Supply Chain Management Definition
In today's fast-paced business environment, effective supply chain management is more crucial than ever. Companies must navigate various challenges, such as globalization, increased customer expectations, and rapidly changing market conditions, to ensure their products reach the right place at the right time. It's no longer enough to simply have a streamlined production process; organizations need to seamlessly coordinate the flow of goods, information, and finances across the entire supply chain.
With the help of advanced technologies and data analytics, companies can optimize their supply chain management strategies, enhance operational efficiency, and gain a competitive edge. From procurement and logistics to inventory management and demand forecasting, every aspect of the supply chain requires careful planning and execution.
What is Supply Chain Management?
Supply chain management (SCM) is the coordination and management of all activities involved in the production and delivery of goods or services, from the initial procurement of raw materials to the final distribution to end customers. It encompasses the planning, sourcing, production, logistics, and reverse logistics processes, with the ultimate goal of optimizing efficiency, reducing costs, and maximizing customer satisfaction.
In a globalized economy, supply chains have become increasingly complex, with multiple stakeholders, geographically dispersed suppliers, and diverse customer demands. Effective supply chain management requires a holistic approach that considers the entire end-to-end process, including both internal and external stakeholders.
Key Components of Supply Chain Management
The success of supply chain management relies on several key components that work together seamlessly to ensure the efficient flow of goods and information. Let's explore these components in detail:
Procurement
Procurement involves sourcing and acquiring the necessary raw materials, components, or finished products from suppliers. It includes activities such as supplier selection, negotiation, contract management, and supplier relationship management. Effective procurement practices focus on securing high-quality goods at competitive prices, while also considering factors such as supplier reliability, ethical sourcing, and sustainability.
Inventory Management
Inventory management involves overseeing the levels of raw materials, work-in-progress, and finished goods to ensure optimal stock levels. It aims to strike a balance between avoiding stockouts and minimizing carrying costs. Effective inventory management requires accurate demand forecasting, real-time visibility of inventory levels, and efficient inventory replenishment processes.
Logistics
Logistics refers to the movement, storage, and transportation of goods from suppliers to customers. It encompasses activities such as warehousing, order processing, transportation planning, and last-mile delivery. Efficient logistics management focuses on reducing transportation costs, optimizing delivery routes, and ensuring timely and accurate order fulfillment.
Demand Planning and Forecasting
Demand planning and forecasting involve predicting customer demand for products or services. It enables companies to align their production and inventory levels with anticipated demand, minimizing the risk of stockouts or excess inventory. Accurate demand forecasting relies on historical data, market trends, customer insights, and collaboration with sales and marketing teams.
Supplier Relationship Management
Supplier relationship management involves building and maintaining strong partnerships with suppliers. It focuses on fostering open communication, collaboration, and mutual trust. Effective supplier relationship management helps companies secure reliable and cost-effective supplies, gain access to innovative products or technologies, and mitigate risks associated with supplier performance.
Supply Chain Management Process
The supply chain management process involves a series of interconnected activities that ensure the smooth flow of goods and information. While specific processes may vary depending on the industry and company, the following steps provide a general framework for effective supply chain management:
Challenges in Supply Chain Management
While supply chain management offers numerous benefits, it also presents several challenges that companies must address to ensure success.
Globalization
Global supply chains introduce complexities such as longer lead times, diverse cultural norms, and regulatory differences. Managing suppliers and logistics across multiple countries requires careful coordination, cultural understanding, and compliance with international trade regulations.
Demand Volatility
Fluctuating customer demand, seasonality, and market trends pose challenges in supply chain planning and forecasting. Companies need to invest in accurate demand forecasting methodologies, real-time market intelligence, and flexible production and inventory management strategies to respond effectively to changing demand patterns.
Supply Chain Visibility
Lack of end-to-end visibility into the supply chain can hinder decision-making, increase lead times, and result in inefficiencies. Companies need to leverage technology solutions, such as supply chain analytics and real-time tracking systems, to gain visibility into inventory levels, transportation status, and supplier performance.
Risk Management
Supply chains are vulnerable to various risks, including natural disasters, geopolitical events, and supplier disruptions. Companies must develop robust risk management strategies, diversify suppliers, and establish contingency plans to mitigate the impact of unforeseen events on their supply chains.
