Why companies mustn’t underestimate provide chain’s worth

Why companies shouldn't underestimate the value of the supply chain

The Covid-19 pandemic has underscored the importance of supply chains in helping organizations cope with surges in demand and supply bottlenecks and as a lever for agility. Calum Lewis, founder of supply chain transformation company OP2MA, explains why companies shouldn’t underestimate the business value of the supply chain in the future.

The companies were tested last year, and with the UK leaving the European Union, there is likely to be further turmoil despite a trade deal. Questions about trade and supply flows will be raised for the coming years. The proliferation of expanded global supply networks affected by the Covid 19 crisis will be subject to further disruptions and changes for many companies.

So what’s next?

When companies emerge from the immediate crisis and plan a way forward, questions about strategy, functioning and organization of the supply chain need to be answered:

  • How should companies prepare for changes in demand?
  • What should the procurement strategy look like to ensure continuity and flexibility of supply?
  • What physical footprint and what assets are needed?
  • How can inventory levels be managed to minimize working capital while ensuring the required levels of service?
  • Are supply chains affected by unnecessary complexity?
  • How should people and organization be developed for success?

How such questions are answered will be fundamental to negotiating these troubled times and finding a path to sustainable growth. However, for some time now, companies have been using supply chain management to gain competitive advantage, disrupt traditional ways of working, and steal a march from competitors.

Today more than ever, companies need to understand how their business drives profitability and affects capital requirements. Those who simply view supply chain management as a necessary, low priority aspect are left behind.

How to adapt

As the supply chain strategy adapts and revises, new solutions must pass rigorous assessments and tests, probably in ways never seen before. Strategic design decisions must ensure that the supply chain is: aligned with the core business strategy and the primary competitive basis (innovation, customer experience, quality, cost), tailored to deliver the required products and services, without undue complexity, resilient in order to be able to to work effectively when conditions are no longer ideal and to be responsible for promoting social and environmental wellbeing.

Being adaptable can also help a company respond to a changing business environment, whether it be due to technological disruptions, market conditions, new products and services, mergers or acquisitions.

Don’t lose sight of the basics

However, we shouldn’t lose sight of some of the core principles that make up great supply chain management performance. When we were clear about which products and services offer added value, one of our customers could see the benefit of removing the complexity of the product range and supplier base while helping with the restructuring of the distribution network. Applying a systematic approach to assessing the impact of the supply chain on financial results gave the company a platform for sustainable growth.

True innovation occurs when creativity and analysis are combined. A historically underinvested foodservice retailer struggled to support continued customer growth, and firefighting was a company’s honor. Established working methods resulted in unnecessary complexity in the supply chain, excess inventory and extensive use of the off-site warehouse.

By strategically redesigning the supply chain for all major delivery categories based on a lean flow model, we were able to reduce average inventory by £ 8m while keeping order fulfillment at over 99% and ensuring sustainable operations of 12% cost reduction. Developing collaboration across the supply chain played a critical role.

Trends such as automation, digitization and near-shoring that have emerged in recent years will accelerate. There is a lot of scope to improve data collection, accelerate the flow of information and synchronize activities across utility networks in ways that were previously impossible. If there is no call to fill digital gaps now, when will it be time to focus on digitization projects and initiatives?

Supply chain management is about balancing service, costs and capital in a coherent way to achieve sustainable financial results. Compromises have to be made. Only through a structured, systematic approach to reviewing, rethinking, and resetting the supply chain can companies meet the need to respond to events, face the challenges of new trading conditions, and capitalize on the opportunities offered by digital technologies.

Organizations need to incentivize their supply chain to operate in a way that provides the most value to their business while protecting against the greatest risks. The right KPIs depend heavily on the requirements of the company, the product and the market. The key players in production costs, the stability of the supply of staple foods and critical products, and agility in volatile markets with fluctuating demand are crucial. If a metric doesn’t matter to your company, don’t misdirect the organization by applying it.