Creating Value with your Supply Chain

There was a time when all the pundits were arguing about what was meant by the term Supply Chain or Demand Chain or Value Chain, or whether we should use the word chain at all because chains have links that can be broken and we should all be part of a pipeline.

Thankfully, these academic arguments have died down, and most of us in the business and education fields can at least agree that the flow of products and service, information and cash is important to everyone involved. For the rest of this article, any reference to Supply Chain is intended to encompass the commonality without belittling the arguments for distinct definitions put forth by my colleagues. Likewise, any reference to product availability can be substituted with service accessibility.

Most of these defined alliances theorize that the key to success is getting somebody (both consumers and investors) to spend their cash with us instead of our competition. With the ever growing integration of the Supply Chain, this means finding the right channel partners, and treating them as more than just a customer or supplier, is as important as having the right product and service offering. Most everyone can agree that adding value, both to our channel partners and to the final consumers, is integral to long-term survival, but where do we start?

The first question we need to ask ourselves is, “Why does the consumer spend money with our supply chain as opposed to our competitor’s supply chain?” Is it the point of purchase that differentiates us, or the product quality? Is it our price offering or the fact that our product is always in stock (or our service is readily available)? The answer to these questions will determine who in the Supply Chain has to take the leadership role. This is the hardest part, as retailers, manufacturers, and even some wholesalers want to believe that theirs is the position of power (next to the consumer). Setting aside the politics for the sake of a stronger alliance is not easy, but it is necessary to truly gain value from one’s supply chain. Once we know the answer to the question of why the money flows, we can re-examine our Supply Chain to ensure we are satisfying that desire better than our competition, and at a lower cost.

The difficult part is accepting the answer and getting the rest of our partners to agree. This leads to our second political issue. Our partners in the Supply Chain (e.g., a retail store), may be working with our direct competitors. How could we possibly suggest that they should hold position of power in our Supply Chain? First we need to understand what is meant by the position of power. It’s merely the party most aligned with the attribute that causes the money to flow into our supply chain.

Let’s take an example of toothpaste. I interviewed a consumer (hardly a statistically relevant sample) and learned that she purchases toothpaste for the marketing claim that it whitens teeth and fights cavities, but would purchase another brand, or another product from the same brand making another claim (fresh breath instead of white teeth) if the preferred product was not in stock or was priced too high. This tells us that the reason we get her purchase is because the product is in stock at the place where she looks for it. Our supply chain, therefore, should be built around ensuring the product is available at the store location most convenient to the consumer (in this case, her local grocery store). In this particular case, we need to accept that this retailer has the position of power. If this were a computer, we might find that position of power is not with the retailer at all, but let’s finish one line of reasoning before we start another.

Now we need to convince our retailers that they require daily replenishment of this product to satisfy the consumer. They may prefer to receive shipments direct from the supplier weekly, in order to keep costs low, but in this case, to create Supply Chain Value, they should purchase a mix of products from their local distribution center on a daily basis (minimizing the number of deliveries and maximizing their assortment while keeping inventory investments low). The carrier needs to be aware of the importance of delivering undamaged product on time so the store receiver can get it unloaded and on the shelf in time for the next consumer. They are an integral part of the Supply Chain and need to be respected for the value they add.

The DC needs to have information about daily retail sales so they know when consumption will drive another purchase from the manufacturer’s warehouse. The manufacturer should know the retail consumption levels as well, to avoid becoming a victim of the Forrester (Bullwhip) effect when planning re-supply to the DC.

Failing that, they should know how the DC is managing their inventory in relation to the store’s needs so they can provide support without increasing their inventory investment. This is a critical component that is rarely addressed in Supply Chains that I’ve seen in action. Inventory decision makers often do not know how their partners are managing their inventories. If your customer or supplier is using EOQ, or some form of DRP, then they are going to have a very different demand (or supply) pattern than if they believe in JIT or lean inventory management, and will make different decisions based on supply disruptions or demand variations. Do you know what method your supplier and customer use to manage inventory for any of the products in your supply chain?

The raw material suppliers, meanwhile, need to understand batch sizes and production plans for their customers so they can minimize their inventory investment without causing a line to shut down. If they can’t fill an order 100 per cent, do they fill it 50 per cent to keep the line running or does the product configuration not allow for partial deliveries of raw materials in the same production run? Again, transportation needs to be actively engaged in their role in the supply chain. If the truck experiences weather delays or a flat tire, will a late delivery impact the customer? Do they need to be advised so they can change their production run, or courier in enough additional stock to meet their needs for the short term until the truck arrives? Unless the dispatcher and the truck driver were made aware of the criticality of the item, they may assume that it’s just a routine delivery. It may be, but “routine” is the value created by a well run supply chain, and the disruption of that routine can result in Supply Chain disaster.

Asset management lies at the heart of logistics leadership, and all parties need to work together to minimize the investment in inventory and workload without causing a disruption in the supply chain. Unless each party knows of the philosophies and nuances of their partner’s view on managing assets, decision making is just guessing; and unless all of that decision making is designed to support the value proposition of why that consumer spends money in your supply chain, it’s just waste. The same holds true for the KPIs and other metrics we use to communicate good service in a supply chain. Why should we measure Order Fill if we would rather have our line running with a partial receipt than have to change our plans to run something else? Why should we measure On Time Delivery if we have more inventory in our building than we will use in the next week? We constantly send false messages, and ask our managers to hold people accountable for items that aren’t important to us. Instead, we should measure how well are changes communicated? How quickly? Maybe we need to feel that we hold a position of power and importance; but in a well-run Supply Chain, we do. We all do. Each party is necessary (or they’re waste and should be eliminated), but we determine that by how they support the flow of goods and information. We need to rethink our metrics and start to focus on what adds value.

So, how do you create value with your supply chain? You cause the money to flow. You build relationships and align strategies that support the player in the position of power (whoever that may be), share information (which includes how your partners make asset management decisions that will affect you in an emergency situation) and eliminate waste (including time waste measuring things that don’t matter).