When looking at the opportunity to improve organizational performance, there is a tremendous amount of value tied up in Supply Chain because it includes inventory, labor, and 3rd party spend. By definition, it's the entire system of producing and delivering a product or service, from the beginning stage of sourcing the raw materials to the final delivery of the product (or service) to end-users. Notably, most Fortune 500 companies have a strategic organizational unit dedicated to this specific area because investment in supply chain is a significant use of funds, and therefore a significant opportunity for performance improvement. My team spent a lot of time helping companies pull investment out of their supply chain without impacting performance. Think of companies like Dell Computer and Walmart, who have really mastered this concept and strategy. As a result, they've added tremendous value to their shareholders while outpacing competitors, who were either unable or unwilling to follow them at a cost and service disadvantage.
When I think of Supply Chain for entrepreneurial companies, I think of the “procure to pay” (P2P) business cycle. This includes:
- Overhead (rent, utilities, repairs, etc.)
For many smaller companies, this process is broken into multiple departments, which makes it harder to optimize the end-to-end value. For example, I’ve found when "purchasing" people sit in "accounting" they tend to focus on the general ledger coding and payment info, not optimizing inventory levels, economic order quantity, or vendor consolidation. Conversely, when inventory managers barely have enough time to place orders, they lose track of the same things. I see 3rd party services not being managed at all (in large companies they have Category Managers within Supply Chain who focus on managing the value of contractors and consultants) and I am sensitive to this as I used to deal with these departments in order to close a consulting sale. Not even the CFO could finalize a deal with us without going through the professional services category managers.
Procure-to-pay is a key business process. Every process can benefit from simplification (doing it the best way), standardization (everyone doing it the same), and perhaps centralization (doing it in one location). Once these three simple concepts have been addressed, a business leader has the option to improve the cost and value, such as outsourcing all or parts or utilizing innovative technology like robotic process automation (RPA). Simplification and standardization are key in driving value out of Supply Chain process improvement.
What are some supply chain techniques I use to optimize value?
- Use of purchase orders, to put authorization at the point of purchase, instead of payment
- Centralization of purchasing, to allow a few people who are good at it to negotiate quantities, prices, and payment terms
- Vendor consolidation, to leverage fewer inventory items, better pricing, and less complexity, from fewer vendors
- Inventory consignment, where vendors own inventory sitting in your warehouse until you sell or use it, which reduces your investment in inventory and the risk of stocking out
One of the first compelling use cases for offshoring was Supply Chain, where automotive manufacturers invested in not only component manufacturing but also assembly up to the point that import duties were minimized (and finished goods could be claimed as “made in the USA”). Benefits from this could only be achieved with Supply Chain people, processes, and technology all aligned to a common objective.
In the next couple of weeks, I'll spend more time on techniques to better manage supply chain costs and carrying values.
Have a question about your Supply Chain performance? Email and let me know. As always, I welcome your comments and suggestions.