Complexity and Integration
Supply chains involve multiple stakeholders, processes, and systems that need to work together seamlessly. Managing the complexity and ensuring integration across various functions, such as procurement, production, logistics, and sales, requires effective coordination, standardized processes, and the use of integrated technology platforms.
Technology and Tools for Effective Supply Chain Management
Advancements in technology have revolutionized supply chain management, enabling companies to overcome traditional limitations and achieve new levels of efficiency. Here are some key technologies and tools that are transforming supply chain management:
Supply Chain Analytics
Supply chain analytics involves the collection, analysis, and interpretation of supply chain data to derive meaningful insights. By leveraging predictive and prescriptive analytics, companies can make data-driven decisions, optimize processes, and identify areas for improvement.
Internet of Things (IoT)
The IoT involves connecting physical devices, sensors, and machines to the internet, enabling real-time data collection and communication. In supply chain management, IoT devices can track inventory levels, monitor transportation conditions, and provide visibility into the entire supply chain, improving efficiency and reducing costs.
Blockchain
Blockchain technology provides a decentralized and transparent framework for recording and verifying transactions. Within supply chain management, it has the potential to improve traceability, verify product authenticity, and streamline operations like supplier payments and contract management.
Robotic Process Automation (RPA)
RPA involves automating tasks that are repetitive and rule-based by employing software robots. In supply chain management, RPA has the capacity to optimize order processing, automate data entry, and enhance accuracy, allowing human resources to concentrate on more strategic activities.
Cloud Computing
Cloud computing enables companies to store, access, and analyze supply chain data in a secure and scalable manner. It facilitates collaboration, provides real-time visibility, and allows for seamless integration with supply chain partners.
Conclusion
Effective supply chain management is vital for companies in the contemporary business landscape characterized by globalization and rapid changes. It serves as a critical success factor, encompassing a range of strategic processes and activities that enable organizations to navigate the complexities of a dynamic and interconnected world.
In the globalized supply chain landscape, involving various stakeholders like suppliers, manufacturers, distributors, and retailers, Godamwale's expertise ensures businesses confidently navigate complex dynamics. This proficiency in inventory management, order fulfillment, and strategic supplier relationships optimizes the flow of goods, information, and finances, enhancing operational efficiency, cutting costs, and boosting customer satisfaction.
https://tinyurl.com/4nv835ds
It is important to know the SCM concept because many people confuse supply chain with logistics. So they reduce the relevance and scope of supply chain. How we are showing the concept of supply chain is quite broad, and that means supply chain is without any doubt one of the main pillars to focus on turnaround projects. So first at all, let us review the SCM concept.
According to APICS body of knowledge, they distinguish between:
- Production & Inventory Management (CPIM): Operations performed inside the four walls of the organization (demand planning, procurement, supplier management, material requirement planning, capacity planning, S&OP planning, master scheduling, performance management, quality control, continuous improvement)
- Supply Chain Management (CSCMP): End-to-end supply chain from the first customer to end customers (CRM, SRM, international trade, logistics, IT SCM).
The rest of the main supply chain organizations offer a much broader definition of supply chain.
CSCMP defines SCM as the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities (demand planning, procurement & supply management, manufacturing & service operations, transportation management, inventory management, warehouse management, order fulfillment & customer relationship).
Scmi says that SCM is the integration of key business processes from end-user through original suppliers that provides products, services, and information that add value for customers and other stakeholders (CRM, SRM, customer service management, demand management, order fulfillment, manufacturing flow management, product development and commercialization, return management).
In order to understand the difference between logistics and SCM we are showing the logistics definition provided by CSCMP. Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements.
Alfred J Battaglia shows us a very interesting view of the evolution of SCM concept
Supply Chain Management Canvas
The Business Model Canvas is a great contribution to reduce the complexity of designing successful business models. Implementing the Supply Chain Management Canvas can contribute to simplifying the process to build Supply Chain models that create a competitive advantage for our companies.
The benefits of a canvas approach
Based on the official site of the Business Model Canvas, we can point out four main objectives for the canvas approach:
- Describe our business model in a limited and manageable quantity of basic building boxes, which allow us to maintain focus on the key functions/activities/processes/resources.
