Many companies across industries are considering how best to optimize their supply chains—to achieve greater efficiencies, lower costs and drive revenue growth, while fulfilling service promises to their customers.
The decision to make this transformation is often triggered by a significant change of some sort or by substantial market or financial pressures. Traditionally, the most common triggering event is a management change—perhaps a new CEO, a merger or acquisition or the introduction of a new owner—that brings with it a re-evaluation of operations. For other companies, the urge to re-evaluate their supply chains might be brought about by any number of events (now intensified by, but not caused by, the COVID-19 pandemic). These events include customers’ lack of interest in certain products, their desire to change the way they shop or a company faces disruptions in the availability of critical raw materials. Forward thinking companies redesign and transform their supply chain to be a strategic advantage—to be resilient to disruptions and agile to respond quickly to market shifts and drive revenues.
Regardless of why a company comes around to it, transformation will always result in the company getting the most out of its supply chain—if the effort is done right. But many do it wrong. They look at, and attempt to improve, only one silo of the supply chain at a time, often over-engineering it to the detriment of one or more of the other areas. These efforts are sub-optimal, and don’t capture the value of the time or resources deployed.
Doing the transformation right
The right way to optimize the supply chain is to perform a large-scale end-to-end transformation through which the complete digital and physical infrastructure of all four areas—plan, source, make and deliver—are evaluated and redesigned simultaneously to create a future-proof supply chain that is resilient and agile and delivers on the profitability needs. This is a radical effort. It encompasses upgrading the demand sensing platforms with concurrent restructuring of a company’s operating assets, network and warehouses; realigning third-party services, logistics and contract manufacturing; resourcing procured needs; and redesigning the operations organization as well as the processes and systems to support the transformed and agile operations. Radical, yes.
This concurrent optimization encourages the four areas to work together collectively. It prevents over-engineering a single area, brings to a halt the bickering often seen among the areas and stops finger-pointing over roadblocks. Furthermore, it eliminates a company’s limited and inaccurate understanding of risk profiles, replacing it with a comprehensive, integrated end-to-end view of risk. It also delivers the correct cost-service-risk balance in all the company’s geographic regions and channels and for every customer. And it builds a cost-effective, resilient and agile supply chain that better satisfies customer needs. The results are often two to four times the impact of optimizing an individual silo. Companies following this approach have experienced benefits such as a 5% uptick in inventory productivity, 12% to 15% supply chain cost takeout, 26% demand surge met in ~4 weeks and ~10% improvement in operating income.
With these large-scale transformation results apparent and proven, why do so many companies settle for a silo approach to optimizing the supply chain? Several companies see this silo approach as being easier, quicker and less daunting than a large-scale transformation, but they don’t understand how limited the results of this approach are likely to be. Others don’t have the required deep functional capabilities or possess the experience needed to develop the right strategies, plan the necessary steps or implement the actions. Many lack the ability to think about (and comprehend) the supply chain from end-to-end and to orchestrate all elements of the supply chain together—an ability that underpins every successful large-scale supply chain transformation.
Making the transformation less daunting
The success of a supply chain transformation is predicated on strong C-level leadership that drives the top-down imperative to make step-change improvements. It also rests on strong rituals, dedicated teams and external support from experts with transformation experience. Resetting the company’s supply chain capabilities can be completed within 12 months to 18 months.
To make the effort less daunting and time-consuming, the best transformations begin with a three-phase approach as follows.
- Rapid assessment. A quick but careful diagnostic is conducted to define the business case for the supply chain transformation. It delivers bold, but pragmatic, ideas and identifies opportunities that are big but sound, so that they can actually be implemented.
- Rigorous planning. Detailed actionable plans for implementing the opportunities uncovered in the first phase are developed following proven methods. These plans cover opportunities in each area, ensuring the concurrent transformation across the supply chain. Risks are identified, clarified and taken out of the implementation, and mitigations are developed. This preparation is key to a successful transformation.
