8 Ingredients Of A Perfect Supply Chain (Nobody Thinks About #8)

Supply chain is not about huge corporations only. Look around – virtually every man-made object has gone through some journey from raw materials to a finished product. Even services require systemized supply chains to provide consistent value.

A perfect supply chain would mean that:

  1. You always have enough stock to cover demand
  2. You never have excessive stock
  3. Your transportation and storage costs are zero

Surprisingly, such a perfect supply chain exists!

Yes, a supply chain without any overstock or understock issues, with plain zero transportation costs, and plenty of free storage options. You guessed it, it’s a fully digital supply chain.

The best example of this is a software industry. You can instantly copy and send your product online – no need for any physical transportation and storage service (except maybe some server space to hold the files, which is, again, often available for free).

Now, having a vision of a perfect supply chain, how can you optimize your own?

Success Recipe

How to ensure that your customers get what they want, when they want it, and you spend as little as possible in the process?

Chef preparing his perfect dish

Success recipe may not be a universal one because all companies are different. However, there is a number of proven ways to help you organize your own perfect supply chain.

Here are the 8 ingredients for your end-to-end supply chain perfection:

  1. Tier 2 Supply Optimization
  2. Negotiated Supplier Price Reduction
  3. Supplier Inventory Management
  4. Choosing the Best Vendors
  5. Smart Logistics
  6. Automated Inventory Control
  7. Customer Demand Planning
  8. Starting at the End

1) Tier 2 Supply Optimization

I know, I know, direct supply management is often complicated even on its own, but if possible, try to optimize your supplier’s supply. This is called Tier 2 Supplier Management.

Think about it – you depend on your direct suppliers, but they rely on their own partners to supply them too (for example, raw materials). Therefore, it’s in your best interest to help your direct partners in negotiating with the Tier 2 suppliers.

Granted, this is rarely possible. However, you have to at least understand what products your Tier 2 suppliers provide, what are their costs and lead times.

If the cost of goods and lead times are not suitable, and cannot be negotiated – consider looking for another Tier 2 supplier on behalf of your direct partners.

2) Negotiated Supplier Price Reduction

Just because you’ve negotiated a good price for today, that doesn’t mean you shouldn’t ask your supplier to renegotiate it ever again. In fact, in some industries, it’s a common practice to negotiate year-over-year supply prices reduction.

For example, our CEO Viktor Mikla has been leading an auto parts business before, and he says that “in the automotive industry, it’s a common practice that OEMs demand a 3-7% yearly price reduction from suppliers, depending on the details’ type”.

You are optimizing your internal costs, and so should your suppliers! There are many business improvement methodologies, including the most popular ones: Lean, BPM, and Six Sigma. Drive your annual costs down and demand this from your partners.

3) Supplier Inventory Management

Most issues occur in-between processes. Even if your suppliers reach efficiency perfection, and your own costs are minimized, you still have to make sure that they always have enough inventory to meet your needs.

Overheads and understocking in your supplier’s inventory are just as damaging to you as to them. Moreover, an excessive stock is the source of many types of waste and is even more dangerous than understocking if you think about it.

When there’s a problem is one link of the supply chain, all its participants will be affected. That’s why it’s crucial to keep contact with your partners and synchronize your own demand with theirs. Ask for their lead time information and available forecasts.

4) Choosing the Best Vendors

To ensure that you find the right suppliers for your business, you have to follow the correct procurement process. And yes, this means you need a bit of bureaucracy here.

There are two main documents that managers use at this stage – Request for Proposal (RFP) and Request for Quotation (RFQ). They help supply chain and sourcing managers to find not just the cheapest, but the best-quality suppliers.

RFQ’s are a usual tool for surveying the supplier landscape. It’s used for simple products (commodities), services, and common parts that have very little differentiation between various vendors. RFP’s are used to help solve complex supply challenges and ask suppliers to show how their expertise can suit your particular need for a custom product.

Key products usually get RFQ’s and RFP’s every 3 to 5 years.

5) Smart Logistics

When your inventory is not balanced, it’s natural that you would lean towards expedited and overnight shipping to compensate delays. This is, obviously, not very smart.

Many companies fall into such trap, relying on premium shipping each time they are getting late with orders. However, this cannot solve the root cause of the problem.

If you have to pay those extra shipping fees too, most likely your supply chain is not optimized. While there may be several issues underlying this, it’s smart to start with demand planning and lead time management.

Studying your lead times and long-term demand tendencies is the best way to reduce logistics costs.

6) Automated Inventory Control

Data is the king in the modern connected business world. Every company should have a resource planning system if it wants to be successful today and survive tomorrow.

Of course, small business doesn’t necessarily need the huge ERP system that large corporations use. However, you must have at least a basic inventory control system in place. Otherwise, how can you be able to manage the whole supply chain when you can’t control your own resources?

Without a full 100% control over your inventory, you will always pile up more of what you already have or buy items you don’t need at all.

7) Customer Demand Planning

It’s great to receive customer forecasts, and even better – to have long-term or blanket orders. Still, your customers may not always be aware of their own changing needs beforehand. And it’s fine! There is a better way to plan production than simply following your customers’ current orders.

Customer demand information like forecasts and orders are a good starting point. However, there is much more information that can help you create a robust demand plan. Use historical data, competitor analysis, seasonality, and other available market insights to understand your customers better than they do.

Proper demand planning is the basis for optimizing everything else in your end-to-end supply chain.

8) Starting at the End

Finally, have you just noticed this previous point? We often tend to look at the customer, thinking he’s the end-point when actually he’s also the beginning and the very pacemaker of our whole value stream. There’s no end to a successful business – it’s a circle, not a line.

This means that you can’t stop with optimizing just your supply chain – all of the business processes should be improved as a whole system, starting from the last step before the happy customer, and moving upstream. Otherwise, sub-optimization will cause you further problems.

By starting at the end point when your customer receives the product, and then optimizing each previous step, way back to your Tier 2 suppliers (if possible), you ensure that no new bottlenecks are created. This is one of the tricks I’ve learned while studying Value Stream Mapping (one of the Lean-management methods), and now, you know it too.

Business improvement is a journey

And we’re here to help you navigate it! At Boost Solutions, we have both business development and logistics experts to support your digital transformation and make sure it propels your business in the right direction. Check out our Business Integration page for more info.