- Define a logic pre-structure of the canvas. This is essential because business or supply chain models depend heavily on the alignment and tradeoffs between those basic building boxes. Usually, the canvas framework is used for a strategic purpose. It is important to realize that strategy is about “choices,” so the choices are what will make our model unique. Some examples of supply chain choices are make-to-stock vs. make-to-order, efficiency vs. responsiveness, centralized vs. decentralized stocks, etc.
- Help to describe, map, design, discuss, challenge, choose, improve, innovate… This visual chart allows us to better visualize the “As Is” and “As Should Be” scenarios. Moreover, it is a great visual communication tool to discuss new ideas and align different teams/people.
- Make the focus on the Key important things. The one-page “limitation” helps to maintain focus and avoid getting lost in many building boxes and initiatives.
Having the Business Model Canvas is a prerequisite
Even if your objective is the Supply Chain Canvas, be aware that we need the input of the Business Model Canvas before. The Supply Chain Canvas must be driven by the company strategy and business model. Thus, using the Business Model Canvas as an input for the Supply Chain Canvas is the only way to guarantee the necessary alignment between the firm’s business model and the supply chain model.
Furthermore, I would suggest creating a supply chain complementary version from the CEO Business Model Canvas. That complementary version should be focused on the Supply Chain function in order to move from the company scope to more specific Supply Chain details. For instance, in that complementary version we are using key supply chain partners rather than the company partners, or key supply chain activities rather than the company activities, or the supply chain value proposition rather than the company one, and so on.
The Supply Chain Canvas
Once that we have the Business Model canvas from the CEO, and we have performed a complementary version focused on the supply chain function, we are ready for the more specific and customized Supply Chain Canvas.
My proposal for the Supply Chain Canvas is fifteen building boxes. This number is a consequence of the complexity of the supply chain function, and likely the maximum number of building boxes that we should have in the canvas tool. The operations of the model are placed on the top ten building blocks which follow the sequence of the value chain (design, plan, source & make, deliver, and customer.) The bottom five building boxes are focused on the supply chain financial impact in the Balance Sheet and the Profit & Loss Account. Finally, the light gray background building blocks are more focused on efficiencies, and the light blue more focused on customer value creation.
Warehouse Management Canvas
Warehouse costs are one of the largest fulfillment costs, and Distribution Centers are a key supply chain process for satisfying the rising logistics needs and expectations of customers. However, it is not easy for supply chain professionals to avoid getting distracted with small warehouse issues rather than focus on what really matters. The good news is that the business canvas is one of the best management tools to help warehouse professionals to see the big picture, apply a holistic warehouse optimization approach, and identify high potential improvement initiatives or programs.
Aligning the warehouse management canvas with the supply chain management canvas
Supply chain is so complex and involves many activities. Execution is essential in supply chain to materialize the potential operational and financial improvements. These two detailed characteristics suggest that at least we need three canvas level in supply chain:
- The business model canvas
- The supply chain management canvas (see the post Supply Chain Management Canvas)
- A more detailed level for the main supply chain processes, i.e., the Warehouse Management Canvas
These three levels need to be aligned and consistent with each other. This alignment is not obvious because the building boxes for the three levels of the canvas are not the same. When we are talking about alignment, I would suggest focusing on Customer blocks (last column in the three canvas levels – see the image below) and the financial performance (last row in the three canvas levels – see the image below).
The Warehouse Canvas
We continue using the idea of fifteen building boxes from the original Supply Chain Management Canvas (see the post Supply Chain Management Canvas) as the maximum number of practical building boxes. However, we are using a simpler and more tactical and operational model on the top, based on the well-known People, Process, and Technology Framework.
Learning to See in the Warehouse
Improving the operational and financial performance of a warehouse is never an accident. It is the consequence of being able to see the big picture of the warehouse and the high-impact potential opportunities. So, let’s review where we are finding some of the most key improvement opportunities when we are analyzing the performance of warehouses:
- Layout: In many warehouses, there is the assumption that the initial layout design is the optimum, even if it was the optimum design at that time, customer needs, and volumes change with time, which means that layout should be reviewed periodically.
- Planning: Any issue or lack of planning will automatically transfer to the tactical and operational warehouse processes. I always suggest checking overtime because overtime is a good indicator of the efficiency of the planning process.
