The Right Supply Chain
So what are the goals of supply chain management and planning. You want to deliver the right product
- Right Products: Having the product the customer wants. Depending on the industry and company that can change. For example what the customer wants this year may not be what they wanted last year. Producing last year’s smart phone would be a mistake if the customers want the new one you launched last month.
- Right Quality. Both from a regulatory point of view and from the specification of the part. There may be government requirements that a company has to meet but then above and beyond that there will be requirements in terms of specific customer or market requirements such as size, performance, appearance, taste etc. You do NOT want a product recall. Product recalls are bad news for your organisation. High profile ones that hit the media will damage your brand, potentially permanently. The Boeing 737Max issue is probably a prime example of that. But even smaller recalls can have major impact on the company.
- Right Quantity. You don’t want to produce too much or too few. Too many may mean you have to offer significant discounts to clear the stock. In a tight margin industry such as food that could even mean making a loss on that product. Too few will mean you cannot meet the customer demand. Now you may be thinking that some of the basic laws of economics mean that in shortage situation you can up the price to make the same margin. Well not in reality. In the real world if you don’t have enough product you can’t increase the price because you may have already advertised the selling price or you may have a contract with the customer. Too few may also mean you are fined by your customer if they in turn incur a loss. For example many supermarket chains will fine their suppliers the cost of lost sales if the supplier cannot meet the demand. And finally having too few products on the shelf may mean the customer will switch to a rival brand. For example if a customer always uses a particular type of lipstick and on that day it is not available they will be forced to switch to a competitor with a very similar shade. Once they switch to that competitor they may not return to you. The right quantity also means holding the correct level of inventory back through your supply chain. You do not want to have too much Work in process or inventory. Companies should measure WIP levels, Inventory costs, Inventory Turns, Throughput times etc.
- Right price. You need to have the product priced correctly. If you charge too little then you may not be covering all your costs. For example a product may have been priced based on incomplete information and may not include the cost of transportation. In a tight margin industry that could see your profits wiped out. Plus if you are significantly below the price or your competitors for no obviously good reason that may cause customers to order more at that low price and then resist or even refuse to accept a price increase thus damaging your relationship with that customer. Of if you charge too much then it is easy for a competitor to undercut you and win the business. If the customer cannot see any real benefit for your product over your competitor then they will not choose you.
- Right time. Customers do not want products at the wrong time. If you are late then it is the same as having too few products. If the customer has a tight deadline for their customer then your late delivery may disrupt their supply. Similarly customer do not want products too early. If you supply the product too early that will have an impact on their inventory levels and potentially on their finances. They may not even have space to hold stock. Many companies operate Just In Time systems for delivery. If you turn up early, even by an hour, they will not accept the delivery until the specified delivery slot has been reached. I have seen situations where trucks will be made to sit outside a depot overnight because they arrived a day early.
- Right Location. You have to have the product in the right place for the customer. That place can be any where along the supply chain depending on what you make and your place in the supply Chain. If you are B2C (Business to Customer) then you may have to have the stock in a shop, or your distribution depot, or a dealership, or a warehouse that services online orders. If you are B2B (business to business) then you will need to deliver the product to a factory, a warehouse, a distribution center, an office, a third party contract manufacturer, etc. It is critical that you deliver to the correct place. For example if your customer has two factories that you regularly deliver to and the order is entered incorrectly then you will deliver to the wrong factory. Once this mistake is discovered you will incur all the costs associated with a late delivery for the correct destination plus the cost of picking up the product from the incorrect location and shipping it to the correct location. If the product is perishable (e.g. food) and you cannot get it to the incorrect location within the required time then you may even have to write off the entire delivery.
All these factors can be grouped together into three broad objectives. You want to have
– The right customer service level
– The right Inventory/stock through the supply chain,
– The right cost of production and serving the customer
The factors that make up each of these can overlap. For example having stock in the right location can influence your customer service level, your inventory level and your costs. However these objectives sit at the heart of an organisation’s objectives. But these may sometimes conflict. For example you could reduce inventory by deciding to extend the leadtime communicated to the customer. So instead of saying the product will always be on the shelf the customer will instead have to order it from a central hub and you will deliver it in one week. That impacts on the customer service level as you will not have the stock when the customer wants it. Or you may decide that you will maintain customer service levels by always stocking the product regardless of the cost of waste or excess inventory. Or you may decide to cut the cost or production by using lower quality ingredients which in turn impacts on the taste and on customer service. You have to find the correct balance between meeting the required level of customer service, the right stock levels and the right costs. You will not be able to maximise or minimise each one. But you will be able to optimise the supply chain by finding the appropriate balance between them.