Why businesses should not underestimate supply chain’s value

05 May 2021 Consultancy.uk 5 min. read

The Covid-19 pandemic has highlighted the importance of supply chains in helping organisations to deal with demand surges and supply shortages, and as a lever for agility. Calum Lewis, the founder of supply chain transformation company OP2MA, explains why businesses should going forward not underestimate supply chain’s business value.

Businesses have been tested over the past year and there will likely be further turbulence to come with the exit of the UK from the European Union despite a trade deal. Questions will be raised about trade and supply flows for the coming years. The prevalence of extended global supply networks, exposed by the Covid-19 crisis, will be subject to further disruption and change for many businesses.

Why businesses should not underestimate supply chain’s value

So, what next?

As businesses emerge from the immediate crisis and start to plot a way forward, questions about the strategy, operation and organisation of the supply chain need answers:

  • How should businesses prepare for changes in demand?
  • What should the sourcing strategy be to ensure continuity and flexibility of supply?
  • What physical footprint and assets are needed?
  • How can inventories be managed to minimise working capital but ensure necessary service levels?
  • Are supply chains impacted by unnecessary complexity?
  • How should people and the organisation be developed for success? 

How such questions are answered will be fundamental to negotiating these difficult times and navigating a path to sustainable growth. That said, for some time there have been businesses that have used supply chain management to gain competitive advantage, disrupt traditional ways of working and steal a march on competitors. 

Now more than ever, businesses need to understand how their operations are driving profitability and shaping capital requirements. Those that simply see supply chain management as a necessary but low priority aspect of doing business will be left behind.

How to adapt

When adapting and rethinking supply chain strategy, emerging solutions need to stand up to rigorous evaluation and testing, probably in ways not seen before. Strategic design choices need to ensure the supply chain is: aligned to the core business strategy and the primary basis of competition (innovation, customer experience, quality, cost), tailored to deliver the products and services required without undue complexity, resilient to be able to operate effectively when conditions are no longer ideal as well as being responsible for promoting social and environmental wellbeing.

Being adaptable can also help a business to respond to a changing business environment, be that change stemming from technological disruption, market conditions, new products and services, mergers or acquisitions.

Don’t lose sight of fundamentals

We should not lose sight, however, of some of the fundamental principles that determine excellence in supply chain management. Being clear of what products and services are adding value helped one of our clients to realise the benefit of removing complexity in the product range and supplier base whilst also supporting restructuring of the distribution network. Applying a systematic approach to assessing how the supply chain was driving financial results gave the business a platform for sustainable growth.

True innovation happens when creativity and analysis are combined. A historically underinvested foodservice distributor struggled to support continued customer growth and firefighting was a badge of honour in the business. Established ways of working resulted in unnecessary complexity in the supply chain, excess inventories, and extensive use of external warehouse storage.

With a strategic re-design of the supply chain for all major supply categories based on a lean, flow model, we were able to reduce average inventory holding by £8 million whilst maintaining order fulfilment at over 99% and secure a sustaining 12% operating cost reduction. Developing collaborative working across the supply chain played a pivotal role. 

Trends that have been emerging in recent years, such as automation, digitalisation and near-shoring, will accelerate. There is much scope to improve the capture of data, to speed information flows and to synchronise activities across supply networks in ways not previously possible. If now is not a prompt to close digital gaps, then when will it be a time to focus on digitisation projects and initiatives?

Supply chain management is about balancing service, costs, and capital in a coherent manner to deliver sustainable financial results. There are trade-offs to be made. Only by taking a structured, systematic approach to review, rethink and reset the supply chain can businesses meet the imperative of responding to events, address the challenge of new trading conditions and take the opportunities offered by digital technologies

Organisations need to incentivise their supply chain to work in ways that deliver the most value for their business, while protecting against its biggest risks. The right KPIs depend strongly on the needs of the business, the product, and the market. The cost of production crucial players, stability of supply for staples and critical products and agility in volatile markets with fluctuating demand are key. If a metric doesn’t matter in your business, don’t misdirect the organisation by applying it.