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7 Reasons Why the Supply Chain Matters

to Business Success
Jan 10, 2019 | Business Improvement, Supply Chain | 6 comments
 

Whether you are the CEO of an expanding corporation or the owner of a edgling
enterprise, its fortunes are subject to an undeniable truth. The success of your
business links inextricably to the performance of your supply chain. If you want
business success (and who doesn’t?), you have to make your supply chain successful
too.

Of course, it is helpful to have some statistics on hand to validate the statement

above. First though, since the topic is “business success”, let’s be clear on what that
looks like.

 
The de nition above is not from any textbook, but is simply one that I’m sure you’ll
agree, describes a state of a airs that any corporate leader or business owner would
be happy to arrive at.

Supply Chain and Business Success By the Numbers

Now for those statistics I mentioned. According to a survey by Deloitte from 2014,
79% of companies with high-performing supply chains achieve revenue growth
superior to the average within their industries.

Conversely, just 8% of businesses with less capable supply chains report above-
average growth. That gure highlights like no other how critical the interrelations
are between an enterprise and its supply chain.

Given that something like 50% of businesses, regardless of their size, fail or close
down within ve years of launch, it can be deduced that poor supply chain
performance commonly contributes to corporate or business failure. Similarly,
one can assume that in many cases, businesses that fail do so because of
nancial problems—a fact that makes the following statistic also worthy of
consideration:

 
 Companies with global supply chains – a category
which includes a fast growing number of corporations,
medium-sized companies and even small businesses –
can be standing on a cost base of which 90% is
attributable to supply chain expenditure.

Again then, it’s not di cult to see how the nancial health of a business depends on
that of the supply chain, or how probable it is that supply chain costs feature
strongly in the demise of many companies that become insolvent. Here are a few
more sobering facts, to complete the big picture of business success and its
dependency on supply chains.
1) In many businesses, the supply chain has never been subject to a design process,
but has instead just … evolved.

2) According to a 2012 report into corporate insolvencies by the Australian Securities

and Investments Commission, 44% of businesses in Australia failed because of
poor strategic management. Supply chain strategy is critical to business success,
but companies often underestimate its importance and hence pay it less leadership
attention than other areas of operation.

3) It is also common for the supply chain to be the least understood area of strategic
business management, which for an activity generating up to 90% of overall
business costs, is alarming indeed.

So where does this all lead us? Well… it simply

highlights just how important the supply chain and its
management are to the success of businesses
operating in today’s local and global markets.

So let’s dive a little deeper and look at precisely how the supply chain can make or
break a business organisation. Each of the following seven sections in this post
highlights how speci c elements of supply chain management can contribute to the
success or failure of a commercial enterprise.

The Top 7 Supply Chain Points to Address for Business Success

 

1. Supply Chain Strategy

In 2014, a survey by Tompkins Consortium delivered a shocking revelation. Of the
business leaders participating in that survey, more than 50% considered supply
chain to be a standalone business operating function. In other words, the
majority did not recognise the need for close alignment between supply chain and
general business strategies.
Now let’s rewind to the earliest paragraphs in this post, and the statistic relating to
supply chain performance and revenue growth:

If your company hasn’t focused much attention on supply chain strategy, now is the
time to start, even if it means enlisting some external help to do so. A properly
designed supply chain strategy is an enabler for achieving commercial goals and
consequently, corporate success.

What does “properly designed” mean? It means that your supply chain strategy
should support the overall strategy of your business. In far too many
organisations, this is unfortunately not the case.

Remember, poor strategic management is a factor in

44% of Australian business failures.

Given the other statistics we’ve looked at so far, it’s fair to include poor supply chain
strategy along with general strategic management in the gure above. So if you want
to be sure of business success, review your supply chain strategy. If it doesn’t
align with the objectives of your business, you have some work to do.

 
Mini Case Study: Walmart
Walmart may be the most famous example of a company that has succeeded
primarily because of a well-developed and aligned supply chain strategy. Some of
the company’s most notable strategy wins are as follows:

Strategically removed links from the grocery supply chain

Pioneered the use of vendor-managed inventory
Built strategic partnerships with vendors to drive down prices
Developed a process of excellence in supply chain collaboration
Implemented cross-docking in its supply network to enable inventory reductions
Established the strategic use of technology to gain supply chain e ciencies

All of the initiatives listed above support the company’s business strategy to be a
leader in low-cost grocery retail, making Walmart a prime example of what
enterprises can achieve when supply chain and overall business strategies are
aligned.

SEE ALSO: Supply Chain Strategy Development

2. Supply Chain Network Design

Along with the design of supply chain strategy, the design of the supply chain
itself, especially the part dealing with outbound distribution from plants or
warehouses, is instrumental in the success or failure of businesses.

