste or mark down at season end.
Thinking of the product range in terms of these value streams, starts to provide the realisation that supply chains need a range of tactical and operational ‘means’ to achieve the business ‘ends’. Any supply chain strategy needs this pragmatic approach to the lower levels of detail and an acceptance that plans may and will change over time as the business changes.
Gaining Buy In
One of the main reasons for supply chain strategies failing to deliver the expected results will be inadequate ‘buy in’ at the most senior levels of the business. The importance of this cannot be over stressed. Where supply chain strategies are developed in isolation, by the supply chain team alone, they invariably fail. This will often be due to a lack of focus on the big picture, which the senior executive team can bring to the process.
The buy in stage of strategy development should focus not only on ensuring the business objectives are clearly supported, but must also articulate the business benefits to the senior executive team in language that is meaningful to them. If particular elements of the strategy do not deliver improved margins, reduced costs, improved service or other end game objectives, they need to be seriously questioned.
The very successful process used by Logistics Bureau for example, includes one on one discussions with the CEO and all the major department heads and a series of short workshops designed to tease out the supply chain strategic imperatives based on the business’s needs. Communication and buy-in are also of course important at the lower levels of the organisation as well as externally with customers and suppliers.
There can be a tendency for those at the operational level of businesses to measure ‘stuff’ that is of little real management value. Certainly, the Key Performance Indicator (KPI) needs of managers across the business will vary and must aid improved operational management, but at the top levels of the KPI ‘tree’, KPIs link directly to the strategic imperatives.
For example if one of the strategic imperatives is ‘Always in Stock’, the top level KPIs need to focus on this. Appropriate KPIs might include; store on shelf availability; distribution centre availability; supplier in full on time (SIFOT) performance and delivery in full on time (DIFOT) performance to stores or customers.
Below these top level KPIs, the next layer provides visibility of the causes of performance failure. As with the strategic imperatives, the KPI focus will and should vary dependant on the industry and specific business focus.
Causes of Supply Chain Strategy Failure.
The common causes of supply chain strategies failing to deliver on expectation include:
- Not understanding the customer’s needs.
- Failure to gain senior executive buy in.
- Failure to gain employee commitment.
- Poor communication of change.
- Poor change management.
To appreciate how appropriate supply chain strategies drive business performance, case study examples are always interesting. A very brief look at Walmart, Nokia, and H&M will help illustrate this.
Walmart. (Change management approach) In 1995 Walmart bought Woolco in Canada. The purchase included all the stores but not the distribution centres. A new distribution centre network was required to be up and running within three months and this was made possible by forming a joint venture with UK based 3PL, Tibbett and Britten.
This rapid and significant change was possible not only by the very strong Walmart culture, systems and processes being overlaid on Woolco, but also by the approach to change management.
This approach included a buddy system whereby Walmart key executives spent months with Woolco counterparts and were given substantial training at residential courses. The Walmart culture was embraced and adapted for the Canadian market and ensured that the highly compressed project timelines were met and that Walmart Canada went on to not only a very successful launch, but also significant growth in the years to come.
Nokia India(flexibility and innovation). Nokia has an innovative supply chain approach to support the business in India.
India has a very high mobile phone usage, due to having some of the cheapest tariffs in the world. Whilst teledensity in the cities is 30-35%, it drops to 2-3% in the country. This was Nokia’s target market. Nokia makes hand sets specifically designed for the Indian market with low functionality cheaper handsets for the rural areas.
Given the opportunity in the rural markets and the fact that in India mobile phones are sold through over 100,000 retail outlets a specific supply chain strategy was required. This includes ‘marketing vans’ supporting sales in the rural areas and a partnership with HCL as distribution partner, who already had a well established network.
H&M. (responsiveness). H&M is the world’s third largest retailer with 1,600 stores in 33 countries. The focus is fashion at reasonable prices. H&M have 20 production offices in Asia and Europe and have about 80 suppliers. The Stockholm head office designs all the garments, which are made in Asia and Europe. Shorter lead-time products are made in Europe.
Store replenishment is a very high focus with new products being ranged on a day-to-day basis. The H&M approach is almost to panic the customer into buying what they see, as it may not be ranged the next time they come to the store!Beware of Boiler Plate Supply Chain Strategies
Whilst we can learn a lot from these world-class businesses, we should not overlay their supply chain strategies in a boilerplate fashion on our own businesses. Valuable lessons are there, but every business’s supply chain strategy should be tailored to the needs of that business alone. In the Australian market specifically, we must ensure that we take adequate account of much lower sales densities that in Europe or the USA and often much longer supply lead times just as two simple examples.
