The cost of waiting: Holding off on supply chain improvements
Brad Huff, Executive Vice President & General Manager of TAKE Supply Chain discusses how delaying supply chain improvements could impact both margin and market share.
As businesses continue to emerge from the 2008 recession, especially mid-market manufacturing and distribution companies, they are faced with the very real need to upgrade their talent, processes and tools. The challenge most companies face is ‘where and when’. Prior to the recession, the concentration was on internally focused systems like ERPs and CRM. These types of systems were considered the primary lifeblood of the organisation. And while I would not discount their importance, there is another area of the business that has emerged as equally critical: supply chain operations.
The supply chain can drive value in cost management and expansion
It’s no secret that supply chain operations have become far more complex and far more critical to business success. If you think about it, it is the one area of the company that is now capable of driving considerable value in both cost management and growth/expansion.
Why? Supply chain operations (plan/source/make/deliver) often steward a majority of a company’s revenue in the form of materials, finished goods, and personnel/labor costs. For example, a typical manufacturing company can have up to 45 percent or more of its working capital tied up in the supply chain at any given time. With that much money in play, inefficiencies with even a small percentage of impact can have a noticeable and negative effect on the bottom line.
For an example, let’s look at a $250 million dollar manufacturing company. With $110 million or more tied up in the supply chain, waste areas such pricing errors, non-optimised carrier/transportation rates, lost inventory, late payment penalties and foregone early payment discounts can run into tens (and sometimes hundreds) of thousands of dollars per month. This is lost and generally unrecoverable capital that could be put to better use.
For mid-market companies, which habitually have tighter margin controls, not having this additional working capital available restricts market and product development, and it strains the ability to respond and scale for the longer term health of the business. Or, put another way, by taking steps to reduce supply chain inefficiencies and convert them into working capital, companies are in a far stronger position to respond to changing market conditions and fund growth initiatives. See the link below for the infographic: http://takesupplychain.com/DataSheets/TSC-CostofWaiting-Infographic.pdf
It’s important to note that this is a basic illustration and your company’s metrics will vary from the example above. As you can see, however, the inefficiencies quickly translate into lost working capital regardless of where they are embedded in your balance sheet.
Fast and easy improvements
Fortunately, making improvements to supply chain operations is now far less costly and disruptive to the organisation. Many companies I speak with are pleasantly surprised at the speed and ease with which they can incorporate improvements, such as workflow automation, into key contribution areas like procurement and accounts payable. In fact, because of advances in data integration and secure SaaS delivery along with complementary implementation/roll out services, supply chain improvements can be done in advance of or in parallel with other system initiatives without disrupting internal resources.
By connecting through the cloud and utilising standard data feeds for key supply chain activities, we’ve seen companies capture enough additional working capital to not only improve margin and growth initiatives, but help fund ERP upgrades and replacement projects. This continued focus on supply chain operation improvement will be crucial for mid-market growth.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”