7 reasons why the supply chain matters to business success

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7 reasons why the supply chain matters to business success

Whether you are the CEO of an expanding corporation or the owner of a fledgeling enterprise, its fortunes are subject to an undeniable truth. The success of your business links inextricably to the performance of your supply chain. If you want business success (and who doesn’t?), you have to make your supply chain successful too.

Of course, it is helpful to have some statistics on hand to validate the statement above. First though, since the topic is “business success”, let’s be clear on what that looks like.

Supply chain and business success by the numbers

Now for those statistics I mentioned. According to a survey by Deloitte from 2014, 79% of companies with high-performing supply chains achieve revenue growth superior to the average within their industries.

Conversely, just 8% of businesses with less capable supply chains report above-average growth. That figure highlights like no other how critical the interrelations are between an enterprise and its supply chain.

Given that something like 50% of businesses, regardless of their size, fail or close down within five years of launch, it can be deduced that poor supply chain performance commonly contributes to corporate or business failure. Similarly, one can assume that in many cases, businesses that fail do so because of financial problems—a fact that makes the following statistic also worthy of consideration:

Companies with global supply chains – a category which includes a fast growing number of corporations, medium-sized companies and even small businesses – can be standing on a cost base of which 90% is attributable to supply chain expenditure.

Again then, it’s not difficult to see how the financial health of a business depends on that of the supply chain, or how probable it is that supply chain costs feature strongly in the demise of many companies that become insolvent. Here are a few more sobering facts, to complete the big picture of business success and its dependency on supply chains.

1) In many businesses, the supply chain has never been subject to a design process, but has instead just … evolved.

2) According to a 2012 report into corporate insolvencies by the Australian Securities and Investments Commission, 44% of businesses in Australia failed because of poor strategic management. Supply chain strategy is critical to business success, but companies often underestimate its importance and hence pay it less leadership attention than other areas of operation.

3) It is also common for the supply chain to be the least understood area of strategic business management, which for an activity generating up to 90% of overall business costs, is alarming indeed.

So where does this all lead us? Well… it simply highlights just how important the supply chain and its management are to the success of businesses operating in today’s local and global markets.

So let’s dive a little deeper and look at precisely how the supply chain can make or break a business organisation. Each of the following seven sections in this post highlights how specific elements of supply chain management can contribute to the success or failure of a commercial enterprise.

The top 7 supply chain points to address for business success

1. Supply chain strategy

In 2014, a survey by Tompkins Consortium delivered a shocking revelation. Of the business leaders participating in that survey, more than 50% considered supply chain to be a standalone business operating function. In other words, the majority did not recognise the need for close alignment between supply chain and general business strategies.

Now let’s rewind to the earliest paragraphs in this post, and the statistic relating to supply chain performance and revenue growth:

If your company hasn’t focused much attention on supply chain strategy, now is the time to start, even if it means enlisting some external help to do so. A properly designed supply chain strategy is an enabler for achieving commercial goals and consequently, corporate success.

What does “properly designed” mean? It means that your supply chain strategy should support the overall strategy of your business. In far too many organisations, this is unfortunately not the case.

Remember, poor strategic management is a factor in 44% of Australian business failures.

Given the other statistics we’ve looked at so far, it’s fair to include poor supply chain strategy along with general strategic management in the figure above. So if you want to be sure of business success, review your supply chain strategy. If it doesn’t align with the objectives of your business, you have some work to do.

Mini case study: walmart

Walmart may be the most famous example of a company that has succeeded primarily because of a well-developed and aligned supply chain strategy. Some of the company’s most notable strategy wins are as follows:

  • Strategically removed links from the grocery supply chain
  • Pioneered the use of vendor-managed inventory
  • Built strategic partnerships with vendors to drive down prices
  • Developed a process of excellence in supply chain collaboration
  • Implemented cross-docking in its supply network to enable inventory reductions
  • Established the strategic use of technology to gain supply chain efficiencies

All of the initiatives listed above support the company’s business strategy to be a leader in low-cost grocery retail, making Walmart a prime example of what enterprises can achieve when supply chain and overall business strategies are aligned.

