Understanding and Improving Supply Chain Efficiency
Supply chain efficiency is crucial to the success of a business. Managers are always looking for new ways to improve supply chain management, whether it be fresh ideas to analyze business data, reduce your risk and working capital, optimize your costs, and improve predictability. Throughout this guide, we will explain everything you need to know about the efficient supply chain definition, how to go about improving supply chain processes, and more.
What is Supply Chain Efficiency?
According to the supply chain efficiency definition, supply chain efficiency refers to a company’s basic performance standard. Supply chain efficiency is all about measuring the amount and quality of work performed during the supply chain process, making the most of the supply chain resources available, and utilizing the best supply chain practices to reduce wastefulness.
Supply chain efficiency is not the same as the effectiveness of the supply chain. A supply chain can be efficient and reduce costs, risk, and working capital. However, this isn’t useful to anyone if it’s developing an ineffective product that doesn’t successfully sell to the target audience.
The best supply chains out there reduce the costs of operation, help create better and more positive customer experiences, boost margins, and support expansion. And in order to move a product to its final destination, an organization needs to think about how to improve and optimize reverse logistics, outbound schedules, receiving procedures, and order processing.
What is an Efficient vs Responsive Supply Chain?
What is the difference between an efficient supply chain and a responsive supply chain? Efficiency is all about reducing the amount of resources, effort, hours, and costs associated with the supply chain. While an efficient supply chain is certainly important, it cannot be the only focus of an organization or business when it comes to successful supply chain management. Analyzing the responsiveness of your supply chain is an integral part of supply chain management.
A responsive supply chain refers to a supply chain that is flexible enough to react and adapt quickly to new and unexpected issues, seamlessly overcome obstacles, and evolve gradually to be able to deal with issues that may come up. Responsiveness is all about getting your supply chain to respond purposefully and promptly to changes in the marketplace and consumer requests. To be successful as an organization, you need a supply chain that is both efficient and responsive.
How to Measure Supply Chain Performance
Here are some of the top ways to measure your supply chain performance:
- Inventory investment. Inventory investment impacts a company’s cash flow and profit, so every business should invest in finished goods, work-in-progress, and raw material inventory to make sure they can meet their targets. Common issues like inaccuracy in demand forecasting, fluctuation in demand, a lack of manufacturing capacity, and long lead times can come up and throw a wrench into your processes. You can calculate inventory investment as a percentage of your net or gross revenue based on the customer service targets, expected demand, and lead time of an item.
- Inventory efficiency. Calculating or measuring inventory efficiency is also important. You can calculate inventory turns, which is how often the inventory turns over each year, as a ratio of the annual cost of goods sold (also known as COGS) and the average inventory investment per month.
- On-time supplier delivery. You can calculate the on-time supplier delivery performance based on the difference between the actual and agreed delivery times. The on-time supplier delivery metric can be stated as the number of hours late or early, or the on-time percentage, which is the percentage of overall delivery times that the supplier delivered within the agreed delivery time. This is a crucial metric to measure, as any late deliveries can significantly affect a company’s delivery and manufacturing schedule, as well as overall lead times and operating costs.
- The accuracy of forecasting. Forecasting accuracy is also an essential metric to measure because it can impact every single aspect of your supply chain. You can calculate the forecasting accuracy by product or product family, as well as a 30- to 90-day outlook.
- Lead time. Lead time refers to the amount of time needed to complete a particular process, project, or task. We recommend measuring the lead time of your most important business processes, including the supply chain process since the lead time can affect your inventory investment and overall supply chain costs. You should consider the amount of time needed for inspection, shipping, receiving, moving, transportation, and processing.
- Unplanned orders. Unplanned orders refer to orders that go above the original capacity allocation, and this metric is calculated as a percentage of the total number of orders. While unplanned orders can be beneficial from time to time, they can also quickly become a problem when there are internal process breakdowns, poor management practices, and an inaccurate demand forecast. Unplanned orders in these cases can lead to a lot of money spent on raw material and capacity shortages, extra machine setups, the delay of already scheduled orders, and re-scheduling.
