By monitoring the efficiency of their supply chains, companies can ensure they are notwasting resources as they produce and deliver goods to customers. This article provides tipson how to measure and improve your supply chain efficiency.
Inside This Article
- Why efficiency isvital in a supply chain
- The differencebetween supply chain efficiency and supply chain effectiveness
- Metrics to measureyour supply chain efficiency
- Ways to improveyour supply chain efficiency
What Is Supply Chain Efficiency?
Supply chain efficiency is about how effectively a company gets its products to the rightplace at the right time and at the lowest possible cost and how well it uses resources toproduce and deliver goods. Improving supply chain efficiency is a key part of anybusiness’ overall supply chain management practice.
Manufacturing efficiency is separate from supply chain efficiency. You canlearn more about ways to make your manufacturing processes more efficient.
Key Takeaways
- Stellar supply chain efficiency keeps costs as low as possible while maintaining orimproving sales.
- You should use key metrics to help you gauge and monitor your supply chain efficiency.
- Tensions can arise between supply chain efficiency, which focuses on low costs, andsupply chain effectiveness, which concentrates on pleasing customers.
- Experts recommend specific steps that can improve your supply chain efficiency.
Why Is Efficiency Important in Supply Chain?
Supply chain efficiency is important because excellence in this area can save a company moneywhile keeping customers satisfied. An efficient supply chain means shorter order processingtimes, better inventory management and faster delivery. It also often means higher profits.
Supply Chain Efficiency vs. Responsiveness
Supply chain efficiency focuses on delivering quality products to customersat the lowest possible cost by maximizing such resources as materials and labor.
Supply chain responsiveness focuses on customers’ expectations andstrives to provide a quality product faster.
There can be tension between the two goals. For example, at times, higher supply chainefficiency will mean lower supply chain responsiveness.
Supply Chain Efficiency vs. Supply Chain Effectiveness
Supply chain efficiency describes how well a company uses resources to makeand deliver quality goods. Supply chain effectiveness defines how well acompany satisfies its customers with those products.
Experts consider supply chain efficiency to be an internal standard, while supply chaineffectiveness is an external standard that reflects how well the business is meeting thewants and needs of customers. Experts often equate “supply chain effectiveness”with “supply chain efficiency,” but it’s possible for a company to have anefficient supply chain that is not effective. Or, it can have an effective supply chain thatis not efficient. The most successful companies strive for a balance.
Companies can cause themselves expensive problems when they strive for too much efficiency,as the past several years have shown. A 2014 study, “Reducing the Risk of Supply ChainDisruptions,” found that companies that made their global supply chains very leancould suffer costly disruptions. For example, the study cited how Toyota Motor Corp.incurred billions of dollars in lost sales because of 2010 product recalls. Those recallswere primarily caused by the car company relying on a single part from a singlemanufacturer.
More recently, companies that had embraced just-in-time manufacturing often found themselvescaught short. Leaders need a way to continuously monitor the performance of their supplychains and must carefully consider the potential for disruptions when deciding howefficiently they wish to work.
Supply Chain Efficiency vs. Effectiveness
| Supply Chain Efficiency | Supply Chain Effectiveness | |
|---|---|---|
| Overall focus | Using resources in the most efficient way while still accomplishing goal | Using resources in a way that provides the most satisfaction externally,especially to customers |
| Overall purpose | Minimal cost | Quick and accurate response |
| Performance focus | An internal standard | An external standard |
| How it affects manufacturing strategy | Maximum resource utilization | Flexibility in operations |
| How it affects inventory strategy | Leanest possible inventory | Strategic inventory management, including extra stock at times to meetpotential customer demand and manage disruption |
| Potential problems | Lowering costs and efficiency to detriment of customer satisfaction | Pleasing customers with products and delivery but at high costs that areunsustainable |
| Difficulty in quickly adjusting to external disruptions in the supplychain | Tendency to raise the cost of goods sold (COGS) |
How to Measure Supply Chain Efficiency
You can measure supply chain efficiency through supply chain efficiencymetrics. These metrics often focus on the time it takes for a production step tohappen, the cost and the final product’s quality.
Here are some valuable metrics that measure supply chain efficiency:
Perfect order index:
This is the percentage of orders delivered on time, complete, without damage and withthe proper documentation.
Service rate, or on-time deliveries:
The frequency with which orders arrive within the promised timeframe.
Inventory turnover ratio:
How often your company sells its inventory in a specific period. Read our guide on inventoryturnover ratio to learn more.
Order accuracy:
The percentage of orders accurately taken and conveyed to your production anddelivery teams.
For companies that want to get more in-depth on measuring, a publication from the LuleaUniversity of Technology in Sweden, titled “Measurements of Efficiency in a SupplyChain,” details the 12 top supply chain performance metrics that the Supply ChainCouncil recommends through its Supply Chain Operations Reference, or SCOR. The paper alsoproposes a new way to measure supply chain efficiency through the Average Logistic Index(opens in newtab).
The SCOR model provides benchmarking tools(opens in newtab) that help organizationsimprove their supply chain processes.
What Is the Supply Chain Efficiency Curve?
The supply chain efficiency curve measures the cost of your supply chain on one axis and theperformance of your supply chain on the other. In general, increased performance meansincreased costs.
Companies with efficient supply chains have an efficiency curve that is flatter than average.Their supply chain performance increases more than their costs do.
Ways to Improve Supply Chain Efficiency
Experts recommend a few ways companies can improve their supply chain efficiency. Thoserecommendations range from better use of data and automation to building betterrelationships with suppliers.