- WMS: Many WMS and ERP implementations are performed without doing enough process mapping work and a detailed business requirement study for all the processes. The consequence is fast but sub-optimized implementations. So, those systems will require complementary Excel spreadsheets and manual processes that will reduce productivity.
- Storage Solution and MHE: Conventional racks are not the only storage solution, although it is the most common and flexible. Customizing different storage solutions and MHEs according to different types of items and volumes will increase productivity and reduce costs.
- Processes: If we do not map processes, it is difficult to identify issues at the activity or task level. All companies are wondering how to improve productivity, and process mapping is one of the key steps in the productivity improvement journey.
- Operational flow: The traditional approach to warehouse processes is a silo approach, which looks at optimizing activities. A warehouse holistic optimization approach based on improving flow and productivity can revitalize warehouses increasing flow +40% and productivity +20%.
- Performance management: To properly perform, businesses need to be able to answer positively two key questions: Do we have a performance hierarchy of KPIs to be able not only to understand the overall health of the warehouse but also the diagnostic and root cause KPIs? Do you have a process to identify why some KPIs are not good enough, and which actions need to be taken?
- Quality: Are you able to track where are quality issues coming to? Most of the quality issues are not people’s problems; they are process problems. Nevertheless, it is important to identify who was the operator that makes a mistake to understand why (lack of training, a badly designed process, etc.) and promote a culture of quality and accountability.
- Inventory: The inventory level and the inventory control process are two of the best indicators to determine how well the warehouse is running.
How to make the Warehouse Management Canvas work
The warehouse management canvas will help warehouse professionals build and accelerate real warehouse transformational plans, which will deliver huge value for their companies and customers. However, the success of any project is likely based on the sustainability of performance improvements.
The warehouse canvas is built on the sustainability of the improvements. Thus, we have five building boxes that will support performance sustainability: planning (less operational issues), technology (simple, robust, and repeatable processes), operational flow (complexity reduction), people (accountability), and performance management (KPIs with action plans.)
It is important to highlight that even the warehouse canvas is built on the sustainability of the improvements. The tool does not substitute the need for a remarkable Warehouse Manager with the skill of change management and making things sustainable and happen.
Supply Chain, Manufacturing and Marketing/Sales Strategies Alignment
According to SCOR Reference Model there are three main supply chains or we could say three main supply chain strategies (make-to-stock, make-to-order, and engineer-to-order). As we are showing those strategies must be aligned with manufacturing and marketing/sales strategy.
Despite SCOR mention three strategies, we could say that in reality there are two main supply chains and/or manufacturing strategies because engineer-to-order could be considered as a sub-classification of make-to-order.
The two main supply chain and/or manufacturing strategies
- Make-to-stock (MTS): We manufacture and stock the goods. The goods are stocked until we receive sales for those products. The main advantage of this strategy is that allowing us to short delivery times to customers because finish goods are already produced (if our forecast is correct). On the other hand, we are building stock, and costs associated with stock (cost of capital, inventory damages, insurance of inventory, inventory obsolescence, and inventory shrinkage). Perhaps the main handicap of this strategy is that we need to forecast sales, and as it is well known to perform a good forecast is complex, and be 100% right with the forecast is “almost impossible”. The make-to-stock strategy fit very well with the traditional economies of scale approach because we can optimize production batches supporting extra production with finish goods warehouses.
- Make-to-order (MTO): We start manufacturing after receiving sales orders, and just covert the sales orders (we are not stocking). The main advantage is that finish goods stock is not built, so the cost associates with that stock are not going to flourish. On the other hand, delivery lead times are getting longer to compare with firm that stock product. However, this approach makes more agile and flexible to these firms, if we are talking about customized products. This make-to-order strategy fits with lean approaches well or even many customized products that are not able to be planned.
Now we are showing an image that shows and summarizes the relation between supply chain, manufacturing and marketing/sales strategies. We should not forget that any functional strategy not well aligned with the rest of the functional strategies could be created an inconsistent business model that could make fail the firm in the market.
Supply Chain and Manufacturing Strategies: Aligning functional strategies (adapted from Martin Christopher)
The two other supply chains and manufacturing strategies related to make-to-order
- Engineer-to order: Customers’ orders will require of engineering specific designs. So inventory “cannot be built” until the sales order is not received, and the design needs are known.
