Keeping Score on Supply Chain Management Performance
According to The World Bank, the global economy is experiencing strong headwinds in the form of Euro uncertainty with deleveraging from European Banks, fiscal consolidation from high-GDP countries while key developing countries are facing production constraint with their capacity utilization. All these drivers are translating to moderate growth for 2012.
All facets of business are buckling up in the wake of anaemic growth and poor runway visibility. This would imply to the supply chain function as well with newly laden pressures on raising the bar set on the balance between market responsiveness with cost efficiency. In the process of rationalising which process needs improvement, Michael H. Hugos in his book “Essentials of Supply Chain Management” provides 4 paradigms to frame supply chain performance measurement:
Customer Service: Defines the ability of the supply chain to meet the expectations of the customer in terms of product availability and delivery turnaround time. This expectation varies from market to market. Zappos, the online merchandising company known for its customer service and customer loyalty, overhauled its supply chain strategy by eliminating the drop ship model from its business in order to improve order fulfilment to its customers. In his book, “Delivering Happiness”, Tony Hsieh talks about how Zappos chose to run its warehouse 24/7 in order to maximize customer experience by getting orders to their customers as quickly as possible.
Internal Efficiency: Refers to the capabilities of the supply chain to achieve appropriate level of profitability that is associated with the market conditions. For instance, in some mature markets where demand forecast is more accurate with less risk and also profit margin, supply chain can take the opportunity to leverage economies of scale and commit large business volume to boost the company’s gross profit and to make up for gross margin. On the other hand, form factor can be a key cost efficiency driver. In situations where the core product, such as a digital camera, only takes up 30% space of the final product packaging but accounts for 90% of the product value, it would be more cost efficient to air freight the high value camera to the regional distribution center but have the package sourced and perform pack out near the end-user market. This is discussed in more detail in the article from Loadstar, A tale of two parts: why the high-tech supply chain is coming to Europe, where the author, Gavin van Marle toured ModusLink’s Brno facility.
Demand Flexibility: Flexibility here is two-fold. First, it refers to the ability to respond to uncertainty in demand forecast and the fluctuations that happen concurrently in different markets. Second, it is defined by the ability to respond to uncertainty in the range of products that may be demanded. In the white paper, “Meeting the Challenges of Supply Chain Management” we rationalized that shipping units in bulk to regional distribution centers near the actual end-user market and performing localized configuration and/or packaging there might be the strategic choice for a business that has lower forecast accuracy (which could result in excess and obsolete inventory) and/or in cases where there are different end-market configuration requirements for finished goods.
Product development: This capability involves evolving along with the markets served. It measures the speed to develop and deliver new products in a timely manner. These capabilities can be pivotal in a developing market where the climate is shrouded with uncertainty in terms of demand and supply and industry platform and standards are still emerging and on tectonic grounds.
What are the areas your company looks at when trying to improve Supply Chain? Write and share your experience.