Most logistics companies in South Africa and major consulting firms do not recognise the difference between supply chain management and processing time. And these differences have a significant impact on bottlenecks and capacity decisions, and more importantly on lead time related metrics.
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Time-based competition is one of the last ways your business can differentiate, especially now that product differentiation is becoming less of a sustainable strategy.
This article will examine the importance of supply chain management and explain how you can improve your business’ performance by using supply chain solutions.
What is supply chain management?
Logistics companies in South Africa and around the world are discovering a powerful new source of competitive advantage, it’s called supply chain management and it encompasses all of those integrated activities that bring product to market and create satisfied customers.
Supply chain management can help your business achieve the true return on investment of customer relationship management systems, making it easier to see how well-managed and efficient supply chain solutions have a significant impact on your company’s overall performance.
You need to focus on supply chains because of:
- The fierce competition in today’s global market.
- The introduction of products with shorter life cycles.
- The heightened expectations of customers.
- Continued advances in communication and transportation technologies.
Supply Chain Management is defined as a system which encompasses all activities associated with the transportation and flow of information and goods from the raw material through to the end user. A well-developed supply chain process must involve all people related to the material delivery process, such as suppliers, manufacturers, distribution centres, retailers and customers.
Best Purchasing and Supply Chain Management practices
In order to grow, your business relies on a balanced mix of innovation, advertising and pricing optimisation. If your supply chain process is not working properly, it undermines each one.
Poor supply management hampers the flexibility necessary for profitable innovation, the funding needed for advertising and the efficiency that enables competitive pricing.
Choosing suppliers and purchasing products are critical to your business activities and often determine the success of your business. Purchasing, supply management, and procurement are used interchangeably to refer to the supply chain integration of related functions to provide effective materials and services to your business.
Purchasing is concerned with the following standard steps in the procurement process:
- The recognition of need.
- The translation of that need into a commercially equivalent description.
- The search for potential suppliers.
- The selection of suitable sources.
- The agreement on order or contract details.
- The delivery of the products or services.
- The payment of suppliers.
Purchasing has increasingly been regarded as a strategic weapon, centred on its ability to create collaborative supplier relationships for business advantage. Partnerships with suppliers can have a strong positive influence on your company’s performance through the development of joint resources and the exchange of valuable knowledge.
The ability to extract benefits from supplier relationships are linked to the way you manage these relationships. It is thus not enough for you to process a strategic purchasing orientation, you must also create conditions which allow your buyer and supplier to contribute and develop the relationship.
A good buyer-supplier relationship is built on the rock of impeccable performance to contract agreements.
- Pay the right amount on time without hassle.
- Create a platform for problem resolution.
- Develop continues improvement goals with the objective of achieving value for both parties.
- Ensure performance measurement objectives are achieved.
Purchasing and Supply Chain Management
Segment customers based on service needs. Group customers by distinct service needs, regardless of industry, and then tailor services to those particular segments.
Customise your supply chain strategy. Your business need to focus on the service requirements and profitability of the consumer segment identified.
Listen to signals of market demand and plan accordingly. Sales and operations planning must span the entire chain to detect early warning signs of changing demand in ordering patterns, customer promotions etc. This demand-intensive approach leads to more consistent forecasts and optimal resource allocation.
Differentiate your product closer to the customer. You can’t afford to stock pile inventory to compensate for possible forecasting errors. You need to postpone e product differentiation in the manufacturing process closer to actual consumer demand.
Strategically manage the sources of supply. Work closely with your key suppliers to reduce the overall cost of owning materials and services, supply-chain management leaders should enhance margins for both themselves and their suppliers.
Develop a supply-chain-wide technology strategy. Information technology acts as one of the corner stones of supply chain management, and as such must support multiple levels of decision making. It should also have a clear view of the flow of products, services, and information.
Adopt channel-spanning performance measures. Excellent supply chain measurements do more than just monitor internal functions. They adopt measures that apply to every link in the supply chain strategy. These measurement systems embrace both service and financial metrics, such as account’s true profitability.
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The Purchasing and Supply chain cycle
Your business need to spend less time processing purchase orders and invoices, and more time on strategic value-added purchasing activities..
- User need for product and service. The purchasing process begins with identifying or anticipating material or service needed by a user.
- Purchase approval and supplier evaluation. The evaluation of suppliers begin right after determine that a purchase need exists, and the development of material specifications occurs.
- Bidding, Negotiation and Supplier selection. This occurs once purchasing completes the activities required during the supplier evaluation process. Errors during the selection process can result in long lasting damage. After bids have been received, and negations has taken place, your sourcing team will select a supplier, and then move on to authorise the purchase through the purchase approval process.
- Purchase approval. This is accomplished through an electronic drafting of a purchase order (PO), sometimes called a purchase agreement. This is a legally binding document and should include the following information:
- Material specifications
- Quality requirements
- Delivery date
- Method of delivery
- Ship-to address
- Purchase order number
- Order due date
- Release and receive purchase requirements. This phase of the purchasing cycle involves the physical transmittal of purchase requirements. This shipping and receive process requires several other important documents, including the material packing slip, the bill of lading, and the receiving discrepancy report.