- Assemble-to-order: Compare with make-to-order the difference is that rather than make we assemble.
The utility of this framework for turnaround processes
Reviewing if there is any inconsistent in the main functional strategies, because those inconsistencies could be one of the causes of current business issues.
- Make-to-order strategy could be a lean solution to optimize total costs rather than silos costs.
- Make-to-order strategy could be a new approach to revitalize company strategy.
- Rethinking about our core competencies.
How Important Must the SCM Function Be?
The Value Chain tool (Michael Porter 1985) shows us the main activities of the firm. Those activities are separate in primary and support activities. If we analyze the primary activities, we can get the conclusion that primary activities are Demand Activities (Marketing, Sales and Service) and Supply Activities (Inbound Logistics, Operations and Outbound Logistics). We could say that Demand activities are CRM (Customer Relationship Management) processes and Supply activities are SCM (Supply Chain Management) processes. In fact, many IT companies define their ERP modules in that way.
Unfortunately, there are still many people who think about SCM as just day-by-day back office tasks (storage, import, purchase, and so on) or confuse SCM with Logistics. Indeed, SCM is one of the two main strategic activities of the company. SCM is a very strategic function because is the nucleus activity of the firm. I said nucleus activity because it is the link with all the areas of the firm and the external link with customers and suppliers.
You can see below an adapted value chain (engineering has been added because is important for manufacturing firms, and infrastructure has been removed) where you can see the important value untapped in many firms that SCM is able to deploy (blue background). Some of those activities are cross functional and responsibility must be shared with other departments. In red letters we can find SCM core functions that are shared with other areas of the company. For instance, cost improvements or cash to cash cycle time are financial ideas but the implementation use to happen in SCM. Other example could be change management: because an important proportion of the staff is SCM related, the materialization of change initiatives rely on SCM many times.
SCM Activities in the Value Chain
Thus, having a robust SCM function is a key cornerstone to compete nowadays. CEOs must realize of the full potential of having an important and integrated SCM function rather than breaking the SCM ideas in several departments with the risk of losing the power of integrated internal and external processes.
So can anyone say that SCM is less important than any other function?
Tax Efficient Supply Chain Management: TESCM Strategies
There are financial tools like Economic Value Added (EVA) which shows us tax management as one of the key business levers. Tax Efficient Supply Chain Management (TESCM) shows us the potential of using tax and supply chain management in an integrated way. The result of that approach is getting important effective tax saving (effective tax is the tax after tax exemptions, tax refunds and so on) AND improving supply chain efficiencies at the same time. So let’s go to review some of the main TESCM strategies that can bring massive savings to our companies and support turnaround processes:
Centralized assets and operations in low-tax countries/states by putting in place a regional/global Tax Efficient Supply Chain Management (TESCM) strategy
In Europe for instance, Ireland and Switzerland used to be the preferred locations. Those countries to attract global or Pan-European headquarters are offering important corporate tax savings at the same time that offer access to the huge European Union market (EU has free movement of capitals, people and products). Thus, we have well-known companies like Unilever, Kraft Foods or Johnson Wax that have moved their regional headquarters to Switzerland. Those are small countries which tax strategy is attracting large global or regional headquarters. There are other benefits like English language for Anglo-Saxon firms in Ireland, or high life quality standard in Switzerland which could be an incentive to attract and retain the best staff. Moreover, Switzerland is in the center of Europe and connected by plane in less than three hours with any European country what can reduce traveling expenses and improve productivity.
Additional to tax saving the huge potential of TESCM is materializing supply chain efficiencies. Therefore, in these specific TESCM strategy firms are finally creating a “real” global or regional SCM strategy; for instance creating a European procurement team that rather than optimize purchases at country level, they are leveraging the regional/global purchasing power of the corporation.
However, the most important question likely is how do we get important tax effective savings with this strategy? The answer is moving activities (planning, procurement, call-centers, etc.), assets (stock, facilities) and risks (risk of: receivables, stock, purchase and manufacturing) from other countries to headquarter country which “allow us” to move transfer price to headquarter. So we are transferring benefits from other countries to headquarter country where the effective tax is much lower.
