It doesn’t matter what you sell — if you have a product you’re supplying to a customer, there’s a good chance you have a supply chain in place. A supply chain is the sequence of processes involved in the production and distribution of a commodity.
Naturally, supply chain management involves supervising this process. Thus, in its simplest form, a supply chain is a network established between a business and its suppliers to produce and distribute a product which involves a series of steps to go from the supplier to the business to the customer.
However, supply chain management is more than just “logistics”. Planes, boats, and trucks — that’s logistics, as UPS has so graciously drummed into our heads with their catchy ad. There’s more to the process than just getting the product from point A to point B. You have to factor in the cost of the raw material used to make the product. You must also pay the cost of labor, fuel for the vehicles used to transport the product and much more.
Overall, supply chain management involves managing money, time, and information.
For example, let’s say a mom and pop shop located in the United States sells furniture. Since they do not manufacture the furniture themselves, they source their product from a company in China (the supplier). Let’s say the mom and pop shop puts in an order for 200 units. Once the check clears, the supplier will place the units onto a boat (or plane) and send it overseas to the United States. When the boat/plane arrives, the units must now be transferred to a delivery company (FedEx, UPS — pick your poison) which will then deliver the furniture to the mom and pop store.
Now let’s say a customer purchases a piece of furniture from this shop. Now the product is hefted into a truck operated by the owners of the storefront and delivered to the customer’s house.
The entire delivery process from Point A, the supplier, to Point B, the retailer, to Point C, the customer’s house is part of the of the supply chain process. The cost of fuel for the plane/boat and the transport truck must be factored into the supply chain. Tracking the length of time that it took for the products to go from point to point is also part of the supply chain. Even the labor costs of the supplier are taken into consideration. Also, we can’t forget that the drivers/pilots must also be paid.
Supply chain management is essential for any business that provides goods and services because an optimized process can save the company money and naturally results in a smoother, faster and more efficient production cycle.
Why UPS drivers only make right turns
Once again, we turn to the masters of logistics, UPS, to learn a lesson about optimized production cycles. UPS deploys nearly 100,000 trucks and a fleet of aircraft to deliver nearly 15.8 million packages daily across the globe. As you can very well imagine, their operating costs must be rather significant.
To reduce costs, UPS implemented a “right turn only” policy in 2004. It was determined that making “right turns only” reduced emissions, diminished gas consumption and decreased accidents significantly.
The right turn only policy in combination with UPS’ routing software has been estimated to have shortened routes by 20.4 million miles and saved 10 million miles of gas while delivering an additional 350,000 packages and reducing CO2 by about 20,000 metric tons each year.
In other words, UPS is the perfect example of why optimizing a system will benefit you in the long term. You can learn more about this here.
Creating a reliable supply chain
Identifying reliable suppliers
Let’s be honest here — it’s hard to find good help these days. Even so, it’s essential that you find a reliable supplier to work with. If one link of the supply chain is weak, the rest of the chain will be weakened as a result. Your supplier should be someone who provides high-quality material and must respect deadlines.
For example, let’s say you receive a shipment of furniture. However, the legs on the chairs you ordered are so weak and brittle that the chair immediately collapses when you sit down. Now the store owner must send the chair back for a replacement, costing him/her time, energy and money.
A reliable supplier must have the capacity to fulfill the orders from their manufacturer. They must keep a timely production schedule and ensure that the material they use is of the highest quality. Having these steps in place is necessary for producing high-quality products that can be shipped off promptly.
Tier II suppliers
Most people think that supply chain management begins when you put in an order with your suppliers. However, the process should begin when your supplier puts in an order with their suppliers. This is what is known as Tier II management.
Remember, if any single link in the chain is not running smoothly, the rest of the chain will be affected adversely. Thus, if your suppliers don’t have a good supply chain management system in place with their suppliers, your supply chain will also suffer. There’s a reason that Tier II supplier management is so widely taught in the world of supply chain management.
How does one go about managing their Tier II suppliers? The answer is simple — provide information. The information that you need to deliver to your Tier II suppliers is the same information you give to your “Tier I” suppliers.
This information can include but not limited to forecasts, order bulk, etc. Having this information on hand will allow your Tier II suppliers to plan ahead of time and have the material they need to meet your needs. Ensuring that your Tier II suppliers are well-informed will ensure that your supply chain runs that much more smoothly.