- Continuously Measure and Manage supplier performance. One way to identify the best suppliers is to track performance after rewarding a contract. Supplier measurement and management is a key part in the purchasing cycle. Continuous measurement is necessary to identify improvement opportunities in South Africa or supplier non-performance.
Inventory Management Techniques and Supply Chain Logistics
Inventory is spread out throughout the supply chain and includes everything from raw material to work in progress to finished goods that are held by manufacturers, distributors, and retailers in a supply chain.
Inventory management techniques include materials handling, storage, work-in-process inventories, and value-add processing and the delivery of goods to the distribution channel.
There are three basic decisions to make regarding the creation and holding of inventory:
Decision 1: Cycle Inventory
This is the amount of inventory needed to satisfy demand for the product in the period between purchases of the product. Companies in South Africa tend to purchase large amounts to account for a possible surge in consumer demand.
However, this increases carrying costs (cost from store, handle, and to insure the inventory). The inventory manager must decide between increased carrying costs that comes with purchasing in bulk and the reduced cost of ordering and better prices offered by purchasing products in a large quantity.
Decision 2. Safety Inventory
Inventory that is held as a buffer against uncertainty. Because every forecast has some degree of uncertainty in it, you cover that uncertainty by a lesser or greater degree by holding additional inventory in case demand is suddenly greater than anticipated. It’s important that you weigh the costs of carrying extra inventory against the cost of losing sales due to insufficient inventory.
Decision 3. Seasonal Inventory
This is inventory that is built up in anticipation of predictable increases in demand that occur at certain times of the year. The alternative to building up seasonal inventory is to invest in flexible manufacturing facilities that can quickly change their rate of production of different products to respond to increases in demand.
Inventory levels are affected by customer service expectations, demand uncertainty, and the flexibility if your supply chain. For products that have a relatively certain demand and a long product life, it should be relatively easy to maintain desirable customer service standards even as inventories are reduced.
For products characterised by erratic demand, a short life cycle, or product proliferation, a more responsive supply chain and larger buffer inventories may be needed to meet a desired customer service level.
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Supply Chain Logistics Management
Logistics management is the creation of time, place, quantity, form and possession utilities within and among firms and individuals through strategic management, infrastructure management and resource management in order to create products and/or services that satisfy customers through the attainment of value.
In other words, logistics management is that part of the supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customer requirements.
Logistics management can be separated into two functions:
#1 Materials Management
Materials management is associated with the incoming flow of information and materials into the organisation supporting the cycle of materials flow from the planning, purchase and control of inventory, to the manufacture and delivery of finished goods to the distribution channel.
Materials management is a functional centre aimed at providing the supply chain integration of materials activities, such as product scheduling, purchasing, transportation and distribution. Divide your material activities into two main sections:
#2 Physical Distribution management
This is the management of all activities associated with the warehousing and movement of finished goods and services parts through the distribution channel in order to meet customer order fulfilment and delivery requirements.
Pricing decisions and timing of purchases
Many businesses have, and are still today, exploring innovative pricing strategies in an effort to improve their operations and ultimately their bottom line. The benefits can be significant, including not only potential increases in profit, but also improvements such as reduction in demand or production variability, resulting in more efficient supply chains.
However, it is essential for these pricing decisions to coordinate with other aspects of the supply chain, such as production and distribution. The coordination of these decisions mean an approach that optimises the supply system rather than individual elements. Thus, in order to be effective your pricing strategy will have to coordinate with production lead-time decisions.
Your business must set a price, taking into account the ability of buyers to time their purchases. Timing is important to exhibit less real price response to demand-driven movements in sales. When deciding when to make a purchase, people often compare their outcomes to those that would have occurred had they purchased earlier or later.
Purchase-timing decisions often involve the possibility of counterfactual comparisons. You can compare the price that you paid for a good or service to the price that you would have paid had you bought it earlier or later.
Your business need to integrate pricing and timing to influence market demand and improve your bottom line. Buyers will accept a higher price if they get additional value and service in areas that address their critical pains and fears.
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Rethinking your supply chain strategy not only involves coordinating different activities in your supply chain, but also deciding what to make internally and what to buy from outside sources.
The outsourcing of elements of a supply chain process is now an integral component of the operationalisation for a business’s competitive strategy. The goal being to derive a competitive advantage in the marketplace. This goal can be achieved if you ensure your outsourcing strategy are strategically aligned with your overall competitive strategy.
If aligned to your overall strategy, there are many supply chain components you could choose to outsource. Research and design, product development, product component manufacturing, product final assembly and distribution and logistics functions.
Outsourcing has the following benefits:
- Reducing costs
- Improving speed and responsiveness
- Reducing cycling times
- Improving innovativeness and quality
- Increasing flexibility and agility
- Improving overall competitiveness
Supply chain management is a complex process. Make sure you plan carefully and incorporate the best strategies for your business and customer needs. The main aim is to gain a competitive advantage and contribute to your consumers’ satisfaction.
Always keep your customers in mind. Build and nurture your supplier relationships and consider carefully whether you should outsource components of your supply chain.