Given this impact on business success, it’s

disconcerting to realise that just 22% of companies take
an active approach to supply chain network design.

For the rest, there may be no prede ned structure for moving materials and
products through the stages of ful lment. Typically, networks evolve through a
series of discrete changes and developments, each addressing needs as they arise
and few considered as deliberate steps toward a strategically integrated supply
chain.

Such an approach results in unnecessary cost, a lack of

resilience, and unwanted challenges in meeting
customer service requirements – yet sadly, it’s still the
approach most commonly taken.

If your supply chain network design has not been under the microscope, and you
care about business success, it’s probably time to consider the bene ts of a design
review and optimisation exercise. You may well nd opportunities for savings and
service improvements, perhaps enough to substantially improve the chances of
business success.

Mini Case Study: Whirlpool

Following its acquisition of competitor Maytag in 2005, Whirlpool found itself
entering an unprecedented period of growth, at which point the management team
recognised the need to continuously optimise its supply chain design and make it
more exible and adaptive to ride out economic uctuations.
As a result, the newly merged company developed a systematic methodology for
network design optimisation, based on the following four principles:

A continual process of high-powered modelling and network design analysis

A disciplined approach to the collection, cleansing, and standardisation of supply
chain data
Development of analytical and network design skills within the company’s supply
chain teams
The perpetuation of knowledge surrounding supply chain network design
(eliminating the reliance on tribal knowledge)

This formula has enabled Whirlpool to endure and thrive in the 13 years since it set
out to build an adaptive supply chain, but of course, the work never ends.

In 2017, the company began to look at new options for warehousing, knowing it
would need to start placing inventory closer to customers if it wanted to compete in
the challenging omnichannel retail space. Today its supply chain analysts and
designers continue to explore new initiatives, like the use of shared warehousing as
a fast and exible way to scale the distribution network as necessary.

SEE ALSO: 10 Reasons to Review Your Distribution Network Design

3. Supply Chain Service Performance

Pro table revenue growth is a sure sign of business success, and one of the most
critical factors driving pro table growth is customer service and most
importantly, customer satisfaction.

Customer satisfaction is highly dependent on the supply chain and to be

successful, your business must manage its supply chain with that in mind. That
means the customer must be a primary focus when considering supply chain
strategy, network design, and performance management. To put that claim into
some perspective, consider this data revealed by Gartner from research conducted
in 2014:

 
 The study found that by this year (2016), 89% of
companies expected to be competing primarily on the
basis of customer experience.

That should be sobering news for any business not yet focused on supply chain
excellence as a lever for business success. The performance of your supply chain
will absolutely impact customers’ perception of your business and the service
they receive from it.

The following supply chain performance issues can all have a negative impact on
customer satisfaction and therefore, hamper the success of your business:

Slow time to market for new products

Long delivery lead times
Delays in response to customer service requests
Poor order ll and on-time delivery performance
Inventory shortages
Poor product or service quality

If you recognise any of these problems within your own company’s supply chain,
don’t despair. Provided you can identify the root causes and begin to address
them, you will be on your way to a more successful supply chain, and to creating an
enhanced customer experience. In turn, operational performance and business
success will be under greater control and will lie less in the hands of Lady Luck.

 
 While the root causes of supply chain performance
issues often lie with weaknesses in strategy and/or
network design, that’s not always the case.

If your supply chain strategy is well considered and aligned with business goals, and
your distribution network is designed to meet the strategy, some of the problems in
the list above might well have discrete causes that you can address directly. For
example, supplier performance issues can cause problems with inventory, order
ll; on-time delivery performance and customer-order lead times.

5 Supply Chain Service Lessons to Learn from Zappos

 

The Zappos shoe brand has become synonymous with customer service excellence
and with good reason, from its formative years to its existence as an Amazon
subsidiary, the online footwear retailer has striven endlessly to provide superlative
service to match the high quality of its popular products.

Any company wishing to leverage its supply chain as a service di erentiator can
learn many lessons from Zappos. For example, the following ve pieces of advice,
which were highlighted by a 2012 Entrepreneur Magazine article and are every bit as
relevant today, can be applied by any enterprise with an outbound supply chain
serving online shoppers.
 

i. Select one strategic logistics partner and build a long-term, close relationship.
ii. Think of your distribution and delivery expenditure as a marketing cost, rather
than an operating expense.
iii. Place your main inventory holdings close to your logistic partner’s central hub.
iv. Develop your returns policy and process with the objective of driving sales (even if
that means encouraging returns at certain times or under certain circumstances).
v. Expedite deliveries, but not returns (because it is cheaper to ship slowly and
customers are not looking for expedited return shipping).

