Outgrowing your Supply Chain?

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Have you outgrown your supply chain?  Are you a victim of your own success?  As a general rule, companies do not build a supply chain for the needs of the future.  Partly out of necessity, and partly due to the reality that the future needs of the business are unknown.  As a result, companies that experience the success of a growing business outgrow their operational organization and internal skill sets.  If you are experiencing any of the following symptoms, you may be outgrowing your supply chain or other operational infrastructure:

  • Increasing complexity of operations
  • Increase in cost of goods sold as a % of revenue
  • Ballooning inventory, decreased inventory turns
  • Higher transportation costs with declining service
  • Historically ‘easy’ things have suddenly gotten complicated
  • Reduced customer service levels

Building a supply chain for the future

There are two major problems with building a supply chain for the future – limited resources and unknown future business needs.  Limited resources in the organization force companies to solve the problems of ‘now’, and only pay for what they absolutely need at this moment in time.  This does not allow an organization to invest in flexibility to support future growth.

The second issue is the unknown future needs of the business.  What is the future product focus?  Will the business strategy change?  Is a merger on the horizon?  Will miniaturization or changing packaging requirements change the size of your product footprint and thus alter future space, weight or shelf requirements?  Does it make more sense to simply build a supply chain for the current needs, and solve tomorrow’s problems tomorrow?

As with most things – it depends.  Generally speaking, organizations are well advised to build an operation that is flexible and is evaluated with regularity.  Of course, overbuilding can be expensive, but solving the same problem over and over again is expensive and frustrating.  Over the years we have seen many organizations ‘paint themselves into a corner’ by relying for too long on an outdated supply chain operation that is working ‘well enough’.  The longer you wait to improve, the more likely you are to see issues in sales and customer service.  If you wait too long, an ‘issue’ can become a very expensive ‘problem’.

The Opportunity to Leverage Scale

As the organization grows, so does the opportunity to leverage scale.  More volume means more opportunities to save money (see my blog: “Utilization Equals Money.”) As your buying power increases, there are increased opportunities for leverage and for utilization improvement.

Potential areas to save money and improve cash flow include:

  • Utilization
  • Carrier rates – transportation and service costs
  • Supplier’s rates – product cost
  • Reduced inventory / Increased inventory turns
  • Packaging costs
  • Reduced damage

Supply Chain practitioners have many models.  The “7 rights of supply chain” is a common model that helps to organize the many areas that supply chain touches.  Each of these areas is an opportunity to reduce cost or increase efficiency as the business grows and presents opportunities to leverage increasing scale:

  1. Right Product – did you ship the right thing?
  2. Right Place – to the right place?
  3. Right Price – is the commercial invoice correct? Is the price right for the market?
  4. Right Customer – is the product sold to the proper customer? Is the customer in the target market?
  5. Right Condition – Quality.   Quality.
  6. Right Time – this one is interesting in logistics circles – how do you define ‘on time’? Is early late?  Is late defined as plus or minus a minute, an hour, a day?  Every customer and every shipper has a different definition.
  7. Right Quantity – so how many bananas do you want? 2 bananas or 2 truckloads of bananas?

For a more detailed discussion of the 7 right of supply chain, check out my blog: “Is your Supply Chain Right?”.

Supply Solutions

Today’s modern supply chains require flexibility, collaboration and smart use of partnerships.  While no one size fits all, here are some strategies to consider if your company is outgrowing its supply chain:

  • Leverage your inbound supplier’s supply chain
    • This can be a low cost option, but is very inflexible and reduces opportunities to change to new suppliers.
    • This option trades low cost for inflexibility
  • Partner with a 3PL (3rd party logistics company)
    • This allows companies to share the cost of people & technology while standardizing or optimizing processes
    • This option trades internal control for best practices
  • Outsource or Insource?
    • Bringing your supply chain operations in house tends to be lower total cost, but hard to scale with growth.
    • This option helps an organization determine which tradeoffs are the best decision

Where do I start?

Take a look at your profit and loss statements.  Consider the following measurements to determine where opportunities might lie.

  • Cost of goods sold (COGS) as a % of revenue
  • Cost of inventory over time
  • Total cost of the supply chain – people, process and technology – as a % of revenue and COGS
  • Cost, time and complexity to process an order
  • Cost, time and complexity to plan, make, store and administrate finished goods
  • Customer service metrics – time to deliver, perfect order metric, damage, returns

Another option is to call or contact BEI Global.  For the cost of a few cross country shipments, we can guide your organization through an assessment to identify the opportunities.  BEI Global is experienced in helping clients evaluate the “Make or Buy” decision as well as guiding the implementation.