Creating a Supply Chain Strategy

Supply chain is happening at your company. I mean, if your company sells a thing to a customer, supply chain is all around you. Even if you’re a farmer and you think you don’t have a supply chain, you’re wrong. You do. You might procure seed or fertilizer or packing supplies that end up being crucial to your customer supply

ut is it optimized?

 

What does that mean? 

 

An optimized supply chain means that you’re getting your customer what it wants, when it wants it – and doing that by spending as little money as possible.

 

 So, how do you optimize your supply chain? 

 

Let’s start with this: What does your supply chain look like right now?  To really see your supply chain, you’ll need a whiteboard.  Okay, you can use a big sheet of paper or Visio or PowerPoint – but I’ve found whiteboards to be very useful for this exercise. 

 

When you’re drawing your supply chain, you’ll do it three times.  I’ll explain in a minute – but my definition of optimized supply chain should give you a hint as to why.

 

Drawing number one.  On the far left of your whiteboard, list your Tier II suppliers.  These are the suppliers who supply your suppliers.  Focus on just suppliers of key raw materials and components.  If you buy a machined metal component from a contract manufacturer, then one of the key Tier II suppliers that you need to track would be your contract manufacturer’s raw metal supplier.  Once you’ve listed all of the critical Tier II suppliers, move to the right on your whiteboard and list your suppliers. 

 

Now draw arrows to represent the flow of goods from your Tier II suppliers to your suppliers.

 

 In some cases, the same Tier II suppliers might provide materials to more than one of your suppliers.  To the right of your suppliers, put yourself.  Or your company.  Or the many divisions of your company. 

 

Don’t forget to put in warehouses.  If there’s a freight forwarder or 3PL between any of the Tier II suppliers, suppliers or your company, be sure to include them and to draw the arrows to represent the flow of goods.

 

Include any manufacturing steps along the way under each production facility (whether it’s your company or one of your suppliers). 

 

Finally, to the far right of your whiteboard – put your customers.  If there are warehouse, freight forwarders or distribution centers within the flow of goods, be sure to include them. 

 

Don’t forget to include all of your arrows to represent the flow of goods.  If you’re a small company, this diagram might take you 30 minutes to complete.  If you’re Pfizer, it could take 6 months.  And you might have to have a different diagram for different products or family of products. 

 

That’s drawing number one.

 

Drawing number two.  It’s the same drawing, really.  Except now look at all the steps in your supply chain and start filling in how much time each step takes.  If you’re shipping products across the Pacific Ocean (and who isn’t these days), put in the amount of time it takes for ocean transit and air shipments.  If there’s processing time at the ports, freight forwarders, in quality control or on receiving docks – include that time.  And production lead times at your suppliers and your own manufacturing facilities – include it all.  By doing this, you’ll be able to see how long (on a calendar) your supply chain takes. 

 

That’s drawing number two.

 

Drawing number three.  It’s the same drawing as number one.  And – at some companies – it can be laid on top of drawing number three.  (It depends on how much activity and how busy you want these diagrams to be.)  In drawing number three, instead of time, label each step of the way with dollars (or your local currency).  Each link in your supply chain costs something.  If a raw material costs $1 from your Tier II supplier and costs $.10 to ship it to your supplier, and then your supplier adds value and charges you $2.50 for it and then it costs you another $.25 to deliver to your door (freight, customs, duty, insurance – etc.).  And then your own processing adds $.75 to its cost – by the time you’re ready to ship it to your customer, it’s cost you $3.50.  Hopefully, you’re selling it for more than that.  (This is all direct cost, by the way.  You’ll probably want to start adding indirect costs, too.) 

 

That’s drawing number three.

 

And what did I say optimized supply chain is?  Getting your customer what it wants (drawing number one), when it wants it (drawing number two) – and do that by spending as little money as possible (drawing number three). 

 

You have it all in front of you now.  Does your product flow make sense?  Where can your supply chain stand some lean trimming?  If a customer ordered a product today and you had to make it from scratch – how long would it take you to deliver it?  And where can you improve on those steps?  And if you’re selling that part in our example for $3.25 – and you discover it really costs you $3.50 – can you: 1) approach your customer about a price increase, or 2) look into your supply chain to see where you can work some Six Sigma or Lean or COGS magic to get your costs down. 

 

Supply chain is happening at your company.  It’s happening right now and it’s costing you time and money.  The sooner you create a strategy around optimizing your supply chain, the sooner it can help deliver increased revenue and increased earnings
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