Supply chain managers spend much of their time and energy on supplier management. Supplier management is a big job and entails many aspects. These include overlooking the development of new products, audits, managing the delivery schedule, negotiations regarding the cost of goods and much more.
It’s vital that you measure the performance of your supplier. If they perform poorly on a consistent basis (such as not delivering your product on time), you will also perform poorly, as you will have to explain to the customer why their product is late.
On-time delivery can be a relative subject because delivery dates often change due to unforeseen circumstances. Thus, you have to recognize whether or not you’re gauging your supplier’s performance based on the original delivery date or the revised date.
We’ve already slightly touched on why logistics is just one part of supply chain management (albeit a large one). The supply chain manager is responsible for every aspect of the logistics of your operation that includes dealing with shipping companies, managing freight forwarder delivery customs brokers and parcel delivery companies (UPS and FedEx amongst others).
Logistics does not have to be an overly complicated process. You can and should manage the logistical aspects of your supply chain in the same manner that you manage your suppliers. Thus, you should negotiate contracts and costs amongst other things.
Shipping is often among the most expensive links in your supply chain (along with warehouse storage). Managing your logistics properly can reduce costs and keep your supply chain running smoothly, literally.
Inventory can be your worst nightmare if mismanaged. In fact, it can be more expensive than logistics. The defining difference between the expense of inventory vs. logistics comes down to one thing — benefit.
You will receive an immediate benefit from logistics. For example, if you pay the extra fee for expedited shipping, you will have your goods shipped as a result.
However, when you pay for inventory, there’s a possibility that it will sell quickly and pay you back right away, but there’s also a possibility it may not pay you back for months or even sell at all! You will only benefit from your inventory the moment you make a sale.
This is the exact reason that inventory management is one of the more crucial aspects of supply chain management. You need to strike a balance between having enough inventory on hand to satisfy your customers and ship it out to meet demand, but not so much inventory that you may be stuck with too much stock to sell, thus leaving you with goods that is no longer a benefit to you.
Purchasing is also an essential aspect of supply chain management. The process isn’t as simple as picking the first supplier that comes your way. Sometimes the cheapest supplier isn’t the best route even if it saves your company a significant sum of money. A purchasing manager must be able to negotiate price and identify a good deal when they see one.
Though purchasing is important for the business, it’s just a small part of supply chain management, though a crucial one nonetheless.
Not everyone may agree with this, but customer service is also a part of supply chain management. You can think of your customer service team as a two-way phone that allows you to reach out to your customers and provides a way for your customers to reach out to you.
Your customers will tell you, unabashedly, what you’re doing fantastically and what you’re doing wrong. And yes, mistakes are bound to happen from time to time. You will need a team in place to deal with unsatisfied customers.
Your customers will also tell you exactly what they want. Do you need to ship your products out in larger boxes? Does your customer want their package delivered with standard shipping or expedited shipping? Your customer service team will be able to handle these situations as they arise.
Your customer service team should be perfectly positioned to deal with any and every issue that arises concerning your customers. And since customer service plays such a significant role in on-time delivery, it rightfully fits into your supply chain.
If you don’t get anything else right, at least make sure you get this one down. You can plan until you’re blue in the face, but if your calculations (relating to cost, inventory, logistics, etc.) are inaccurate, you’re definitely going to run into problems at some point.
Supplier performance reports and on-time delivery reports must be accurate, or you’ll continue operating on the false assumption that everything is okay. That is until everything comes crumbling down around you. That’s when you’ll learn the hard way that accuracy is a vital aspect of supply chain management.
Your team should be engaging in daily cycle counts of your inventory. This should keep you on track if done properly, but you should also take stock of 100% of your physical inventory on an annual basis. Your margin of error should be at least 1% (mistakes happen). But if your inventory is off by an even higher margin, that’s an indicator that you need to refine your cycle counting process until you’ve fixed the issue.
A well oiled and optimized supply chain management process will result in one thing — deliveries made to your customers the moment the transaction is complete.
Supply chain management is so much more than “just logistics”. Oiling all of the pieces of the machine, so to speak, from accurately auditing your inventory to dealing with Tier II suppliers, will ensure that your supply chain will run smoothly which, in the end, will make your customers happier.