SEE ALSO: Supply Chain Strategy Development

2. Supply chain network design

Along with the design of supply chain strategy, the design of the supply chain itself, especially the part dealing with outbound distribution from plants or warehouses, is instrumental in the success or failure of businesses.

Given this impact on business success, it’s disconcerting to realise that just 22% of companies take an active approach to supply chain network design.

For the rest, there may be no predefined structure for moving materials and products through the stages of fulfilment. Typically, networks evolve through a series of discrete changes and developments, each addressing needs as they arise and few considered as deliberate steps toward a strategically integrated supply chain.

Such an approach results in unnecessary cost, a lack of resilience, and unwanted challenges in meeting customer service requirements – yet sadly, it’s still the approach most commonly taken.

If your supply chain network design has not been under the microscope, and you care about business success, it’s probably time to consider the benefits of a design review and optimisation exercise. You may well find opportunities for savings and service improvements, perhaps enough to substantially improve the chances of business success.

Mini case study: Whirlpool

Following its acquisition of competitor Maytag in 2005, Whirlpool found itself entering an unprecedented period of growth, at which point the management team recognised the need to continuously optimise its supply chain design and make it more flexible and adaptive to ride out economic fluctuations.

As a result, the newly merged company developed a systematic methodology for network design optimisation, based on the following four principles:

  • A continual process of high-powered modelling and network design analysis
  • A disciplined approach to the collection, cleansing, and standardisation of supply chain data
  • Development of analytical and network design skills within the company’s supply chain teams
  • The perpetuation of knowledge surrounding supply chain network design (eliminating the reliance on tribal knowledge)

This formula has enabled Whirlpool to endure and thrive in the 13 years since it set out to build an adaptive supply chain, but of course, the work never ends.

In 2017, the company began to look at new options for warehousing, knowing it would need to start placing inventory closer to customers if it wanted to compete in the challenging omnichannel retail space. Today its supply chain analysts and designers continue to explore new initiatives, like the use of shared warehousing as a fast and flexible way to scale the distribution network as necessary.

SEE ALSO: 10 Reasons to Review Your Distribution Network Design

3. Supply chain service performance

Profitable revenue growth is a sure sign of business success, and one of the most critical factors driving profitable growth is customer service and most importantly, customer satisfaction.

Customer satisfaction is highly dependent on the supply chain and to be successful, your business must manage its supply chain with that in mind. That means the customer must be a primary focus when considering supply chain strategy, network design, and performance management. To put that claim into some perspective, consider this data revealed by Gartner from research conducted in 2014:

The study found that by this year (2016), 89% of companies expected to be competing primarily on the basis of customer experience.

That should be sobering news for any business not yet focused on supply chain excellence as a lever for business successThe performance of your supply chain will absolutely impact customers’ perception of your business and the service they receive from it.

The following supply chain performance issues can all have a negative impact on customer satisfaction and therefore, hamper the success of your business:

  • Slow time to market for new products
  • Long delivery lead times
  • Delays in response to customer service requests
  • Poor order fill and on-time delivery performance
  • Inventory shortages
  • Poor product or service quality

If you recognise any of these problems within your own company’s supply chain, don’t despair. Provided you can identify the root causes and begin to address them, you will be on your way to a more successful supply chain, and to creating an enhanced customer experience. In turn, operational performance and business success will be under greater control and will lie less in the hands of Lady Luck.

While the root causes of supply chain performance issues often lie with weaknesses in strategy and/or network design, that’s not always the case.

If your supply chain strategy is well-considered and aligned with business goals, and your distribution network is designed to meet the strategy, some of the problems in the list above might well have discrete causes that you can address directly. For example, supplier performance issues can cause problems with inventory, order fill; on-time delivery performance and customer-order lead times.

5. Supply chain service lessons to learn from Zappos

The Zappos shoe brand has become synonymous with customer service excellence and with good reason, from its formative years to its existence as an Amazon subsidiary, the online footwear retailer has striven endlessly to provide superlative service to match the high quality of its popular products.

Any company wishing to leverage its supply chain as a service differentiator can learn many lessons from Zappos. For example, the following five pieces of advice, which were highlighted by a 2012 Entrepreneur Magazine article and are every bit as relevant today, can be applied by any enterprise with an outbound supply chain serving online shoppers.