- Schedule changes. Schedule changes are typically caused by unexpected events or process changes, including staffing and quality problems, equipment breakdowns, and material shortages.
- Overdue backlog. Production and material constraints, machine breakdowns, quality issues, and poor scheduling can lead to overdue or excessive backlogs. This metric is usually calculated as a percentage of the overall revenue. Some amount of backlog is normal for many companies and organizations, but it’s important to take some time to consider and calculate the ideal level of backlog.
- Material availability. There are a number of causes that lead to problems with material availability, including machine breakdowns, quality or personnel problems, poor supplier performance, a lack of information, and wrong inventory information. Poor material availability can lead to rescheduling of orders, downtime, and work stoppages. That’s why it’s so important to measure your material availability as a metric so that you can identify and address any issues.
- Gross profit margin. Gross profit margin is usually measured as the overall revenue minus the cost of goods sold (COGS). Gross profit margin is an important metric used to figure out a company’s efficiency in converting inputs into outputs.
How to Improve Supply Chain Performance
Here are some of the best ways to improve the performance of your supply chain:
Increase the visibility of your supply chain
You may have heard about supply chain visibility, but what exactly is it, and how can it help improve your supply chain performance? Supply chain visibility is all about the ability of your organization to track the various parts of your product as they move from your suppliers to your hands. You can increase your supply chain visibility by allowing your suppliers to check your inventory in real-time so that they can know how much inventory you currently have in stock. This will enable them to plan ahead and give you exactly what you need when you need it. Supply chain visibility helps important members of your own team get information about your inventory so that they can develop strategies on their own without going back and forth. It’s crucial to give your colleagues, employees, and suppliers this supply chain visibility to help them better plan inventory and communication.
Automate the most important parts of your supply chain process
It might not make sense for every organization to automate parts of their supply chain process, but automating the most important aspects can significantly boost your supply chain efficiency. We recommend speaking with your planning teams, executives, and warehouse managers about the possibility of supply chain automation. And once you do choose automation for your supply chain process, it’s essential to make sure that every automated component is well maintained and managed. To do this, you need to further educate and train your planning teams, suppliers, and warehouse managers. You should also conduct regular inquiries and check-ins with your team to ensure that the automated components are well maintained.
Engage your IT department
Organization managers often only consult and speak to IT departments when something goes wrong with the current system or when it’s time for new software to be implemented. But we recommend engaging your IT department and taking the time to check in with them regularly about possible software changes that could improve your supply chain process, rather than only speaking to them when something goes wrong. Your IT department fully understands evolving technologies in the supply chain industry, so you should take the time to work with them, learn from their expertise, and find a solution together to help your organization stay ahead of the competition.
Examine and assess your training programs
If you’re having difficulty figuring out where your supply chain efficiency problems are coming from, it might be time to look at your internal training programs. We recommend scheduling meetings with the managers or directors of each of your organization’s departments and going over training programs with each. During these meetings, you can review all of the current training procedures, processes, and materials to ensure that they’re up-to-date and focused on productivity and efficiency. Also, make sure that your managers and directors are not asking their employees to do anything exhausting or unachievable, as this often leads to burnout and issues with the supply chain.
Implement a great project plan
Improving your supply chain efficiency is an ongoing process, which means that you need to implement a thorough project plan to make sure you’re constantly working towards your goals. Your project plan can help you identify both risks and opportunities, establish communication channels, develop a distribution strategy, make investments in the supply chain, promote supply chain improvement projects, and facilitate cross-functional decision-making. You can also use your project plan to ensure that all your investments and decisions will help you reach your supply chain goals, as well as your overall business goals.
The ShippingTree Difference
Supply chain efficiency and performance are crucial to the success of your business. ShippingTree can improve the efficiency of your supply chain with our order fulfillment software designed for consumer product businesses of every shape and size. We are dedicated to helping e-commerce professionals achieve their goals without worrying about the logistics and complexities of the supply chain.
If you want to learn more about supply chain efficiency, reach out to ShippingTree to learn more about our efficient supply chain management services.