Supply chain levers: innovation meets challenges

Identifying levers for change

Supply chain and business leaders within manufacturing companies continue to face broad challenges. A challenging global economy, Brexit, intense competition and relentless pressure to control costs figure into their every decision. To stay competitive, they must choose their response carefully. Our recent report indicated that manufacturing companies are adopting new innovative supply chain tools and enhancing more traditional ones.

The top supply chain levers

In our recent survey, Manufacturers cited the top two levers – improving demand forecasting and inventory management – as key to evolving their supply chain. This reflects the drive to increase working capital efficiency, whilst at the same time maintaining high levels of customer service.

This balance is increasingly difficult due to issues throughout the supply chain:

• Forecasting volatile SKUs
• Demand aggregation across multiple channels
• Increasing drop frequency with short lead time fulfilment
• Complex order orchestration
• Constrained manufacturing such as long lead times, low make frequency, and large batch size

Companies are increasingly optimising these two divergent needs (customer service versus working capital efficiency) using a new approach to their supply chain design – segmentation.

One size doesn’t fit all

In this innovative segmented supply chain approach, the product, customer, and proposition define the supply chain design. The key attributes include:

• Segmented customer service levels – depending on the customer importance (typically revenue or profit)
• Segmented demand forecasting – typically as a function of the SKU demand volatility profile
• Segmented stock holding – driven by the product item revenue, margin contribution, demand volatility, and lead-times

We find that the need to perform complex demand profiling typically leads to the bespoke building of standalone tools to assist with analysis due to limitations of the basic ERP (Enterprise Resource Planning) software.

End-to-end segmentation

Moving away from a one-size-fits-all approach means important customers are more likely to get the products they want. The business can then optimise margin contribution by maintaining the lowest possible supply chain cost.

Manufacturing companies typically go one step further by driving the segmented approach back into their operations. Most notably these companies are:

• Aligning and integrating the manufacturing systems - make-to-stock (MTS), make-to-order (MTO) and assemble-to-order (ATO)
• Optimising their distribution network
• Rationalising their manufacturing foot-print

This approach characterises the most advanced manufacturing companies. They have segmented the supply chain from end-to-end and can use it to address both the demand forecasting and inventory management levers.

Sales and operations planning

Businesses continually strive to perfect the prioritisation of customers and product supply. Increasingly the Sales and Operations Planning (S&OP) process has new objectives, tied directly to profit or revenue optimisation.

Today, leading companies are doing this via a new version of S&OP, where different scenarios or solutions to the supply plan are assessed on three criteria. These include their feasibility, the impact on customers and for their financial contribution to the business. This requires a deeper tool set than previously, and closer integration with financial planning.

For this reason, leading manufacturers see S&OP as an important tool when they seek to control supply chain costs and optimise profit.

Simply put, S&OP has transitioned from a basic planning instrument (owned by supply chain) into a tool to optimise profit (shared by the executive team).

The excellence journey

Manufacturers are focusing on ‘excellence programmes’ both in manufacturing sites and more broadly, across the entire customer-driven end-to-end supply chain to deliver change. Typical best-practice features for supply chain change include:

• Multiple initiatives driving rapid supply chain change
• Customer-centric business models
• Advanced optimiser tools that leverage big data
• Supply chain representation at Board Level
• Highly qualified and upskilled supply chain professionals within teams
• Formal business performance management processes (BPM)

Clearly this is a very substantial investment in the in-house capability of the human resource. The payback however, is reflected in service level performance measures  (such as on-time-in-full, OTIF), working capital efficiency, and return on net assets. This is why the best manufacturers show a singular focus on this one topic.

Cost-to-Serve® implementation

As we’ve seen, many manufacturers approach cost reduction from a discrete, functional approach. Cost-to-Serve® solutions address the supply chain with an integrated approach. As options for companies become exhausted, we increasingly see companies turning to Cost-to-Serve® to identify which levers to pull.