Supply chain is happening all around you. If your company somehow makes a product, or procures a product, or procures then makes a product that you then sell to a customer, you have an end-to-end supply chain that might need optimizing.
How do you know if your end-to-end supply chain needs optimizing? This is the litmus test:
Are you getting your customers what they want, when they want it—and spending as little money as possible accomplishing that?
If you can’t answer that question, yes—clearly—your end-to-end supply chain needs optimizing.
If you’re getting your customers what they want, when they want it—then good for you. You’re 10% of the way there.
Because if you’re not spending as little money as possible accomplishing your customer delivery goals, then your end-to-end supply chain needs optimizing. And how do you know if you’re spending as little money as possible—on cost of goods, on inventory, on shipping, on warehousing, on labor, on overhead, and so on?
Chances are you could be spending less, and so, your end-to-end supply chain needs optimizing.
But where do you start? Here are seven ways you can begin to optimize your end-to-end supply chain—and start spending less while getting your customers what they want when they want it.
Tier 2 Supplier Management
Your end-to-end supply chain doesn’t begin with your suppliers. Your Tier 2 suppliers are the suppliers who provide components, raw materials, and sometimes services to your suppliers.
If you don’t know who your Tier 2 suppliers are—and don’t understand the products they supply, what their costs are and what their lead times are—your end-to-end supply chain needs optimizing.
By negotiating with your Tier 2 suppliers, you can lower your suppliers’ cost of goods and lead times. Oftentimes, a Tier 2 supplier might supply more than one of your suppliers.
And with that visibility, you can negotiate volume pricing, where your individual suppliers don’t have that leverage.
Or, you can help your multiple suppliers to find a single Tier 2 supplier, where that Tier 2 supplier consolidation makes sense.
Supplier Cost of Goods Sold (COGS) Management
COGS management is like auto maintenance. Just because you’ve changed the oil and rotated the tires at 10,000 miles doesn’t mean your car will run smoothly for the next 100,000 miles. And just because you’ve negotiated a low price with your supplier, that doesn’t mean you shouldn’t renegotiate once your suppliers have optimized their own internal production processes.
In fact, when you’re negotiating prices with your suppliers, you should be able to negotiate year-over-year price reductions—in the order of 3%-5%—that are built into your supply agreement.
Your suppliers should be optimizing their own internal costs so that they’re not losing money with this arrangement, year-over-year.
And within your own organization, you should be driving your own process costs down—by using six sigma, lean, and other process optimization tools—so that you can drive your own year-over-year costs down. Your enterprise resource planning (ERP) system should be telling you if that’s happening—or not. But it’s up to you to do something about it.
Supplier Inventory Management
Your own suppliers are doing what they can to supply you what you want when you want it—and accomplish that by spending as little money as possible. But if you and your suppliers aren’t sharing demand information, they run the risk of not carrying enough inventory to meet your needs.
Or, just as bad, carrying too much inventory. If your suppliers are carrying too much inventory, that means that they spent too much money manufacturing to meet your demand. And that cost will get passed along to you (whether you know it or not).
By sharing demand information with your suppliers, your suppliers can do their own demand planning to ensure that they are optimizing their inventory management. That demand information can be in the form of forecasts, with defined time fences that convert those forecasts to order, or blanket orders.
Be careful to understand the financial implications of both those scenarios—i.e. what you will be obligated to if you have to cancel or revise down your demand.
Understanding your suppliers’ lead times is also critical in managing their inventory. If your suppliers have a three-month lead time on a raw material, you need to understand that they may not be able to react if you increase your demand within a 90-day horizon.
RFQ, RFP, or RFI
Minding your P’s and Q’s is just as important in your end-to-end supply chain as it is in etiquette. (The expression “mind your p’s and q’s” means that you ought to mind your manners.)
But in the case of your end-to-end supply chain, the P’s and Q’s refer to the Request for Proposals (RFPs), Request for Quotes (RFQs), and Request for Information (RFIs). These three Ps and Qs are the supply chain and sourcing managers’ tool to ensure that their suppliers are providing the highest quality, lowest costs, and latest innovation.
In many cases, the RFI is used to survey the supplier landscape. You know which suppliers you already use, so the RFI is an opportunity to understand the infrastructure, financial strength, and capabilities of new suppliers. The RFI is an excellent tool to identify potential new suppliers.
The RFP is a great tool to help answer the question of “here is my supply challenge—how would you go about solving it?” Oftentimes, your suppliers are the experts and they will approach a supply challenge with an innovation or a process that may not have occurred to you.
After deploying RFIs or RFPs and identifying a handful (3-10) of suppliers that you can send an RFQ to. Reviewing RFQs takes time and resources and it is often too burdensome to send RFQ’s out to too many suppliers. RFQs are not just to get the best prices—to help drive down your COGS—but also to ensure quality and ongoing supply.
The RFP/RFI/RFQ process can take anywhere from nine months to three years—depending upon the terms of supply agreements.
Contrary to what the age-old adage, “poor planning on your part does not constitute an emergency on mine,” might suggest, poor planning throughout your end-to-end supply chain does constitute a logistics emergency.
Actually, “emergency” might be the wrong word—it’s more like “expedited and overnight fees” which can be worse, if you’re a CFO, than an emergency.
If your goal is to ship a customer what that customer wants, when that customer wants it, then you might fall into the trap of relying on expedited and overnight shipping fees to make up the delays in production or purchasing.
Those expedited fees are a sign that you’re not accomplishing customer delivery by spending as little money as possible.
Robust demand planning and lead time management can help minimize the amount of money you might be spending on logistics expedite and rush fees. Understanding lead times and having access to long-term demand are the top two ways to help reduce logistics costs.
How can you be sure that what your warehouse management system or resource planning system tells you what you have on hand is actually what you have on hand? Every company’s goal should be 100% inventory accuracy and the only way to accomplish that is by conducting regular, systematic cycle counts and physical inventories.
Without 100% inventory accuracy, you may or may not be able to ship to your customers on-time. Lack of inventory accuracy also means that you’re buying inventory that you already have on hand or you’re buying items you don’t need.
Implement a cycle count program now—and make sure you’re counting floor-to-sheet and sheet-to-floor—to pressure test your inventory accuracy.
Customer Demand Planning
Yes, your customer might send you forecasts. And, yes, your customer might even send you long-term or blanket orders. But does your customer know what it actually wants—and when it wants it? You might know better than they do.
You can use your customer’s demand information (forecasts, orders) as a starting point. But, you can do so much more in a robust demand planning environment. You can use history, market analysis, seasonality, competitive landscape, and other factors to understand your customer needs better than they do.
And robust demand planning helps to minimize those expedited fees and other logistics costs that drive the costs up in your end-to-end supply chain.