These ve strategy elements all helped Zappos to become one of the world’s
favourite e-commerce retailers by driving high levels of customer service while also
addressing another area of supply chain operations critical to overall business
success—cost management.

4. Supply Chain Costs

The cost of meeting demand is one of the most telling ways in which the supply
chain matters to business success. Supply chain outlay can make up a large
proportion of product costs, while excessive inventory in the system can tie up
working capital and sti e cash ow.

Investigating the costs of serving customers is one way to understand the way
supply chain costs a ect business success. The use of a methodology known as “cost
to serve analysis” often reveals shocking realities about supply chain costs.

 
 

By understanding which of your customers are unpro table, or yield minimal pro ts,
you can take steps to reduce the cost of serving them. The same applies to certain
products in your range, some of which will inevitably incur more costs than others
in the process of manufacturing or buying, storage, and delivery to customers.

In all this, it’s important to recognise that the line between appropriate and
excessive supply chain cost-cutting is a ne one. Indeed, rather than focusing only
on cost-reduction, your emphasis should be on trimming away processes and
activities which add no value. Some of the ways by which poorly managed supply
chain expenditure can in ate product costs are listed below:

Excessive transportation costs

Procurement costs
Inventory and storage costs
Waste in the supply chain
Inadequate inventory management
Poor forecast accuracy

These are all areas to look closely at if you want your supply chain to support, rather
than hinder the general success of your business. A great deal of cost can be
saved not by making cuts per se, but by improving, streamlining, and optimising
the supply chain.

In case you think this an idle assertion, the results of a 2014 survey conducted by
PwC support it. They revealed that businesses with optimal supply chains have 15%
lower supply chain costs, less than 50% of the inventory holdings, and cash-to-cash
cycles at least three times faster than those not focused on supply chain
optimization.

SEE ALSO: Cost to Serve and Business Pro tability

5. Supplier Performance
The supply chain, as its name suggests, is only as strong as its weakest link.
Unfortunately, some of the links are unlikely to be under the direct control of your
business organisation. To some extent, your suppliers hold your business success
(or lack of success), in their hands. That’s why it’s essential to work in
collaboration, at least with primary suppliers, to try and minimise supply chain
uncertainty.

Uncertainty in the supply chain costs money and impacts customer service, making
it a particularly disruptive factor in overall business performance. Collaboration
between your organisation and its key suppliers is the only sure protection against
supply bottlenecks and inventory shortages, both of which can otherwise get in
the way of business success.

At the same time, there is also a need to manage

supplier/buyer contracts and agreements effectively. 
 

Remember that in the eyes of your customers, there is no distinction between the
performance of your suppliers and that of your own company. Best-in-class
companies have recognised this fact for a while now and have responded
accordingly with positive results. Not only have these organisations leveraged
supplier management to maintain exemplary service standards—they have also
achieved reductions in supply chain costs.

According to a study conducted by Aberdeen group in

2013, top-performing companies that implemented
supplier performance management initiatives have
achieved average cost savings of around 12%.

Supplier performance and relationship management today though, extends beyond

maintaining availability and streamlining the ow of materials through your supply
chain. There is also the question of ethical procurement and purchasing to
consider.

6. Ethical Procurement and Corporate Responsibility

Recent times have seen a signi cant uptick in the number of commercial brands
su ering tarnished reputations and revenue-loss because of unethical practices
among their suppliers. Moreover, corporate responsibility issues like this can
a ect any business, even if unethical supplier practices exist way down in tier 2 or
tier 3 of the supply chain.

If yours is a small or young enterprise trying to nd its feet, public knowledge of

association with unethical suppliers might very well lead to nancial disaster
and business failure, as customers react to what they perceive as your wrongdoings.

If your supply chain operates across international borders, out of sight must never
be out of mind as far as supplier management is concerned. Any performance
management program you implement should therefore focus on the integrity and
ethical responsibilities of your suppliers’ sources, as well as on service
performance and collaborative initiatives.

SEE ALSO: Corporate Social Responsibility – Much More than Just Marketing

Like all of the supply chain success factors described in this post, this is an area in
which particular knowledge and skill sets are required to drive improvement. If
you’re concerned that your company lacks the necessary resources, it can be well
worthwhile to enlist help from external experts.