Tax Efficient Supply Chain Management (TESCM): Centralized Assets and Operations
We have to mention that this very attractive TESCM strategy has some risks that need probably be mitigated with support of experienced tax consultancy firms. In the last years many large corporations have moved headquarters to countries like Switzerland, and any “political and economic” movement is expected from EU to avoid this transfer of countries’ income and qualified staff to countries with much less taxes. Thus in the future tax corporation homogenization should be expected in the EU. In the short-term the governments that have lost important incomes from those multinational are checking taxes paid in the last years to disincentive that practice and trying to recover part of the income likely with fines from tax inspections.
Tax authorities are going to find out if this price transfer is legal or not. Thus, they used to request e-mails, purchase order, sales orders and so on in order to demonstrate that the activity was not transferred to other country and profits cannot transfer too. There are firms that implement the tax saving but they “forget” to properly implement that transfer of activities, assets and risks. Be aware that implementing this strategy in large multinational is expensive and take “some” time.
When we have to work in a subsidiary turnaround, first thing that we have to investigate is any transfer price issue. That can be the main cause of subsidiary failing.
Outsourcing services
One of the advantages of outsourcing is that the company that performs the service used to have lower salaries according to that specific industry (logistics service providers, re-packers, and so on). In that case the social charges/taxes are lower because salaries are lower. Moreover, outsourcing activities (e.g. call centers) to other countries can bring even further salary reduction and even additional saving because they could pay fewer corporate taxes in those countries. So this TESCM strategy can mean that we are reducing taxes at the same time that we take advantage of outsourcing (reduce costs, avoid investments, gain flexibility, reduce complexity, and so on). I have to stress that lower salaries should be constrained by countries’ laws regarding minimum and fair salaries, and even company policy regarding fair salaries.
Realizing of TESCM potential could make us outsource tax services with specialized tax consultancy firms which could help us to accelerate the process to detect and materialize opportunities, and to avoid risks. In this case we would be outsourcing services to firms that will likely pay for salaries higher than in our industry, but the expertise and cost benefit analysis recommend we should outsource these services.
Bounded warehouses
This type of warehouses allows companies to build stocks close to the selling market, and delay the payment of taxes (import taxes, and VAT mainly) to the moment of the sales. So this specific strategy is much more focus on improving cash-flow massively, then this is affecting the profit and loss account reducing our borrowing costs. We must be aware that bounded warehouses required of processes much more robust to guarantee that we are not having additional risks related to taxes. The complexity and risk of having a bounded warehouse used to push us to have a centralized bounded warehouse which means having the benefits of a centralized warehouse. In this article we are not going to analyze the advantage and disadvantages of centralized warehouse, but some of the advantages of centralized warehouses used to be: higher control, flexibility, responsiveness, and even less cost coming from higher efficiency. We have to mention that diseconomies of scale is likely the most important constraint for a centralized warehouse that can make us create a new warehouse. The other could be networking optimization design.
Using alternative low cost ports located in low taxes states
Most companies used the biggest, busiest, and most common ports which used to be the highest port taxes and used to be located in states with highest taxes too. So there is an opportunity to use “second level ports” with fewer taxes and not necessarily worse service. That is part of the job of supply chain professionals, synchronizing ocean freight with other supply chain areas to get the economic benefits of those “second level ports” without affecting in the service level (ocean freight frequency). Moreover, it must mention that those smaller ports used to have a good local service level because they are less busy and more customer focused.
Tax and Supply Chain Management areas can bring important benefits to our firms, if those are managed properly. We can be losing TESCM opportunities, if we do not nurture of internal/external resources those areas and support collaboration initiatives to look for new saving. Furthermore, if those areas look proactively for new saving, it will probably bring other saving just tax related (there is not any SCM efficiency) like reduce import cost because there is a new product classification according to customs, new tax reductions for specific industrial product in some underdeveloped countries, and so on.
Sales Efficient Supply Chain Management (SESCM): A Success Foundation for a Business Model
What is Sales Efficient Supply Chain Management (SESCM)?
To be successful in the fierce competitive marketplace, it is not enough having a good Sales or Operation strategy any more. Nowadays we need both synchronized strategies with a powerful synergistic effect that allows market leader firms to beat the market. This is what we could call Sales Efficient Supply Chain Management (SESCM.)