Here are some top tips to improve supply chain efficiency:
Increase supply chain visibility.
Visibility means better tracking of your product through the supply chain, fromfinished production to warehousing and inventory, then to your team for packing andshipping the product to customers. All of this is considered part of supply chainexecution.
Visibility helps you understand your inventory levels and your efficiency ofdeliveries. It can even help suppliers better understand your inventory levels andadjust their deliveries in response.
Advances in technology are giving companies information on every specific stepthroughout the supply chain. Technology is also helping companies respond inreal-time to problems. A tracking device on each item, for example, tells companieswhen a shipment enters a facility. Technology can then provide data that plannerscan analyze to predict when a load might be late and make adjustments.
Develop strong relationships with dependable suppliers.
Good relationships with reliable suppliers are vital. Your suppliers should beconsistent in delivering the products and materials you need, so cost should not bethe only factor in choosing your partners.
To build and maintain good relationships, communications must be consistent. Thesupplier must inform your team promptly of issues so you can respond quickly tochanges.
Perform consistent vendor management.
To build products, companies often need many suppliers, with some providingrelatively small amounts of material. Ensuring your systems manage all suppliers inthe same way, to the same standards, can improve efficiency and save money.
Form strategic partnerships that are mutually beneficial.
When choosing partners, especially suppliers, craft contracts that work for bothsides. If one succeeds, both succeed. True partners will work to understand yourrequirements and deliver what you need, when you need it.
Automate supply chain processes.
Technology can perform many tasks within your supply chain automatically. Allowingtechnology to perform those tasks instead of your staff will reduce errors. It willalso save money.
Automated technology can perform many tasks more quickly and accurately than humans.That frees your staff to work on higher-level decisions.
Use integrated supply chain software.
As you automate your processes, integrated supply chain software can allow you tomore efficiently accept and fulfill customer orders and manage multiple warehouses.And it will help you use supply chainanalytics to understand how everything is working.
Implement and optimize inventory management processes.
You should also use technology to track and manage inventory. That will help you keepthe optimal level of supplies, avoid inventory stockouts and improve your inventoryforecasting.
Enact and optimize a returns management system.
A sound returns management system benefits your customers and your company. Asolution that lets buyers initiate returns quickly and efficiently increasescustomer loyalty and satisfaction.
An integrated returns management system can also point out trends and highlightissues with suppliers so that you can make changes to decrease future returns.Changes might include better online descriptions or improved quality testing ofcertain products.
Use real-time supply chain data.
Inefficiencies can arise suddenly. So don’t just track supply chain metricsquarterly or even monthly — track daily or at least weekly, with datathat’sas “real-time” as possible.
Real-time information helps you make needed changes quickly. Ensure your supply chainsoftware can help with continual monitoring.
Leverage new technologies.
You need up-to-date software and other technologies to do the best possible job inunderstanding and improving your supply chain efficiency. That might mean newcomputerized shipping and tracking systems or mobile device applications that allowcompany leaders to make changes when they’re away from the office. There arenew technologies in many other areas that can help your company boost the efficiencyof its supply chain.
Engage and consult with your IT department.
Too many leaders engage with their IT colleagues only on a per-task basis. Instead,consult with IT regularly. IT leaders have a broad understanding of what the newesttechnologies can and cannot do. They will have ideas that others in your companywon’t on ways to improve your supply chain technologies and processes.
Assess and invest in employee development and training.
Humans are still more vital to your supply chain than technology. Therefore, yourcompany must ensure your employees are well trained in how your supply chain worksand how they contribute to success.
Make sure you routinely provide employees with formal training on your supply chainsystems and processes as well as on-the-job training and mentoring. Well-trainedemployees empower your company to improve its supply chain processes and make themmore efficient. Conversely, employees who aren’t well trained may becomeoverwhelmed and prone to errors.
Research and initiate green shipping and packaging.
More and more of your customers expect companies to engage in business practices thatreduce their carbon footprints and are environmentally friendly. In supply chains,one area these engaged customers are watching is how you package your products. Moreand more shippers are using “ships in own container” — or SIOC—packaging. That means the product is shipped in its original packaging only and notplaced within another box. Also consider using packaging and filler materialscomposed of biodegradable materials.
Develop a supply chain efficiency plan and continuous improvement processes.
Your company, its leaders and employees should have a comprehensive plan to ensureyou’re consistently working to improve supply chain efficiency, notjust maintaining the status quo.
A comprehensive supply chain efficiency plan will guide company leaders to create,monitor and adjust processes. Nothing stays the same for long in the business world.To succeed, companies must continually adapt and improve.
Start a supply chain council.
Many companies create supply chain councils made up of company leaders and employeeswho understand the inner workings of the supply chain. The council makes suresystems and processes are as efficient as possible and fit with the company’soverall business strategies. Councils are also tasked with choosing and trackingmetrics, addressing issues with suppliers and evaluating new technologies.
Beyond improving your supply chain efficiency, you can also learn more about best practices inoverall supply chain management.
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NetSuite Enables Companies to Master Their Supply Chains
Practicing supply chain efficiency can help companies save money and use resourcesappropriately. But that’s only half the equation to have a productive supply chain; itmust also be efficient. NetSuite’s Supply Chain Control Tower helps you achieve both anefficient and effective supply chain by balance demand and supply. It also helps you controlcosts while pleasing your customers.
Use the NetSuite solution to analyze demand, forecastsales and automate essential tasks so that you can stay on top of your supply chain.It enables you to save money while keeping your customers happy and winning new ones.
