Your supply chain should be helping your company deliver the products that your customers want—when your customers want those products—and accomplish those things while being as cost-effective as possible.
That is the basis for how you might decide how to design your supply chain. Think of your supply chain and its associated metrics in terms of:
- Order accuracy
- On-time delivery
- Cost savings
If you need to design or redesign your company's supply chain—drive toward success in those three factors.
Types of Supply Chain Structure
But what are your options when considering the type of supply chain that your company is going to need? If you’re designing or redesigning your company’s supply chain, you might think in terms of these three supply chain categories:
- Low inventory volume, high inventory turn (approaching Just-In-Time supply chain)
- High inventory volume, low inventory turn (because your company has long lead times with its suppliers)
- High inventory volume, high inventory turn (because your inventory expires or spoils quickly, as in the fresh or frozen food industry and other perishable industries)
Other considerations to include in designing or redesigning your company's supply chain include the geography of where products move, the logistics of lead time and costs, and the taxes involved in moving the products.
Related to these considerations is that fact that your supply chain will tend to be measured by:
- The flow of goods
- The cost of the flow of goods
- The time it takes those goods to flow
At the end of the day, your supply chain needs to help you deliver customer satisfaction and spend as little money as possible. In order to figure out what kind of supply chain is right for you, start at your endpoint and work backward.
Where Are Your Customers?
This might seem like a very basic question to ask—and it is. Do you ship globally to your customers? Do you ship to them regionally? Do they come to you to pick up their orders?
If it takes your customers six weeks to receive your order, because you have put it on a ship and sailed it across an ocean—then you'll likely want to design that last link in your supply chain around the complexities of international freight and customs.
If your customers walk to a pick-up window or counter, then the customer delivery in your supply chain can be an extension of your inventory control and management function.
If you have customers who require a fast order-to-delivery lead time, you will likely need a high inventory, low turn supply chain—which means that you’ll invest more in inventory but you’ll reap the benefits of high customer satisfaction.
If you have high-demand customers and you deliver perishable products to them, you’ll likely want to keep high inventory, too, so that you can deliver to your customers quickly—before inventory expires.
Spud Fish and Chips, a franchise of restaurants in the Seattle area, maintain a high inventory volume, high inventory turn supply chain—because their inventory is highly perishable (and delicious) and their customers expect Spud to have their entire offering available when they order it.
How Do You Manage Your Inventory?
Inventory management is a critical link in any supply chain. If you don't know exactly...
- What you have in inventory
- Where that inventory is
- How much it costs you to procure
- How much it costs you to hold
...then you are likely spending too much money on your inventory or not delivering to your customers on time.
Do you have thousands of products that you need to keep track of? Then you need a robust warehouse management system or you can outsource your inventory management and customer fulfillment to a third-party logistics (3PL) provider.
Is your company a smaller one, with fewer products to manage and without a robust inventory management system? Outsourcing your inventory management and customer fulfillment function requires investment—and not all companies can afford to do that. Even so, if you are small and without those kinds of resources, you need to understand your exact inventory—the same way that a global multinational corporation does.
A small business like The Blankyclip Company sells its unique and cuddly infant blanket accessories and infant blankets online. They manage their inventory on spreadsheets and in QuickBooks. They conduct regular cycle counts and annual physical inventories. Because their inventory has a lengthy supplier lead time, their supply chain is in the high inventory volume, low inventory turn category.
If your supplier lead time is four months long, you can expect to turn your inventory about three times every year—which is a low inventory turn category. However, you are probably sourcing from a far off low-cost manufacturing region so that your costs can be competitive—so the low inventory turns are the trade-off for low costs.
Where Are Your Suppliers?
If your suppliers are halfway across the world, then you likely have long supplier lead times. (High-cost air freight helps cut the lead times, but the expense offset is often not worth it over the long term).
Or if your suppliers have lengthy manufacturing cycle times, then your lead times might also be high.
High supplier lead times can often lead to supply chains with high inventory volume and low inventory turns, as we saw with The Blankyclip Company example above.
However, some companies are able to leverage their position in the marketplace to drive inventory volumes down and increase their inventory turns. Apple, for example, within its accessory supply chain (phone cases, laptop sleeves, and so on) uses a combination of strategic regional distribution centers and consignment inventory to reduce its inventory costs.
If your company is an accessory supplier to Apple, you can expect to ship your inventory to Apple’s distribution centers but not invoice Apple for that inventory. The inventory remains on your books until Apple releases it (based on the days of supply at their retail stores). At that point, Apple purchases the inventory that your company has in its distribution center.
Even though your company may have a longer lead time—sometimes shipping to an Apple distribution center in the United States from your low-cost factory in Asia—Apple is able to maintain a Low Inventory Volume, High Inventory Turn supply chain because of its position in the market.
Ultimately, the supply chain you choose will need to deliver what your customers want, when they want it—while costing you as little money as possible. How you accomplish that is up to you.