Are Sales and SCM opposite views of the company?
Someone could be still thinking that Sales and Supply Chain are not really “enemies” but “opposite” views of the firm (front-office vs. back-office). Nevertheless, the origin of logistic is likely one of the 4 Ps of marketing, I mean Placement. So the main logistic objective is satisfied customers delivering the right products, the right quantity, with the right documentation, in the right place, at the right time, with the right packing, and to the right customer. In addition, Supply Chain goal is to improve customer performance attributes (reliability, responsiveness and agility.) Also, it should improve internal performance attributes (cost, and assets) or at least to maintain an acceptable competitive level on those internal attributes. Thus, we could say that Sales and Supply Chain Management are not necessary opposite views of the firm rather than complementary views with the same goal of customer satisfaction.
How do leading organizations implement Sales Efficient Supply Chain Management (SESCM) strategies?
Uncoordinated Sales and Supply Chain areas just drive companies to mediocrity. On the other hand, a well-coordinated Sales and SCM areas can bring huge operational benefits AND sales growth. That is the result of success Sales Efficient Supply Chain Management (SESCM) strategies. Let’s go to review a few examples of SESCM strategies to get a better understanding:
- ROLLS-ROYCE Power System (MTU do Brasil) stock reduction program. MTU do Brasil was in a complicated distressed turnaround situation where it needed to improve cash flow and profitability quickly. Thus, a few SESCM initiatives were put in place. First, overstock reduction with discount campaigns. Second, write off obsolete stock to improve the warehousing process and the stock costs (cost of capital, damage, insurance, obsolescence, and shrinkage), AND being able to build stock on the reference that customers really need. Third, implementing a make-to-order scenario for preventive maintenance (overhauls) based on collaborative planning with customers, which reduced the stock need it for those services and the transportation cost. Moreover, with better planning we got to serve better customers (improving the reliability of Delivery On Time.) We must stress that service is a Key Success Factor for future sales. Fourth, stock transfer to customers searching for additional discounts. So we avoid extra cash needs to finance a few growing projects, offering special discounts to customers willing to build some stock. Those discounts supported sales growth, AND that stock in the customer side reduced the KPI of Equipment Downtime accelerating the services to customers AND improving the company cash flow.
- CADBURY implementation of minimum order size. This initiative could mean inflexibility and lack of customer orientation. The implementation result could have the risk to lose sales from customers who prefer smaller orders and more frequent deliveries. Indeed, the result was very positive. From the logistics point of view there was a cost saving because the number of shipments per year were reduced, and the size of the shipments were increased. From the sales point of view this initiative pushed customers to purchase just a little additional quantity, the supermaket shelves showed more product attracting better customer attention, and reducing the sales lost for out of stock (during unusual high sales days, delivery delays, transport strikes, etc.) Finally, retails realized that their handling costs were reduced AND sales were growing. So the initiative were working well for all the stakeholders.
- ZARA/INDITEX supply chain strategy to produce and distribute in small batches. Small batches make raising production and distribution cost, but it allows Zara to avoid overproduction costs, minimize inventory, and reduce unsold products return. So at the end the advantages were higher than the disadvantages. Traditional approaches would say that small products batches generated stock-outs, fewer sales and unhappy customers. Nevertheless, this lean approach “is pushing” Zara customers to buy quickly because if they delayed the purchasing decision, next visit to the store could be late to find that product any more. Additionally, Zara customers used to visit Zara stores more often than visit competitors’ ones because they know that Zara bring new products in small batches almost every week.
- MERCADONA Spanish Supermarkets stopped selling references that could not sell at least one unit in all their network of supermarkets every day. This initiative could generate customers defections who are loyal to some brands that they will not able to find in Mercadona anymore. Nonetheless, this initiative increased supermarket profitability per sqm because of the increase of references turnover, reduced the complexity of handling many references, and increased the purchasing power of Mercadona with the remaining ones. Sales did not fall down because customers are more loyal to Mercadona high quality service than brands from manufacturers. Many customers had to change their initial products preference to Mercadona owned brand, but Mercadona brand is much cheaper and with “similar” quality what increased customer satisfaction and loyalty. Moreover, this approach increased supermarket contribution margin while competitors were reducing the selling price and their margins to stop sales drops due to the Spanish economy slowdown (from 2011 to 2014).
