What does the success of a conglomerate like Dangote and a furniture SME have in common? A well-managed supply chain process. The silent driver of the profitability of any business is the ability to deliver its products in the most cost-effective and time-effective manner possible.
Supply chain management is the end-to-end process that maps creating a product from raw materials to delivery to the end consumer. According to authors Chopra and Meindl in their book, Supply Chain Management: Strategy, Planning, and Operations, “A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer request. The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves.”
Why is supply chain management critical for success, and how can Small and Medium Enterprises (SMEs) increase their profitability utilising its principles?
Take the case of Layo furniture: a customer places an order for a sofa on its website. The sales team receives the order on the backend and immediately swings into action. Is the sofa in stock, and how many sofas are left in stock?
If the sofa is in stock- A request is put in for the fulfilment team to package the sofa in stock for delivery, the transport team receives an alert about an item scheduled for delivery, and the customer success team confirms the availability of the customer to take delivery of the sofa.
Suppose the sofa is not in stock or when stocks are low. In that case, the larger supply chain starting with ordering the raw materials, production and assembly of the sofa, and delivery to the customer, are triggered.
How Layo furniture anticipates this chain of events and manages internal and external dependencies constitutes its supply chain process.
Supply chain management impacts two primary areas of a business:
• Functional: Businesses exist to meet the needs of their customers and extract value in compensation for their efforts. To guarantee that value is given and received, businesses must achieve the functional goal of efficiency, ensuring minimal friction throughout the supply chain in delivering products to customers, from procurement and manufacturing, receiving, warehousing, logistics and fulfilment, and reverse logistics (returns).
Happy customers = More business = Higher performance and profits
• Financial: Cost-effectiveness- the ability to do more with less is a significant financial goal. Creating optimal or near-optimal processes allow for better forecasting and coordination, which reduces costly redundancies, overstocks, and stockouts.
Minimal waste= More cost efficiency = Higher performance and profits
Mapping your supply chain- Principles and strategy
Supply chain management includes six major processes:
• Planning: These are the processes that develop a course of action based on forecasted demand and supply to best meet sourcing, production, and delivery requirements.
• Sourcing: is the process that finds the best suppliers and procures goods and services to meet planned or actual demand.
• Manufacturing/Production: This process transforms raw materials into finished products to meet planned or actual demand.
• Deliver: These processes ensure that finished products are delivered at the right time and in the correct quantity to meet demand, including warehousing, inventory management, shipping, distribution and last-mile fulfilment.
• Return: These processes manage returns and exchanges (reverse logistics) and involve post-delivery customer support.
• Enable: These processes optimize the overall strategy for supply chain profitability. They include monitoring performance data, managing regulatory compliance and risk management.
Not every business will require all six processes in creating its supply chain. For example, downstream oil and gas businesses do not require a return process compared to e-commerce businesses, where an efficient returns process is mission critical. Mapping the supply chain for every business requires specifically looking at the entirety of the business functions both inside and outside the organization— and then creating clear, detailed processes to ensure maximal efficiency.
There are five core principles that SMEs can apply in the development of a supply chain strategy:
• Segment your customers: Using historical data, businesses should segment individual or similar customer groups based on their needs, purchasing habits, and average spending. This will allow the company to anticipate demand better, maintain adequate stock, and adapt its supply chain to deliver value to each segment efficiently and profitably.
• Customise logistics based on segments: Adapting the logistics requirements based on customer location, product size, and additional service requirements like installation will ensure optimal delivery and profitability for each sub-segment. Doing this analysis will help determine whether a central logistics base (hub model) is required, or it has to be decentralized.
• Develop demand forecasts: While historical data is beneficial to segmenting your current customer needs, anticipating future demand is critical to streamlining costs. Utilizing data from parallel market signals and quickly adjusting demand planning can ensure that a business is prepared to meet changing needs. Having raw materials sourcing processes, especially materials and services contracts, mapped to demand forecasts is imperative.
• Reduce costs: Strategically managing costs across the supply chain from suppliers to third party logistics will reduce the total cost of production and delivery. For example- bundling items for delivery based on proximal location can reduce the cost of fulfillment
• Analyse performance: Measure, analyse, adapt. Keeping track of performance metrics across the entire supply chain will allow easy identification of areas that need improvement, expose areas of redundancies, and improve overall ability to reach the end-user effectively, efficiently, and economically.
The benefits of creating an effective and efficient supply chain cannot be overstated, and its impacts, positive or negative, is often the defining success point, especially in industries with thin margins. Research has shown that companies with efficient and well-managed supply chains have a significantly higher-than-average revenue growth than competitors. A smooth supply chain process ensures that your business can consistently anticipate and provide for the customers’ needs in a way that exceeds the expectations of the customer while positioning your company for growth. It also creates a formidable competitive advantage to set your business apart.