Working Capital Optimisation in the Supply ChainIntroduction
This short article will explain what working capital is and how to make best use of working capital in the Supply Chain. It will provide useful tips for businesses to apply that will be helpful in these uncertain times.
Working capital refers to the cash a business requires for its day-to-day operations. Technically, it’s a measure of a company's efficiency and its short-term financial health. Often, it’s the company supply chain that is the first place that people look to for working capital reduction opportunities.
Optimisation of working capital is not about wildly slashing inventory levels and running the business on a shoestring. Optimisation of working capital is contextual and dependent on individual business circumstances. It’s about understanding the current service environment and identifying whether you are over or under servicing your customers. Next, it’s about tailoring your operations to strike the right balance between service and cost.
Working Capital Optimisation in the Supply Chain
The customer’s need shapes the Supply Chain. And so the customer service offer drives the inventory deployment. Specific customers will have varying service needs and it important to appreciate how these drive different costs in the business. Customer group and service examples might include:
High street deliveries, which entail frequent small drops and a high service. So inventory needs to be held close to the customer.
For mass retailers, the focus is on consistency and reliability of service. It’s also about maintaining low costs within the Supply Chain. This places a focus on ‘milking’ the supply chain assets and managing inventory tightly.
For remote customers, such as those in the mining industry, the Supply Chain dynamics might be around high service needs and costs and hence balancing the inventory and transport trade offs carefully.
It must be realised that if we change the customer base, or change the service offer, then the shape of the supply chain may need to change in terms of inventory levels, locations, transport assets and facilities and all will have a major impact on capital. Supply Chains are customer centric and will change depending on the types of customer and service provided. This is a key point.Key Focus Areas
Here are four key focus areas:
- Inventory; because it’s an obvious area to improve capital utilisation and because it can be one of the easiest and most beneficial areas to tackle.
- Transport; because it tends to be over looked and people think it’s all about getting good rates from carriers and of course, it’s not.
- The network; because its shape has a significant affect on capital requirements in terms of facilities and inventory.
- And finally Warehousing. Because again this can suck in capital unnecessarily if incorrectly sized, equipped or utilised.
We must remember though, that the customer is central in all this and that the service that we offer our customers drives all of these cost areas.
Customers shape the distribution network at one end, based on customer locations, demand patterns and service needs. And suppliers have a similar impact at the other end. Routes to market, driven by our customers location and service needs might include; direct from supplier to customer, from our own warehouses to the customer, to the customer’s warehouse, or via a cross-dock facility. That route to market can change over time and so it drives changes in our needs for warehousing and inventory.
Likewise, the speed to market has a similar impact. If we take an apparel importer as an example, much of their stock might come on from overseas as store ready packages, with the appropriate size and range for each specific store. Pushed out as an allocation typically, then replenished based on sales demand. Many apparel retailers are now doing that replenishment as LCL rather than FCL and even by changing to airfreight for the tail end of the season. Higher freight costs could result, but it also drives lower inventory investment and fewer requirements for local warehousing and cross-docks. It can also deliver lower waste and markdowns and so improves the return on that inventory investment.
So aligning inventory to our service offer is critical or we end up with too much stock, stock in the wrong place, or we run out of critical stocks. This is why some retailers categorise their stock as fast or slow moving and deploy the inventory accordingly. For example, fast moving lines are stocked in a number of regional warehouses close to customer demand, but the slower moving lines, are held in a central warehouse and replenished at a slower lead-time.
The shape of the distribution network and the location and number of facilities within it, will also of course have a significant impact on the capital required for materials handling equipment, storage equipment, IT and transport.
Inventory is obviously one of the major focus areas and can still offer significant working capital reduction opportunities within most businesses. As an example an industrial products company was recently reviewing the profile of their inventory as part of a sales and operations planning implementation. The Pareto principle often applies, where it is common to find that 80% of a company’s sales come from 20% of their product range. This company had 95% of their sales coming from 5% of the product range based on many years of poor inventory planning. The opportunity to delete at least half the range is now underway, without having any significant impact on customer service.
The Square Root Law though rather simplistic states that if the number of stock locations are reduced the amount of safety stock inventory required in the network also reduces. As an example, a reduction from ten warehouses to five reduces the safety stock by 29%. The key point here is quite simply, that more warehouses equal more inventory.
