Supply Chain Optimisation: Moving Beyond Estimates, Expediting and Excel
Part 1: The problem of supply chain optimisation is a trade-off between various business issues, i.e. a cost-optimal solution is sought by the naturally conflicting aspects of Inventory, Asset Utilisation and Customer Service as depicted below:
A supply chain can be defined, not without contention, as: “a supply chain is a series of enterprises which must share information and cooperate to ensure a smooth flow of goods”. Striving for efficient, high velocity material flow and effective information flow will facilitate the synchronisation of demand and supply. From this a working definition of supply chain management can be derived as: “Supply Chain management refers to the total management of material flows from suppliers, through your own factory and, via a distribution network, to the end customer”.
The benefits of supply chain management have been well documented and go beyond the obvious of reducing cost to supporting processes that are required by modern businesses or reflect the realities of the environments that businesses find themselves in, such as: increasing variety & customisation, shorter product lifecycles, more offshore sourcing and global competition.
Research has shown that total supply chain management costs are an average of 6.5% in best-in-class businesses as opposed to 11.5% for the average (note total cost include the order management, material acquisition, inventory carrying, supply chain finance, planning & MIS costs). Additionally, profit margins are 73% higher for manufacturers who excel in SCM, as compared to companies with poor SCM performance. When you consider that a 2003 Deloitte & Touche survey of 600 companies showed that 84% of companies with turnover >$200m rated themselves as poor at SCM you start to get a feel for the magnitude of unrealised profit that many businesses tolerate.
An example of the possible impact of SCO (supply chain optimisation) to a business is clearly demonstrated by the figures presented in the table below. The table shows that the effect of making, in most cases quite modest, savings across the board of cost categories has a massive impact on the return on sales percentage figures that the company reports.
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