Linking Supply Chain and Business Performance

Linking Supply Chain and Business Performance

Let us see how the supply chain function is related to the business performance of an organization.

Business performance refers to the extent to which an organization achieves its different goals, such as market share, new product development, revenue, competitiveness, cost reduction, quality improvement, lead time reduction, attrition rate reduction, etc. The supply chain of an organization impacts its performance in different areas.

For example, Walmart would hardly be able to achieve its business goal of assuming a cost leadership position in the retail industry without having one of the most efficient supply chain infrastructures across industries.

An important indicator of business performance is Return on Assets (ROA). Two of its critical components cost reduction and increment in revenue and profitability.

Let us study how the goals of increasing ROA can be accomplished by an efficient supply chain in the following points:

• Cost reduction: This objective can be accomplished by:
  • Decreasing indirect material expenditures
    
  • Decreasing logistics expenditures
    
  • Decreasing stocks
    
  • Decreasing direct material expenditures

• Increase in revenue and profitability: This goal can be accomplished by:
  • Reducing time-to-market
    
  • Decreasing backorder and forfeiture sales
    
  • Selling higher profit and revenue giving goods and services
    
  • Penetrating new markets
    
  • Reducing delivery time to market
    
  • Utilizing supply chain assets efficiently
    
  • Decreasing souring of procurement expenditures
    
  • Decreasing stocks
    
  • Decreasing accounts receivables

Enhancing Supply Chain Performance

We haved studied that an organization cannot meet the dual goal of reducing cost and improving customer service without shifting to a more efficient frontier. In other words, improvement in supply chain performance is necessary to reduce supply chain costs and achieve customer satisfaction.

In real life, most organizations are usually not able to manage their supply chain procedures smoothly. As a result, the position of their supply chain efficiency frontiers is always at some distance from the optimal efficiency frontier.

The only way organizations can meet their goals is by moving to a higher efficiency frontier. Going to a higher efficiency frontier requires organizations to optimize, integrate and restructure their supply chain cycles.

Let us now study how organizations can improve their business performance by implementing optimization, integration, and restructuring of the supply chain.

• Supply Chain Optimisation
  
• Supply Chain Integration
  
• Supply Chain Restructuring

Supply Chain Optimisation

In simple words, optimization of the supply chain refers to reaching the optimal performance level of the manufacturing and distribution supply chain of an organization. Optimization of the supply chain involves an extensive application of mathematical models and computer software to determine optimal inventory levels and minimize supply chain costs. The following are some important steps taken toward optimizing the supply chain of an organization:

Localise

In the highly globalized marketplace, ‘think globally, act locally’ has become the mantra of success for business organizations. Therefore, while looking for growth opportunities in the global market, an organization also needs to look for sourcing opportunities in the local market. Business organizations can also consider developing multiple sourcing channels to optimize the supply chain.

Focus on the Strengths

Organizations need to focus on the business functions in which they have the competency and outsource activities that can be outsourced at a lower cost.

Collaborate for Better Forecasting

Increased collaboration with suppliers and retailer puts organizations in a better position to forecast demand and maintain an optimal inventory level. Collaboration also helps in increasing customer satisfaction as customer demands are met more efficiently and stockouts are reduced.

Use Innovative Technology

Technology plays a very crucial role in supply chain optimization as technology enables integration, coloration, information sharing, etc. An organization needs to have access to innovative supply chain technologies to optimize its supply chain. Walmart is a noteworthy example of an organization that made revolutionary changes in its supply chain with the help of technological products such as Radio-Frequency Identification (RFID) and Electronic Data Interchange (EDI).

Build a Responsive Supply Chain

To optimize the supply chain, an organization needs to use information such as Point of Sale (POS) data, market trends, etc. This information enables supply chains to respond more efficiently to demand fluctuations.

Supply Chain Integration

In simple words, supply chain integration refers to close alignment or coordination within a supply chain. An inefficient supply chain consists of a connected but uncoordinated set of activities that extends to various organizational functions, where every individual function has its budget and set of priorities and measurements. Some companies have discovered that total distribution costs can be reduced by integrating such distribution-related activities.

The integrated supply chain is a system that coordinates various supply chain functions and the parties involved. Integrated logistics is especially useful for manufacturing businesses. Manufacturing organizations are under constant pressure to produce goods at a lower cost.

Price is an important aspect based on which competition among various manufacturers takes place. An integrated supply chain helps in reducing supply chain costs which in turn increases their competitiveness.

A successfully integrated supply chain ties all supply chain activities into a system, which minimizes the total costs and maintains the desired customer service level. It is necessary to state that the total cost includes the following five major cost categories of a supply chain:

• Customer service level achievement costs
  
• Transportation costs
  
• Warehousing costs
  
• Lot quantity costs
  
• Inventory carrying costs

Logistical Integration

Information flow plays a vital role in the process of supply chain integration. An effective supply chain is perceived as a competency that associates an organization with its customers and suppliers. As mentioned previously, the information about the customers flows through the organization in the form of sales activity, estimates, and orders.

Supply Chain Restructuring

At times, integrating the supply chain is not enough to achieve the desired results and the level of optimality. In such cases, major transformations may be required in the structure of the supply chain. The need for supply chain restructuring may be triggered by several factors, such as the internationalization of business, high demand fluctuations, structural loopholes in the supply chain, etc.

Supply chain restructuring includes critical changes in the supply chain structure in the way material and information flows are managed. Restructuring supply chains helps organizations move the entire efficiency frontier downwards and in the right direction, resulting in lower costs and higher customer service. A few ways in which supply chains can be restructured are:

• Decreasing the quantity of stock in the distribution
  
• Separating fast-moving and slow-moving products in terms of material in the chain
  
• Redesigning products and procedures

By restructuring its supply chain, an organization moves the whole frontier downwards.

Some of the benefits of supply chain restructuring include:

• Integrating with new business areas
  
• Lowering process and personnel costs
  
• Increasing efficiency all over the organization
  
• Improving process quality
  
• Providing better customer service