- Resolute execution. Because the transformation targets established in the two earlier phases are unyielding, implementation decisions are made swiftly and present flexible pathways for reaching the targets. The leadership team provides the necessary, measured, support to drive change, making certain everyone understands the purpose and objectives of the transformation, and ensuring the detailed plans are executed flawlessly and on schedule.
This three-phase always begins, operates and ends with the knowledge that an end-to-end transformation cannot be successful if only one part of the supply chain is changed or if the four areas are viewed as silos competing against each other. Working from this approach, the large-scale transformation, which is underpinned with strategic rationale, includes the simultaneous evaluation and redesign of all four supply chain areas: plan, source, make and deliver.
In the plan area, the company addresses product demand and the way it will meet that demand through supply planning. Utilizing advanced frameworks, such as Kearney’s Sense and PivotSM, the transformation of this area looks at market trends and other indicators that give early signals of the product demand coming into the company, at what the company is doing to meet that demand and how best to pivot its assets and supply chain to produce those products and to be resilient and agile to mitigate disruptions. It determines which factories will make which products, what raw materials are needed, how the supply chain must be orchestrated to have on hand and in the right places all necessary materials so it can best satisfy customer orders—at the lowest cost to the company.
In the source area, the company buys all of the materials needed to make its products and run its operations. The transformation effort examines the company’s procurement function versus best practices,
its sourcing methods and the strategies to manage the costs of these parts and components. It looks at how the company manages its supplier relationships, at each supplier’s prices and performance compared to those of the others, at the company’s redundant sources of raw materials and the cost trade-offs of this redundancy. It examines the current strategy for obtaining the materials and where (geographically)
they now are sourced. Then it determines the best overall strategy for sourcing materials based on the criticality of the materials needed, their costs, and where they are available. Advanced techniques such as disruptive sourcing is leveraged to further drive value by challenging design, processes, features and materials to reduce complexity and costs, while maintaining performance requirements.
The make area is responsible for manufacturing the company’s products. The transformation effort examines how and where the company currently makes its products and determines how many plants (and their locations) are actually needed to make them at the lowest cost, while best serving the customer. It looks at the key drivers that shape the manufacturing network, including product portfolio, strategy, growth, capacity requirements and structural and performance advantages of existing manufacturing sites, as well as the company’s appetite for risk.
The effort examines performance within the plant to reduce operating costs and drive value though levers to increase through-put, improve yield, optimize maintenance and focus staff on value- adding processes (reducing manual work). Creating value with digital manufacturing is key to driving breakthrough results. By taking manufacturing from today’s lean factory to the factory of the future and integrating it with the value chain, it would be linked with customers, suppliers, contract manufacturers and logistics.
This transformation also explores the company’s core competencies to determine whether it has the right capabilities for manufacturing certain products in-house or should have them produced by a contract manufacturer, asking questions such as: Does the company have the ability to design new products but not to build the ones that have only a limited customer demand?
The deliver area is responsible for getting products from the manufacturing sites (whether in-house or external) to the end customers. The transformation effort investigates the company’s route to market and determines—by considering factors such as order lead-times, fulfillment channels, manufacturing network design, storage and distribution costs and demand into the equation—if that is the best path for fulfilling the company’s promise to its customers. It looks at questions such as: What warehouse efficiency levers, including digital and automation, can be deployed?
By evaluating and redesigning all four areas of the supply chain at the same time, a large-scale transformation not only optimizes each individual area but balances each area’s needs with those of the other areas, resulting in an optimized, maximized end-to-end supply chain.
Transforming everything is necessary if the company is to give the supply chain the resiliency needed to prevent stockouts, to deliver the necessary product assortment, and to protect the brand; and if it is to give the supply chain the needed agility to meet market shifts, scale assets up and down as needed, respond to channel shifts, and flex distribution capacity. Only this large-scale transformation can get the most out of the supply chain—a supply chain that achieves greater efficiencies to lower costs, drive revenue growth and fulfill the service promise to its customers.