  1. Select one strategic logistics partner and build a long-term, close relationship.
  2. Think of your distribution and delivery expenditure as a marketing cost, rather than an operating expense.
  3. Place your main inventory holdings close to your logistic partner’s central hub.
  4. Develop your returns policy and process with the objective of driving sales (even if that means encouraging returns at certain times or under certain circumstances).
  5. Expedite deliveries, but not returns (because it is cheaper to ship slowly and customers are not looking for expedited return shipping).

These five strategy elements all helped Zappos to become one of the world’s favourite e-commerce retailers by driving high levels of customer service while also addressing another area of supply chain operations critical to overall business success—cost management.

4. Supply chain costs

The cost of meeting demand is one of the most telling ways in which the supply chain matters to business success. Supply chain outlay can make up a large proportion of product costs, while excessive inventory in the system can tie up working capital and stifle cash flow.

Investigating the costs of serving customers is one way to understand the way supply chain costs affect business success. The use of a methodology known as “cost to serve analysis” often reveals shocking realities about supply chain costs.

By understanding which of your customers are unprofitable, or yield minimal profits, you can take steps to reduce the cost of serving them. The same applies to certain products in your range, some of which will inevitably incur more costs than others in the process of manufacturing or buying, storage, and delivery to customers.

In all this, it’s important to recognise that the line between appropriate and excessive supply chain cost-cutting is a fine one. Indeed, rather than focusing only on cost-reduction, your emphasis should be on trimming away processes and activities which add no value. Some of the ways by which poorly managed supply chain expenditure can inflate product costs are listed below:

  • Excessive transportation costs
  • Procurement costs
  • Inventory and storage costs
  • Waste in the supply chain
  • Inadequate inventory management
  • Poor forecast accuracy

These are all areas to look closely at if you want your supply chain to support, rather than hinder the general success of your business. A great deal of cost can be saved not by making cuts per se, but by improving, streamlining, and optimising the supply chain.

In case you think this an idle assertion, the results of a 2014 survey conducted by PwC support it. They revealed that businesses with optimal supply chains have 15% lower supply chain costs, less than 50% of the inventory holdings, and cash-to-cash cycles at least three times faster than those not focused on supply chain optimization.

SEE ALSO: Cost to Serve and Business Profitability

5. Supplier performance

The supply chain, as its name suggests, is only as strong as its weakest link. Unfortunately, some of the links are unlikely to be under the direct control of your business organisation. To some extent, your suppliers hold your business success (or lack of success), in their hands. That’s why it’s essential to work in collaboration, at least with primary suppliers, to try and minimise supply chain uncertainty.

Uncertainty in the supply chain costs money and impacts customer service, making it a particularly disruptive factor in overall business performance. Collaboration between your organisation and its key suppliers is the only sure protection against supply bottlenecks and inventory shortages, both of which can otherwise get in the way of business success.

At the same time, there is also a need to manage supplier/buyer contracts and agreements effectively.

Remember that in the eyes of your customers, there is no distinction between the performance of your suppliers and that of your own company. Best-in-class companies have recognised this fact for a while now and have responded accordingly with positive results. Not only have these organisations leveraged supplier management to maintain exemplary service standards—they have also achieved reductions in supply chain costs.

According to a study conducted by Aberdeen group in 2013, top-performing companies that implemented supplier performance management initiatives have achieved average cost savings of around 12%.

Supplier performance and relationship management today though, extends beyond maintaining availability and streamlining the flow of materials through your supply chain. There is also the question of ethical procurement and purchasing to consider.

6. Ethical procurement and corporate responsibility

Recent times have seen a significant uptick in the number of commercial brands suffering tarnished reputations and revenue-loss because of unethical practices among their suppliers. Moreover, corporate responsibility issues like this can affect any business, even if unethical supplier practices exist way down in tier 2 or tier 3 of the supply chain.

If yours is a small or young enterprise trying to find its feet, public knowledge of association with unethical suppliers might very well lead to financial disaster and business failure, as customers react to what they perceive as your wrongdoings.

If your supply chain operates across international borders, out of sight must never be out of mind as far as supplier management is concerned. Any performance management program you implement should, therefore, focus on the integrity and ethical responsibilities of your suppliers’ sources, as well as on service performance and collaborative initiatives.

