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Any self-respecting company nowadays has a number of initiatives on the books aimed at improving supply chain performance. The supply chain drives nearly all performance indicators of a business and has the potential to significantly improve the competitive position of the company. Unfortunately, in many instances the pressure for short-term financial results turns supply chain strategy into primarily a cost-cutting exercise for the various functional silos. Reducing expenses is always a good thing, however, a narrowly focused, cost-driven approach could have unwanted implications that may affect supply chain performance long past the current quarter, or financial year.

We are all too familiar with initiatives like: (1) centralizing logistics into a global team and reducing transportation expenses only to have worsening delivery performance a few months later or, (2) reducing customer service headcount and relocating the group to a low labor cost location only to witness rapidly deteriorating customer satisfaction levels or, one of my pet peeves, (3) outsourcing technical support to a different time zone making it nearly impossible to reach during normal local business hours. All of these initiatives will save money in the short run but what their impact is on total supply chain cost, business performance, and more importantly on the long term competitive position on the company is at best unclear.

I remember talking not too long ago to a chemical industry executive who was complaining that despite deep cost cuts made during a recent turnaround, as business picked up the cost of sales was growing about as fast the as the sales revenue so that he could only show anemic growth in profit margin. A brief analysis proved this to be the result of just such a cost driven strategy executed with little understanding of core supply chain processes which were seriously damaged by the turnaround.

What is then the solution? What is a supply chain executive to do?

A starting point is to take a systems view when developing the supply chain strategy. In this approach, the supply chain is viewed as the network of flow processes that transport information, materials, and money from the supplier to the customer. These processes and the principles that govern them are then analyzed, performance indicators measured and improved concurrently so that the value added by the supply network is maximized.

In upcoming posts, a methodology for accomplishing this, including supply chain models, principles, methods and tools will be reviewed.

This entry was posted by Ryan Armasu on Sunday, May 21st, 2006 at 1:12 am and is filed under Supply Chain.