By monitoring the efficiency of their supply chains, companies can ensure they are not wasting resources as they produce and deliver goods to customers. This article provides tips on how to measure and improve your supply chain efficiency.
Inside This Article
- Why efficiency is vital in a supply chain
- The difference between supply chain efficiency and supply chain effectiveness
- Metrics to measure your supply chain efficiency
- Ways to improve your supply chain efficiency
What Is Supply Chain Efficiency?
Supply chain efficiency is about how effectively a company gets its products to the right place at the right time and at the lowest possible cost and how well it uses resources to produce and deliver goods. Improving supply chain efficiency is a key part of any business’ overall supply chain management practice.
Manufacturing efficiency is separate from supply chain efficiency. You can learn more about ways to make your manufacturing processes more efficient.
- Stellar supply chain efficiency keeps costs as low as possible while maintaining or improving 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, and supply 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 money while keeping customers satisfied. An efficient supply chain means shorter order processing times, 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 customers at the lowest possible cost by maximizing such resources as materials and labor.
Supply chain responsiveness focuses on customers’ expectations and strives to provide a quality product faster.
There can be tension between the two goals. For example, at times, higher supply chain efficiency will mean lower supply chain responsiveness.
Supply Chain Efficiency vs. Supply Chain Effectiveness
Supply chain efficiency describes how well a company uses resources to make and deliver quality goods. Supply chain effectiveness defines how well a company satisfies its customers with those products.
Experts consider supply chain efficiency to be an internal standard, while supply chain effectiveness is an external standard that reflects how well the business is meeting the wants and needs of customers. Experts often equate “supply chain effectiveness” with “supply chain efficiency,” but it’s possible for a company to have an efficient supply chain that is not effective. Or, it can have an effective supply chain that is 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 Chain Disruptions,” found that companies that made their global supply chains very lean could 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 recalls were primarily caused by the car company relying on a single part from a single manufacturer.
More recently, companies that had embraced just-in-time manufacturing often found themselves caught short. Leaders need a way to continuously monitor the performance of their supply chains and must carefully consider the potential for disruptions when deciding how efficiently 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 meet potential 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 are unsustainable|
|Difficulty in quickly adjusting to external disruptions in the supply chain||Tendency to raise the cost of goods sold (COGS)|
How to Measure Supply Chain Efficiency
You can measure supply chain efficiency through supply chain efficiency metrics. These metrics often focus on the time it takes for a production step to happen, 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 with the 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 inventory turnover ratio to learn more.
The percentage of orders accurately taken and conveyed to your production and delivery teams.
For companies that want to get more in-depth on measuring, a publication from the Lulea University of Technology in Sweden, titled “Measurements of Efficiency in a Supply Chain,” details the 12 top supply chain performance metrics that the Supply Chain Council recommends through its Supply Chain Operations Reference, or SCOR. The paper also proposes a new way to measure supply chain efficiency through the Average Logistic Index.
The SCOR model provides benchmarking tools that help organizations improve 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 the performance of your supply chain on the other. In general, increased performance means increased 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. Those recommendations range from better use of data and automation to building better relationships 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, from finished production to warehousing and inventory, then to your team for packing and shipping the product to customers. All of this is considered part of supply chain execution.
Visibility helps you understand your inventory levels and your efficiency of deliveries. It can even help suppliers better understand your inventory levels and adjust their deliveries in response.
Advances in technology are giving companies information on every specific step throughout the supply chain. Technology is also helping companies respond in real-time to problems. A tracking device on each item, for example, tells companies when a shipment enters a facility. Technology can then provide data that planners can 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 be consistent in delivering the products and materials you need, so cost should not be the only factor in choosing your partners.
To build and maintain good relationships, communications must be consistent. The supplier must inform your team promptly of issues so you can respond quickly to changes.
Perform consistent vendor management.
To build products, companies often need many suppliers, with some providing relatively small amounts of material. Ensuring your systems manage all suppliers in the 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 both sides. If one succeeds, both succeed. True partners will work to understand your requirements and deliver what you need, when you need it.
Automate supply chain processes.
Technology can perform many tasks within your supply chain automatically. Allowing technology to perform those tasks instead of your staff will reduce errors. It will also 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 to more efficiently accept and fulfill customer orders and manage multiple warehouses. And it will help you use supply chain analytics 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 keep the optimal level of supplies, avoid inventory stockouts and improve your inventory forecasting.
Enact and optimize a returns management system.
A sound returns management system benefits your customers and your company. A solution that lets buyers initiate returns quickly and efficiently increases customer loyalty and satisfaction.
An integrated returns management system can also point out trends and highlight issues with suppliers so that you can make changes to decrease future returns. Changes might include better online descriptions or improved quality testing of certain products.
Use real-time supply chain data.
Inefficiencies can arise suddenly. So don’t just track supply chain metrics quarterly or even monthly — track daily or at least weekly, with data that’s as “real-time” as possible.
Real-time information helps you make needed changes quickly. Ensure your supply chain software can help with continual monitoring.
Leverage new technologies.
You need up-to-date software and other technologies to do the best possible job in understanding and improving your supply chain efficiency. That might mean new computerized shipping and tracking systems or mobile device applications that allow company leaders to make changes when they’re away from the office. There are new technologies in many other areas that can help your company boost the efficiency of 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 newest technologies can and cannot do. They will have ideas that others in your company won’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, your company must ensure your employees are well trained in how your supply chain works and how they contribute to success.
Make sure you routinely provide employees with formal training on your supply chain systems and processes as well as on-the-job training and mentoring. Well-trained employees empower your company to improve its supply chain processes and make them more efficient. Conversely, employees who aren’t well trained may become overwhelmed and prone to errors.
Research and initiate green shipping and packaging.
More and more of your customers expect companies to engage in business practices that reduce their carbon footprints and are environmentally friendly. In supply chains, one area these engaged customers are watching is how you package your products. More and more shippers are using “ships in own container” — or SIOC — packaging. That means the product is shipped in its original packaging only and not placed within another box. Also consider using packaging and filler materials composed 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 ensure you’re consistently working to improve supply chain efficiency, not just 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 employees who understand the inner workings of the supply chain. The council makes sure systems and processes are as efficient as possible and fit with the company’s overall business strategies. Councils are also tasked with choosing and tracking metrics, addressing issues with suppliers and evaluating new technologies.
Beyond improving your supply chain efficiency, you can also learn more about best practices in overall supply chain management.
NetSuite Enables Companies to Master Their Supply Chains
Practicing supply chain efficiency can help companies save money and use resources appropriately. But that’s only half the equation to have a productive supply chain; it must also be efficient. NetSuite’s Supply Chain Control Tower helps you achieve both an efficient and effective supply chain by balance demand and supply. It also helps you control costs while pleasing your customers.
Use the NetSuite solution to analyze demand, forecast sales 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.