SEE ALSO: Corporate Social Responsibility – Much More than Just Marketing

Like all of the supply chain success factors described in this post, this is an area in which particular knowledge and skill sets are required to drive improvement. If you’re concerned that your company lacks the necessary resources, it can be well worthwhile to enlist help from external experts.

5 Examples of supplier ethics scandals

To reinforce the fact that no company can afford to neglect matters of ethics in procurement, here are five examples of brands that were harmed by the negligent or unethical behaviour of their suppliers:

  • In 2014, McDonalds’ fast food sales in Asia fell by 7% after one of its Chinese suppliers was found to be selling expired meat.
  • In 2016, ASOS, Marks & Spencer, and Uniqlo were all implicated in scandals relating to unsafe working practices and child labour in their supply chains.
  • Also in 2016, Coles and Woolworths in Australia were both named as purchasers of fruit from Australian farmers engaged in the employment of illegal workers from overseas.
  • In 2015, Nestlé discovered that fish products it was procuring from Thailand for use in its cat food brands were sourced from suppliers engaging in forced and slave labour.
  • In 2017, Justice, a girls’ clothing retail chain, had to react swiftly after a media investigation alleged that one of its makeup products contained traces of four different heavy metals, as well as asbestos.

In none of the above cases was the retail brand intentionally purchasing from unethical or negligent suppliers. Nevertheless, merely being named in connection with the malpractices was harmful enough, illustrating why due diligence in procurement is such a critical factor in supply chain and business success.

7. Inventory management

Few are the businesses that don’t rely on inventory. Even if yours is a service, rather than product-oriented enterprise, the chances are you have some need to move items through a supply chain.

It might be spare parts, consumable items, or perhaps equipment, but if it’s something you need to store and transport, then it requires treating as inventory and managing accordingly. Of course, if your company is providing products, the need to manage inventory efficiently is paramount. Just as customers are something on which your business depends, so is inventory.

In the last section of this post, we looked at the importance of suppliers as a factor for business success. However, the way in which you deal with inventory once it passes from the suppliers’ hands to yours, will also make a huge difference in the fortunes of your business as a whole.

SEE ALSO: Don’t Let Inventory Levels Bloat Your Working Capital

Why is inventory management so important? Primarily because it can dramatically affect working capital and potentially, cash flow too. If you want to reduce working capital within your business, you should certainly take the time to investigate inventory management and ask the following questions:

  • Is it possible to improve forecast accuracy to reduce the need for holding safety stock?
  • Can you find a way to reduce inventory holding costs?
  • Are you taking sufficient steps to prevent the costs of inventory obsolescence?
  • Are you achieving the shortest possible lead times from suppliers?
  • Can you speed up customer delivery lead times?
  • Are you losing money as a result of inventory shrinkage?

The answers to these and similar questions will help you to secure business success by improving your working capital situation. You should also find that improvements in these areas will support increased levels of customer service and make your business more profitable.

Get your hands on the wheel and drive business success

If you want to be sure your business will be not just surviving, but thriving over the next five years and beyond, your supply chain must be at the centre of management attention.

If you can honestly answer “yes” to the following questions, you have little cause for concern:

  • Do you have closely aligned supply chain and business strategies?
  • Do you regularly review and optimise your supply chain network?
  • Are you continuously and actively seeking supply chain service improvements?
  • Do you have visibility and control of supply chain costs?
  • Have you implemented a supplier performance management program?
  • Are you taking steps to mitigate risk in your supply chain?
  • Is your inventory being managed effectively?

In reality, few companies, even those long-established, can unequivocally answer all these questions in the affirmative. That’s no slight toward the professional capabilities of their leaders. Developing a best-in-class supply chain is no easy task, and it takes time.

The time is worth taking though and investments worth making, even if you need to supplement the skills within your organisation with those of external experts to address some of your supply chain issues and challenges. So If you had to honestly say “no” in answer to any of the questions above, you probably have some golden opportunities to improve your supply chain operation—and drive your business toward a bright and successful future.

Rob O’Byrne is a supply chain consultant, coach and author with 40+ years experience in Supply Chain management. He is the expert making the blog called Logistics Bureau.

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