5 Examples of Supplier Ethics Scandals

 

To reinforce the fact that no company can a ord to neglect matters of ethics in
procurement, here are ve examples of brands that were harmed by the negligent
or unethical behaviour of their suppliers:

In 2014, McDonalds’ fast food sales in Asia fell by 7% after one of its Chinese
suppliers was found to be selling expired meat.
In 2016, ASOS, Marks & Spencer, and Uniqlo were all implicated in scandals
relating to unsafe working practices and child labour in their supply chains.
 Also in 2016, Coles and Woolworths in Australia were both named as purchasers
of fruit from Australian farmers engaged in the employment of illegal workers
from overseas.
In 2015, Nestlé discovered that sh products it was procuring from Thailand for
use in its cat food brands were sourced from suppliers engaging in forced and
slave labour.
In 2017, Justice, a girls’ clothing retail chain, had to react swiftly after a media
investigation alleged that one of its makeup products contained traces of four
di erent heavy metals, as well as asbestos.

In none of the above cases was the retail brand intentionally purchasing from
unethical or negligent suppliers. Nevertheless, merely being named in connection
with the malpractices was harmful enough, illustrating why due diligence in
procurement is such a critical factor in supply chain and business success.

7. Inventory Management
Few are the businesses that don’t rely on inventory. Even if yours is a service, rather
than product-oriented enterprise, the chances are you have some need to move
items through a supply chain.

It might be spare parts, consumable items, or perhaps equipment, but if it’s

something you need to store and transport, then it requires treating as
inventory and managing accordingly. Of course, if your company is providing
products, the need to manage inventory e ciently is paramount. Just as customers
are something on which your business depends, so is inventory.

In the last section of this post, we looked at the importance of suppliers as a factor
for business success. However, the way in which you deal with inventory once it
passes from the suppliers’ hands to yours, will also make a huge di erence in the
fortunes of your business as a whole.

 
 

SEE ALSO: Don’t Let Inventory Levels Bloat Your Working Capital

Why is inventory management so important? Primarily because it can dramatically

a ect working capital and potentially, cash ow too. If you want to reduce working
capital within your business, you should certainly take the time to investigate
inventory management and ask the following questions:

Is it possible to improve forecast accuracy to reduce the need for holding safety
stock?
Can you nd a way to reduce inventory holding costs?
Are you taking su cient steps to prevent the costs of inventory obsolescence?
Are you achieving the shortest possible lead times from suppliers?
Can you speed up customer delivery lead times?
Are you losing money as a result of inventory shrinkage?

The answers to these and similar questions will help you to secure business success
by improving your working capital situation. You should also nd that improvements
in these areas will support increased levels of customer service and make your
business more pro table.

Get Your Hands on the Wheel and Drive Business Success

 
If you want to be sure your business will be not just surviving, but thriving over the
next ve years and beyond, your supply chain must be at the centre of
management attention.

If you can honestly answer “yes” to the following questions, you have little cause for
concern:

Do you have closely aligned supply chain and business strategies?

Do you regularly review and optimise your supply chain network?
Are you continuously and actively seeking supply chain service improvements?
Do you have visibility and control of supply chain costs?
Have you implemented a supplier performance management program?
Are you taking steps to mitigate risk in your supply chain?
Is your inventory being managed e ectively?

In reality, few companies, even those long established, can unequivocally answer all
these questions in the a rmative. That’s no slight toward the professional
capabilities of their leaders. Developing a best-in-class supply chain is no easy
task, and it takes time.

The time is worth taking though and investments worth making, even if you need
to supplement the skills within your organisation with those of external experts
to address some of your supply chain issues and challenges. So If you had to
honestly say “no” in answer to any of the questions above, you probably have some
golden opportunities to improve your supply chain operation—and drive your
business toward a bright and successful future.

Editor’s Note: This post was originally published in November 2017. It has since been
revamped and updated with information that is more comprehensive. The most recent
updates were made in January 2019.

Contact Rob
O'Byrne Best Regards,
Rob O’Byrne
Email: robyrne@logisticsbureau.com
Phone: +61 417 417 307

 
6 Comments
Pramod on June 23, 2018 at 1:20 pm

A very learning blog for everyone working in the eld of supply chain
management. I like the quotations you used.

Reply

Bicky on November 4, 2018 at 5:30 pm

This is very important, I got something that I will apply in my everyday

duties.

Reply

Warehousing Express on January 17, 2019 at 4:15 pm

After reading this, i learned something new about logistics services.

Thanks a lot for such a informative blog.

Reply

Kamarweki on January 19, 2019 at 10:12 pm

Excellent! I have increased knowledge in procurement.

Reply

meena on January 26, 2019 at 12:01 am

This line is very true. If a companies logistics partner is good than the
company will grown. “The success of your business links inextricably
to the performance of your supply chain”.

Reply
 Luana on March 24, 2019 at 2:52 pm

It matters to me, the case study is useful. Thank you so much

Reply

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