- IKEA business model based on transferring supply chain activities to customers to get lower selling prices. Many managers think about increasing the number of services to increase sales and profit. But Ikea realized that transferring some activities to customers as pick, load, ship and assemble products would get a better value chain configuration for customers. The new value chain improved selling prices what it is a Key Success Factor to increase sales and profitability. Additionally, handling disassembled furniture for inbound logistics is bringing an important stream of cost savings on inbound transport and storage.
- TOYOTA production system (lean manufacturing). Lean manufacturing is based on reducing the 8 wastes (overproduction, waiting, transportation, overprocessing, inventory, movement, making defective product, and knowledge disconnect). This approach challenges the traditional approach based on “over production and over stock to serve customers better.” So Toyota implemented this production system what optimized its supply chain reducing the 8 wastes AND delighted customers with high quality products at reasonable cost. The result was that Toyota achieved the world biggest car company position.
- DELL make-to-order strategy for mass customization. During long time was assumed that firms building stock could offer immediate product availability, and would be able to close sales easier. But what about customer customization? Dell showed us that make-to-order is a very profitable strategy because with almost ”zero stock,” they can avoid the huge costs related to stock AND customized products to customers’ needs. Thus, Dell was able to offer a very customizable product at competitive rates (Internet disintermediation effect was another KSF) what increased their sales importantly.
- CHEVROLET Spain (Daewoo motor at that time) quick market entry by logistics outsourcing. We could think that because market entry is an important decision, outsourcing logistics could not be the appropriate entry strategy (one of the disadvantages of outsourcing is “losing control”). However, Chevrolet/Daewoo successfully materialized all the advantages of a logistics outsourcing strategy (cost reduction, flexibility, complexity reduction, etc.) AND they could focus on developing the non-existent dealer network. Moreover, the logistics investments avoided by outsourcing supported extra sales and marketing initiatives to make the brand awareness faster. So there was operational cost saving, AND sales growed quickly.
- UBER cost advantage of drivers and cars iddle time to beat the market. This firm offers around 30% cheaper prices than traditional taxis, AND much better service because it is more secure this service than taxis driver (this is an important differentiator in some countries where security is an issue like Brazil), vehicles have and use air conditioner (underdeveloped countries have an important amount of taxis without AC, and in developed countries they have AC but drivers many times decide to switch off to save fuel), the customer service is better (Uber vehicles have sweets, water, and service is evaluated after trips to guarantee the best service level). But how can Uber offer better service and cheaper rates? Uber has a SESCM strategy in place based on taking advantage of assets/cars and driver iddle time. So many drivers are working for Uber because they are unemployed or as a second job for extra income because they have some free time and their vehicles too. Furthermore, Uber application supports drivers to get more services and improve their service turnover compared with traditional taxis. This offer Uber a cost competitive advantage that is using to attack taxi business with lower rates.
Some of the above SESCM examples redefined completely the firm value chain, and that strategy used to be the essence of their company business model (for example IKEA SESCM strategy). Furthermore, in those success business models growth mean profitability, because profits growth faster than sales due to operational efficiencies that limited overheads’ growth at the same rate (Eg. Zara/Inditex).
Uncoordinated Sales & SCM versus Sales Efficient Supply Chain Management (SESCM)
In turnaround situations, we used to find uncoordinated Sales and SCM areas which blame to each other. Implementing SESCM strategy is not an easy job, but these initiatives can really turnaround the firm performance and profitability. Exploring lean techniques is a good initial point to find Sales Efficient Supply Chain Management strategies.
Barriers to implement Sales Efficient Supply Chain Management (SCEM)
The higher handicap to implement Sales Efficient Supply Chain Management (SESCM) is getting a CEO which background is quite unbalanced to Sales or SCM side. I mean CEO should have a complete vision and understanding of all areas of the firm. The CEO should have the skill to think out the box and find strategies in which Sales and Operations have a synergetic effect rather than uncoordinated strategies which sum is zero. The conservative CEO is unlikely to get advantage from SESCM because he/she used to replicate traditional and low risk strategies. SESCM strategies need well-prepared, imaginative and courageous leaders who realized that copying the strategy of the industry leader is a losing battle.
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