Supply Chain - A Framework for Analyzing

“Supply chains are in every organization. Even a corner store has a Supply Chain. They just might not know it yet [1]”

On my first day my boss shared the above quote with me and from there proceeded to educate me on the Supply Chain. To be honest the area of Supply Chain management was never on my radar before I took this job – which, considering its importance and ubiquity now seems crazy to me.

Supply Chain, in my experience, is an area that is full of people that are incredibly passionate and by default, generally excellent at their roles. Operating across the functions of procurement, logistics, inventory management, operations, IT, etc they are subject matter experts in their fields. However, (contentiously!) I have also seen that when establishing the optimum Supply Chain solutions, people focus on improving their site and rarely by looking at the full E2E solution.

In this article I’d like to take you through a High Level framework as a way of viewing the Supply Chain and rationalizing it.

1. Knowing your Supply Chain

As I mentioned above, many people are focused on their site and it’s rare that the full Supply Chain is or has ever been mapped out. In mapping out the Supply Chain it’s important to take into account where you source raw materials, what sites you have and how they are connected, how materials are shipped, where its shipped to and where the end customer is. The image below gives you an example of a Supply Chain Map of a company that operates both an outsourcing and internal manufacturing approach.

When you look at your own Supply Chain in the above format, you may see some inefficiencies or at the very least areas that need to be queried!

 2. What the numbers say 

This can be evaluated in a number of different ways, but for the purposes of this article we will look at it in terms of the Income Statement Costs and Balance Sheet Impacts (we’ll let cash flow be an implied function of both).

The Income Statement

Companies are typically most aware of the costs within the four walls of the factory. These are probably best mapped for high level analysis as Raw Material, Labor (Direct and Indirect), Space & Utilities Costs and Other. In addition, if you are outsourcing, your supplier will also have profit on top of these costs. These costs together should effectively add up to the COGS (Cost of Goods Sold) on a company’s Income Statement.

The Balance Sheet  

Aside from payment terms, one of the key focusses here is Inventory. What’s often forgotten about, however, is inventory outside the four walls (see red highlighted section in Supply Chain Map as an example). If you own the inventory, then you are carrying it on your balance sheet. The same concept relates to Equipment and even the Building you operate in. “So what?”, you may ask, “these are assets in my Balance Sheet, not Liabilities?” Not entirely true, aside from the fact that assets have depreciation and inventory has the risk of wastage, the optics of these numbers can and do impact share price. Freeing up cash allows you to invest that somewhere else to reap a benefit i.e. buy back shares, invest in other businesses, invest in automation to reduce overhead etc.

When chasing cost reductions, a lot of corporations will push their sites, but after seeing an E2E map, shouldn’t optimization of the Supply Chain be the starting point?

3. Optimizing the Chain 

So what’s the optimal Supply Chain? I propose that there is no absolute right answer but plenty of wrong answers. Supply Chains must evolve to meet the requirements of the company and ultimately the customer. For that reason, you cannot just look at the here and now, you must also take into account the future direction of the company.

In mapping solutions, we typically look at the following:

• Low Cost solution – A single site in a low cost geography so you can apply economies of scale and lower cost of labor. The trade off to consider here can be Time to Market (TTM).
• Regional Solution – depending on the lifecycle of the company or the market you are operating in, TTM may be more important. In this instance, you may need regional solutions or at least sites for final configuration in region, to satisfy this requirement. The costs and inefficiencies of multiple sites can be an offset here.
• Some solutions are just a cleaner version of the current solution i.e. consolidation of regional sites, implementation of Vendor Managed Inventory (VMI), localization of the Raw Material Supply Chain, change in shipment methods (i.e. change from air freight to boat as you are less concerned with TTM), etc.

Below is a table which can be used to compare options. The idea is to determine if there are inefficiencies in the current Supply Chain and then to put a list of options on the table so you can establish which best suits the company at hand.

Typically, these options should also be mapped out and discussed with sites to make sure they don’t see something critical in the optimization that we are missing. Remembering that “None of us is as smart as all of us [2]”.

[1] Nadia Kassam, MBA

[2] Edward C. Register, 1915