Our Supply Chain Is Complex And Ties Up Significant Funds.
Can We Release More Profit And Increase Cash Flow?
One of the least understood functions by an executive and their team is the power of supply chain management.
Executives sometimes think of supply chain as solely a procurement responsibility, yet it reaches into all the operational and sales aspects of a business. When effectively done, supply chain management can generate more bottom-line profit and cashflow than any other operational discipline. It can also increase delivery performance, customer relationships and, eventually, sales performance.
The topic of supply chain alone can be quite complex, and I’ve seen my share of suboptimal supply chain management over the years. One example of a badly controlled supply chain was a power tool supplier we had been working with.
They pulled some of their raw materials from Asia and did the final product assembly, boxing, and distributing in Australia. In this case, their procurement arm was not coordinating key data with the operational arm, and the business had lost sight of how that was affecting their delivery.
To compensate for the poor management systems and to enable them to deliver as needed, the company held higher levels of inventory. These high levels of inventory tied significant amounts of cash in the business. This was compounded by poor warehouse processes which negatively affected their delivery performance and drove further need to carry more inventory. The first they knew of it was when the customers contacted them, threatening to pull their contracts with major retailers if the delivery didn’t improve.
The executive at the top of all this didn’t have a clear picture of all those different elements, particularly procurement being disconnected from operations, operations being disconnected from delivery and the view of delivery being disconnected from the business. This is not uncommon as these interdependent systems are complex and dynamic, requiring solid and real-time reporting and management techniques.
The customer had a better view of their delivery performance than the executives supplying them!
They were under threat of losing their lifeblood contracts and had their cash tied up in excess inventory. They weren’t making a profit and were running out of cash. Whilst there were several issues blamed, significant frustration throughout the business, and individuals held accountable, to me it was clear that the real culprit was ineffective supply chain management processes.
From Your Supplier’s Supplier To Your Customer’s Customer
When I go into an organisation and mention “supply chain,” it’s commonly associated with the people who buy items at the right time to support the work the company does.
For example, if you’re in tool sales, the supply chain includes ordering raw materials to manufacture the tools. However, that is only one element of the chain, as supply chain is also everything that’s in the value chain from your supplier’s supplier to your customer’s customer.
The supply chain includes procuring the items and making sure they’re there on time to meet a known demand. It also includes how much inventory you hold, how you might design your factory or your warehouse, and how you might distribute your goods around the country (also known as distribution resource planning).
Effective supply chain management balances the demand from your customers with the availability of material you procure from your suppliers and the time it takes you to add the value such as manufacturing. The buffer enabling this to work is your inventory which can be held at various points in the value chain.
The question is, how well is this organised in your company?
Since it encompasses so many things, the supply chain can make a huge difference, and effective supply chain management is a crucial business discipline to cultivate. There is more cash and profit tied up in supply chain than there is any other place in the business.