The purpose of a supply chain is to provide customers with physical goods in the right quantity and quality at the right time and place. Multiple partners collaborate on the operational processes of a supply chain – material suppliers, manufacturers, logistics providers, distributors, retailers – to fulfill customer demand. Thus, a supply chain can be seen as a virtual entity, distributed over many locations and organizations, connected via material, information, and financial flows. Being virtual, distributed, and connected, supply chains are inherently difficult to manage. As a result, many supply chains operate in a mode that is far from optimal. We call this the supply chain performance gap.
The present article starts our ten-part series about lacking supply chain performance and how supply chain structures, processes, and parameters will lead to business advantage. In this series, you will find detailed information and action points on the eight leading root causes for the supply chain performance gap.
How to measure supply chain performance
"Supply chain management has been a major component of competitive strategy to enhance organizational productivity and profitability. "(Gunasekarana, Patel, McGaughey 2008). You can measure the performance of a supply chain in terms of three basic financial performance indicators: turnover, costs, and capital employed. Simply put, the turnover of a supply chain is the minimum of demand and supply multiplied by price. Let's have a look at this example:
Demand in a period: 1,000
Supplied quantity: 800
Product price: $ 50
Resulting turnover: $ 4,000
The cost of a supply chain is the sum of all variable and fixed costs – e.g.:
Variable costs Fixed costs
• logistics • rent
• production • energy
• material • R&D
• direct labor • Indirect labor
The capital employed consists of fixed and current assets - e.g.:
Fixed assets Current assets
• machines • inventory
• buildings • receivables
• trucks • payables
Closing the supply chain performance gap will release up to $50 million EBIT per $1 billion sales.
It's easy to see that any supply chain falls short of its optimal performance. However, the supply chain performance gap size is surprising: up to $50m of additional EBIT per $1 billion in sales. There are multiple reasons why supply chains are lagging behind their optimal performance, internal and external. In the last decades, global trade and the interdependencies of businesses increased tremendously, resulting in more complex supply chains and interdependencies between supply chain partners. As the level of VUCA – volatility, uncertainty, complexity, and ambiguity – rises globally, the interdependencies make it more difficult to manage supply chains and maintain a high supply chain performance.
In terms of the global pandemic the world is currently facing, supply chains, too, experience a tremendous increase of complexity. Equally, the supply chain performance gap enlarges even further. As McKinsey stated in a blog article recently, businesses must respond on multiple fronts at once. Crisis management mechanisms are set up rapidly to face short-term challenges. Moreover, supply chain leaders must build medium and long-term resilience in their supply chains.
Immediate end-to-end supply chain actions to be considered are:
- Transparency on multitiered supply chains
- Estimation of available inventory
- Assessment of realistic customer demand
- Optimization of production a distribution capacity in terms of necessary hygiene concepts
- Identification and fixation of logistics capacity
- Managing cash and net working capital
aioneers’ 8 root causes for supply chains lagging behind their performance
From our experience, there are eight root causes for supply chains lagging behind their performance. Of course, some may apply to one business more than the other. However, for all in common is the fact that decision-makers either lack resources (financial, human, assets/capacity), information and transparency (e.g., forecasts, analytics) or a skilled workforce to firstly, prioritize the right measures for improvement and secondly, to make sure the measures are diligently being implemented.
Let's have a look at the eight root causes for the supply chain performance gap:
1. Product portfolio complexity
The product portfolio and product architecture have the largest impact on supply chain performance. The actual purpose of the supply chain is to supply physical goods. The number of physical goods and their complexity (the number of raw materials, components, variants) directly determine the quality of forecast, the amount of safety stock, and the supply chain's delivery performance. Thus, the more complex the portfolio, the more complex the planning processes and the related supply chain.
2. Speed of innovation
The speed of innovation has increased significantly over the last 15 years and has become a key factor for competitive advantage. Current technological developments not only have an impact on end-customer markets. More and more use cases are also emerging for companies which can be subsumed under the keywords digital business models, Industry 4.0, IoT, cloud technologies, robotics, and AI. The core of innovation is to enable people to do tasks better than they previously could or make them do things that they couldn't do before. Supply chains have to deal with three types of innovation that can tremendously influence their supply chain performance: product & service innovation, process innovation, and business model innovation.
3. New types of competition
Today we can observe new types of competition emerging in established market environments closely related to business model innovation and the use of new technologies. Thus, the existing players need to deal with new competition types to sustain or even strengthen their position. Consequently, "new types of competition" are considered as the emergence of innovative approaches to gain competitive advantages or market share. This is achieved either by generating new customer needs or by better serving existing ones.
4. Multi-channel sales complexity
A sales channel is a way of bringing products or services to the market to be purchased by customers. Unfortunately, many companies pursue a multi-channel sales strategy that can lead to sales channel conflicts. Such a conflict arises if sales channels in one company compete with another. To bypass these difficulties, businesses need a consistent supply chain strategy.
5. Complexity of supplier network
The creation of delivery networks is determined by the diversity of relationships and their transformation. The number of suppliers and topology of the supplier network are the main drivers for complexity expressed in the number of network levels, degree of network, and the type of relationships. The three key elements for successful supplier network management are transparency, target stating, and successful implementation.
6. Regulatory Complexity
Every business has its individual construct of regulations: On an international level, e.g., through EU directives or on a national level. In addition, there are regulations that apply in cross-border transactions, such as tariffs and trade restrictions. Many companies face difficulties implementing new or changing regulations into an existing business and supply chain structure. An efficient way to prepare against regulatory disruption is to build a resilient supply chain and to be able to effectively adapt supply chain structures and processes to comply with new regulations.
7. Sustainability requirements
Sustainability is demanded with increasing pressure. Global activities, e.g., Fridays For Future, initiated by Greta Thunberg, point to increasing environmental pollution, such as increasing plastic waste in the world's oceans and calling for climate policy based on current climate research results. This also increases pressure on companies to meet their responsibility regarding sustainability, which finds expression also in customers' purchase decisions and therefore has effects across all stages of the supply chain.
8. Internal Complexity
Internal complexity leads to non-optimized supply chains. It drives internal costs, unaligned processes, excess inventories, and working capital. Internal complexity also slows down decision processes, responsiveness, and flexibility. Unpredictable outcomes reduce reliability toward customers and supply chain partners.
In the following nine articles, we present a systematic elaboration of those eight root causes for the Supply Chain Performance Gap and show ways to overcome them. The concluding article summarizes the findings and presents a systematic framework to close your organization's supply chain performance gap.