What is Supply Chain Efficiency?
Sustainability is a philosophy, not an endpoint. Companies should always be striving to become more efficient and less wasteful instead of assuming they’re already as sustainable as they want or need to be. There’s always more progress to make, and there are real consequences for coasting on existing accomplishments.
To understand why simply look at the supply chain efficiency. Any company invested in the global economy depends on its supply chain to be the foundation of the business. Everything is built on top of it, including the company’s environmental footprint. How you manage the transformation and transportation of assets in that supply chain ultimately determines the value you create for the world. And if your master plan isn’t streamlined, your flow of value cannot have quality improvement, consistency, and continuity.
How to measure Supply Chain Efficiency?
Manufacturers who want to measure supply chain performance have access to several metrics which give multiple views of the supply value chain. It is important to prioritize which supply chain metrics are important and how they will be used. Many times, manufacturers use supply chain performance metrics that may be easy to measure but may not give a true indication of how the supply chain is performing. Also, many companies deploy metrics that they require their logistics department to adhere to, but do not realize that these may negatively impact few aspects of the supply chain.
Key types of Supply Chain Performance Metrics
- Time – When manufacturers look at selecting supply chain performance metrics, they usually will consider those metrics that relate to time, as they are easily calculated, understood, and reveal accurate operational effectiveness. So they may look at metrics that show the level of on-time deliveries, on-time receipts, time to process purchase orders, and time to fulfill an order.
- Cost – This metric shows how efficient parts of the manufacturing set up is as businesses need to make a profit and by focusing on supply chain cost metrics, they can identify where in the business the improvements can be made. Inventory carrying costs is one such key performance metric that shows how much it costs them to carry items in the warehouse. Manufacturers are always trying to identify where they can make changes to improve cash flow and hence make the business more profitable.
- Quality – This is another relevant metric as customer satisfaction is critical in ensuring efficiency in the long run. Quality metrics help assure customer satisfaction and improvements in the quality of the product or service can significantly improve customer satisfaction.
Supply chain efficiency vs Effectiveness
A well-functioning supply chain is not only effective, but also efficient. Efficiency is all about the extent to which a process uses resources in the best way possible to ensure the fast, smooth running of systems. Effectiveness, however, is the level to which a specific process gives the kinds of desired results expected from it.
An efficient supply chain is one that can make the most optimum use of its resources including financial, human, technological or physical. This results in reducing operational costs for materials and packaging and reduces time wastage.
An effective supply chain is one that meets or exceeds the actual demands placed on it by its key stakeholders and this can include customers, partners, suppliers or vendors.
Each of these have their own benefits. Many times an efficient supply chain can result in moving processes very quickly and delivering the final product to customers in excellent time,however the quality of the product may or may not be as per their expectations.
The supply chain is therefore efficient because the turnaround time for delivery is quick, but may be ineffective as the product delivered may not meet the demands of your customer.
Similarly, the supply chain can be effective when it results in providing optimum quality of the product or service which adequately meets customer demands. However,it may be inefficient if that product or service was not delivered on time.
Assess Supply Chains in Real-Time
Everyone wins when supply chain efficiency becomes more sustainable, but doing so requires a conscientious effort. Evaluating them yearly or even quarterly isn’t enough. Supply chain efficiency metrics must be evaluated in real-time because that’s also the speed of waste: emissions, scrap, redundancy, and the like. You need to understand these problems when they happen, not months later, which makes access to real-time data from up and down the supply chain. Not surprisingly, most companies are missing this data.
That does not mean, however, that improvements are impossible. My company has done research showing that supply chain managers often fail to properly map out processes, making it harder to identify bottleneck operation. They also fail to systematically document supply chain optimization challenges, causing them to be forgotten instead of resolved.
At the very least, you need to move data trapped in paper notebooks into computer spreadsheets. Once supply chain efficiency monitoring is digitized, the focus becomes collecting as much data as possible. Everything that is good and bad about the smart supply chain management — from an economic and environmental standpoint — is represented in the data.
Ways to Improve Supply Chain Efficiency
Fortunately, there has never been a better time to start collecting thanks to recent innovations that make data more accessible than ever. Better still, these new tools address the kinds of bottlenecks that lead to inefficient and unsustainable supply chains. Here are some examples:
1. Run cleaner on the cloud.
Multi production line optimization using nonlinear programming and machine learning on the cloud are steps a company can take to simultaneously care for the environment and its bottom line.
Supplier issues can bring production to a halt. Late deliveries, poor part quality, and long lead times can all make critical components unavailable. Sourcing and procurement departments exist to mitigate this issue, but input bottlenecks remain common. Throughput issues are similar. Manufacturing is a precise process that is hard to systematize and just as hard to monitor. As a result, no manufacturer in history has ever been able to capture 100% of its productivity.
Technology augmentation and machine learning can make the supply chain planning efficiency more predictable, but in-house servers require a lot of electricity and supporting equipment — cooling units and humidity control, for example — to run effectively. Plus, as the company scales, so does the computing impact on the environment.
But the cost of cloud and computational processing power now make it economically affordable for more businesses of all sizes to use statistical optimization and modeling tools to run leaner, have more standardized business processes, and create less waste (through less scrap and rework). You can have expansive data storage and use fewer resources than when using on-site servers. When all of these elements combine, supply chain efficiency transforms for the better.
2. Use tracking to streamline sales and operations.
The sales and operations departments are closely linked yet poorly connected. Because of a lack of coordination, sales will over- or underestimate supply chain forecasts, forcing operations to accommodate unrealistic demands. It’s a classic case of overpromising and underdelivering, and it has persisted for so long because there wasn’t a good way for these two departments to share information in real-time.
Radio Frequency identification tracking could prove to be a simple solution. Devices installed on any part of the responsive supply chain — a machine, a piece of equipment, etc. — can collect data on that single component to identify inefficiencies that would have been invisible otherwise. RFID technology has already been used to make everything from cattle ranching to grocery shopping easier. Now, thanks to declining costs, it’s viable in complex manufacturing settings as well. After the devices start delivering data, manufacturing operations management can accurately estimate capabilities and communicate that data to sales.
With RFID technology, your company can measure local data for any asset or machine to understand local and global flow within the internal and external supply chains of a company. This results in less machine runtime, fewer emissions, and less waste.
3. Standardize output with smart contracts.
Some of the biggest supply chain bottlenecks occur as goods are heading out the door. Storage and shipping costs can quickly cut into profit margins. Not to mention that time-sensitive goods such as chemicals and food can spoil as they sit in warehouses.
According to research from the U.N. Food and Agriculture Organization, 30% of global food waste occurs in the supply chain, which contributes 8% of greenhouse gas emissions.
Smart contracts link buyers and sellers in ways that benefit both. These contracts execute automatically. For example, when goods are delivered, payment is automatically released. Plus, sharing sales and inventory data and shipment information erases stoppages and uncertainty, which equals a more efficient responsive supply chain.
As smart contracts become standard, the waste that is so common in the last stages of production will become a thing of the past.
Investing in new technology for the purposes of sustainability can be a hard sell in some organizations. Just remember that sustainability and prosperity go hand in hand, and what’s bad for the environment tends to be bad for the bottom line, too. Fortunately, with today’s technologies, companies can create the most productive global supply chains in history. Whether you call them efficient or sustainable, they’re undoubtedly better than what came before.
Have you found any other tools that address the bottleneck operations that lead to inefficient and unsustainable supply chains? Let me know in the comments!