Across the world Supply Chain Directors at FMCG companies face three constant pressures that seem to take turns in being the major bone of contention for their business: cost, inventory and service. However, any focus on one area seems to lead to the others suffering — it’s a permanent challenge. Boards constantly want the supply chain to do more with less, but are not amused at having difficult discussions with customers about why service has dropped following cost cutting or inventory reduction activities.
The issue comes down to really understanding what is actually going on in the supply chain, and what is causing excess costs, non-optimal inventory levels and poor service. How can supply chain teams control the outcomes if they don’t understand the root cause of the issues? Real insight needs to be obtained — insight into the customer’s requirements, the end-to-end value chain processes required to deliver these requirements and the data needed to support these processes.
In this article we take a look at the main reasons why supply chains hit problems and what the best-in-class companies do to provide the level of understanding need to drive control — of inventory, of their time, of service and, of course, control of cash. We also provide an example of a disruptive innovator in the food industry who is using their deep understanding of both customer requirements and the value chain processes needed to fulfill them in order to future-proof their supply chain strategy.
What are the most common supply chain inefficiencies?
There is rarely just one issue in a supply chain, nor even one single supply chain in a business, but there is however often one major cause — a lack of strategic alignment between operations and outcome, resulting in a series of miscommunications, lack of accountability and misaligned activities and metrics driven by a lack of clarity as to the ultimate goal of the value chain — which should be to delight a customer.
Let’s use an example. Assume that you’re a manufacturer of confectionery, notably coffee-based chocolate:
- A focus on sales growth means that the account managers start to overstate their projected requirements for the next period — because that’s what they are measured on.
- The supply chain teams react to this spike in demand and over-compensate by planning to produce more finished goods and holding more safety stock than they need, simply in order to protect themselves from this uncertainty.
- The procurement team reacts to this, and because they are measured on cost savings, they negotiate purchasing a larger volume of coffee and cocoa beans from the farmers in order to hit a certain price point, confident that the recent uptake in demand volumes will consume this additional volume. The real demand comes in and it is nowhere near the expected volume.
- Manufacturing finds it has over-produced the finished products required and halt production, causing production lines to lay idle, excess finished goods are sold at heavy discounts and the unneeded raw material safety stock quickly starts reaching the end of its shelf life, becoming obsolete.
In situations where inventory is held in numerous locations, many of which are controlled by third-party suppliers, the company struggles to have visibility of the shelf life of the stock at the various locations, and ends up either paying for them to hold inventory that is not needed, or where they do have visibility, paying them to move inventory to another location at premium cost.
This wastes far more cash on both unneeded inventory and logistics activities than the procurement team saved through its bulk purchases and the sales team generated through their volume based deals. Net result? The procurement team hits its target and the sales team hit theirs, but the business — notably the supply chain — got walloped.
Supply chain control through certainty and understanding
You can’t control a supply chain when you don’t understand what’s really going on and why. If you continue to operate with this reactive "silo" process mentality, then it will become increasingly difficult to understand the root cause of operational issues. The supply chain will constantly be on the back foot, with obvious knock-on implications for customer satisfaction, supply reliability, stock levels and delivery optimization. All this hits the bottom line of the business, creating even more pressure to cut costs, which in turn causes more issues.
A crucial part to solving this particular puzzle is alignment of business goals to the detailed activities across the value chain — a matter of strategic fit and operational line of sight to the customer. Another key bottleneck is providing constant visibility into the detailed value chain activities, the outcomes they produce and the root causes behind negative results. In the 21st century, this technology is available, but often poorly used. Purchasing the latest tools is not enough — using them to interpret what you do and don’t know about your supply chain is key.
The first step should be to ensure that the tool you require actually understands the issues, and can align to your strategy and report to your key supply chain like delivery reliability, stock levels (including safety, excess and waste), cash flow and complaints.
These metrics should be decomposable down to the actual root cause; highlighting the item that is causing the issues, and better still, prescribing the reasons why. Once you have this holistic and detailed understanding, you can prioritize which issues to focus on. The most powerful analytical solutions don’t just look back — they understand the current situation, can look at the expected demand and supply and prescribe future action. Over time it is then vital to keep reporting on these metrics and see if there if the trend shows a continuous improvement in that metric — rather than just measuring a single point in time.
Putting your own house in order is one thing, but the important wider consideration is that not all inefficiencies are internal. External considerations can have significant implications on delivery partners and raw materials suppliers. These are often the most disruptive for enterprise and global organizations due to the nature of the interactions with multiple partners in multiple countries. In the U.S. alone port delays cost retailers $7 billion last year. In a recent report by DHL, they found that businesses that had developed an explicit risk management focus stood a far better chance of survival, yet even then 74% of them suffered some form of supply chain disruption last year.
Supply chains that are resilient to this disruption are the ones using the latest tools and technologies to alter their production and delivery in an agile and responsive way. This is increasingly vital during the turbulent global market conditions currently being experienced by many companies.
Taking action today
To be truly efficient with a modern global supply chain, especially in FMCG, brands need to be disruptive both in their internal processes as well as in their products. Do you use the latest tools and techniques in the most efficient way to control and mitigate your food supply chain inefficiencies? Or are you still floundering with silos of data, loads of Excel sheets and inconsistent versions of the truth that result in continual firefighting. Do you believe that your current supply chain processes are past their sell by date? Do they need updating and refocusing?
Put your supply chain to the test
Take our supply chain efficiency quiz and find out if you can get our coffee beans to their destination as efficiently as possible based on what you know about your own business metrics. The quiz helps to visualize the top level inefficiencies that may be preventing optimal supply chain performance.
About the author
As CEO of Every Angle, Fred Hermans is responsible for the overall management of the software company. Before joining Every Angle, Fred was CEO of Qurius, a pan-European operating IT company. Prior to that, he was one of the founders of Magnus Holding NV, an SAP-implementation service company. Fred started his career as a management consultant for a worldwide operating consulting firm. Throughout his career, he has been leading fast growing software and service companies with international ambitions, both in Europe, in the US as well as in the Asia Pacific region. Fred Hermans has a Masters Degree in Industrial Engineering and Management Science from the Eindhoven University (TU Eindhoven).