Supply lead times also have an impact on inventory, often being referred to as product velocity. If product physically moves through the supply chain quicker, then less stock is sitting idle, stock turns improve and less capital is invested in that stock. Product velocity can be increased by handling and storing less, and by having less touch points in the supply chain, such as direct delivery from supplier to customer or store and cross docking rather than storing. For those unfamiliar with the term cross docking, it means that product comes in from the supply point, crosses the dock at the warehouse, and goes out on delivery to the customer, all in one hit. Normally no stock is left in the facility at the end of the day. Therefore, it operates like a post office sorter. Of course, all the products need to be labeled ready for delivery. A variation on this is a break bulk operation, where the product arrives in bulk, and is then broken down into store or customer orders based on their demand.
Supplier Management is an absolute priority and is very badly undertaken by 60-70% of the companies seen by the author. Suppliers are the start point of the supply chain and if poorly managed create noise all the way through the supply chain that will be significant, time consuming to fix, and costly. Measuring SIFOT or Supply In Full On Time is an essential KPI. If not well managed, suppliers may short deliver, over deliver and deliver late or even early. All of this additional noise in the system requires additional stock to cover the uncertainty.
Another key focus for inventory is Sales and Operations Planning or S&OP to use the acronym. For businesses who have not adopted S&OP, they should. Very few businesses would not benefit from implementing an S&OP process. S&OP need not be about expensive IT systems, it is about communication, across all functions of the business, it is about engagement and ownership, and it is about planning your inventory needs from supply, right through to the consumer. Many businesses do this really well, on a spreadsheet! Businesses that are more complex, generally need specialist systems. However, it’s the processes, communications and disciplines that deliver the benefits, which can be significant. Reductions in inventory of up to 20% and improved inventory availability that will lead to increased sales are common outcomes.
Warehousing can be a significant demand on capital and the point needs to be reinforced, that two things dictate the number, size and configuration of a warehouse network. Firstly the customer service offer, as that quite simply dictates how close to customers stock must be held, and secondly the supply base. If supply is close and consistent then less buffer stock may be required. If the suppliers are overseas and their service is inconsistent, this can drive higher buffer stock and warehouse capacity. It’s not brain surgery.
To minimise capital needs, ensure that warehousing capacity is not over sized or poorly utilised and make sure that the locations and number of warehouses are appropriate to the demand and supply needs of the supply chain. Flexibility in warehousing capacity can also be important and is possible by having over flow rental warehouses for short periods to meet peak demand.
Facility Ownership should also be considered. The outsourcing of warehouses is probably now at about 80-85%. Therefore, 15% of businesses for whatever reason are choosing to own and operate their own warehouses. Many for good reason of course, because they see it as a core part of their business. However, for those businesses that do not need to own their warehouses, most will buy, design, build and lease back. When warehousing needs are generic, rental will usually make sense.
The fourth key area to target for improved capital utilisation is Transport. The discussion here is primarily about a transport fleet that is owned rather than outsourced, although even if outsourced these focus areas will help reduce operating costs if not capital requirements.
The key objective with a transport fleet is to keep it well utilised. It’s rather like an airline, where aircraft must be kept flying as much as possible, with as many passengers as possible, to maximize the fleet capacity and reduce the unit cost. Similarly, a transport fleet that is sitting idle is still costing money and so ‘sweating the asset’ gives the best return. Having the right fleet size and mix in the first place is critical. With trucks that are too large or too small costs and fleet size are increased due to carting fresh air around or by having to make multiple trips to the same locations. As a business changes, this fleet need can change over time so it needs careful monitoring. The aim must be to ensure good fleet utilisation of the physical capacity, as well as hours through the shift and hours through the day.
Then there is the question of fleet ownership. In some cases where the fleet is specialised and very highly utilised, it can make sense to own it. But if the capacity needs of the fleet vary then leasing or even outsourcing can make better sense. Rather like the argument for warehousing, it can make sense to have someone else make that capital investment.Summary
In summarising the top priorities in terms of improving the utilisation of working capital in the supply chain, these should be your list:
- #1 Is Customer Service. It drives the whole shape of the supply chain and the investment in it. There may be opportunities to renegotiate or adapt the customer service offer, or at least ensure it’s well aligned with customers needs.
- #2 Is Inventory. This is driven by the service offer and the need to hold buffer stocks to cater for peaks and troughs in demand and supply. An absolute must here is good S&OP for most businesses.
- #3 Is The Distribution Network. It is shaped by where and how much inventory we need to hold. Look at the routes to market and options such as direct from supplier delivery.
- #4 Is Warehousing, because that can be capital intensive and needs to be sweated to get the best return. The size, layouts and equipment used are all important.
- And lastly, at #5 we have Transport. Similar to warehousing in that we need to make sure the asset is right for the task and utilisation maximised. In both cases consider outsourcing where it can reduce the investment required as well as give much needed agility in capacity.