How to Save Money in Your Supply Chain.

11 January, 2013

Our businesses now live in an established global economy. There has been a major shift in the location of many manufactured goods from local suppliers to China and South Asia. With the increase in large capacity aircraft and enormous container ships, goods can be sent worldwide in just a few hours. Other factors, such as currency, suppliers’ reliability, geographical disasters as well as political stability now become issues with the local business owner. We group all the factors that affect the procurement and supply of goods as a companies supply chain. Supply Chain Management has been a major focus for companies as significant costs savings can be realized. Large retail stores have lead the way in supply chain management as margins are thin and competition is fierce in this sector. With enhancements in internet connectivity suppliers and customer now share data with each other in attempts to minimize inventory and lead times. Companies must develop a supply chain management strategy to ensure fast, efficient, low cost and reliable shipment of goods from suppliers and to clients.  
We will review 3 steps that will help you create an enhanced supply chain that will identify ways to lower costs and protect your business at the same time.

Step 1 – evaluate your current situation.

We will evaluate the current situation in three ways
1-      competitive analysis
2-      risk analysis
3-      Market analysis
Competitive analysis
This is where you review your position with respect to your top competitors, focusing on the importance of the supply chain in competing with them. What makes you unique compared to your competitors? Why do you win over them? Why do you lose? What is your unique selling proposition? How is the receipt and delivery of goods important to being competitive? Do you have the same suppliers? Is there an opportunity to have different suppliers than the competitor?
Risk analysis
This is done with respect to you providing your deliverables to your customers. Is there a risk based on currency? If you are buying from overseas, is there exchange risk? If you are getting goods from one geographic area, is there a disaster risk? If you have suppliers all located in Hong Kong and typhoons are common in that area from September to December, you can expect delays. During Chinese New Year many Chinese companies can close for one month. Is that a risk factor?  What about political risk? Could you supply chain be disrupted with political issues in one country? What about big fish risk? If you are competing with a competitor who is bigger than you and you share the same supplier, are you at risk of being run over at a crucial time if both companies are looking for goods?
Market analysis
Where are you in respect to the market? Are you in a declining or rising market? Is the market vulnerable to large changes in prices or long lead times? Are more competitors coming into the market that may affect supply? Are there more suppliers coming into the market that may help reduce your costs and lower risk? 

Step 2 – Perform a Value Chain Analysis

In this step we review the performance of the supplier, the capabilities of the company and the customer requirements as an integrated unit. One area affects the performance of another. When reviewing each area we identify opportunities and risk; formulate the supply chain strategy; develop the proper relationships with suppliers; set performance targets and monitor to make adjustments.
For example – Let us suppose your customers require goods from you within a 4 week lead time. In other words from the time the order is placed, the goods must be on the customer site within 4 weeks. With that accepted parameter, we now look at the supplier and the company to see how they must work together to meet that requirement. Let us assume the supplier is in China. The lead time from the supplier is 2 weeks. Customs clearance is a week; so the goods will arrive at your company in 3 weeks. You then have one week to turn around the goods to meet the customer required lead time. In this supply chain example there are many issues to be reviewed.
We then identify opportunities and risk.
First we will explore opportunities at the supplier level.  What if the supplier was given a larger order? Would than bring down shipping costs and per item costs and allow us to have inventory levels to handle emergencies? Is there anyway that the supplier can drop ship to the customer directly by shipping goods in boxes with your company name on it? Is there a chance that the shipper can handle these duties? Can the shipper bring the goods into the country and then re-package into your company boxes, add whatever materials you want ad then deliver to the customer? This is sometimes referred to 3rd party or 4th party logistics, where the supplier or the shipper adds more value to the product. Let us assume we decide to have the shipper to handle the importing, re-packaging and delivery t the customer.
Now we must identify risks of the strategy. Are there risks associated with the time of year? This can affect the timing in the supply chain so inventory may have to be stocked here to compensate. These issues are discussed with the supplier and shipper and decisions made accordingly. If stock will be inventoried here then what financing is required to keep the inventor and what is the affect on cost of sales?

Step 3 – Formalize the strategy and execution.

Once the decisions are made the supplier relationships are formularized and performance targets must be established. A business owner must be very specific in performances clauses. If a customer adds financial penalties to delivery times, will all members of the supply share in those financial penalties? If a shipper indicates a “best effort” will be made to deliver before 10 am; what does “best effort” mean? Perhaps it would be better for the company to guarantee delivery before 5 pm to allow for variances in the supply chain.
In all cases, performance is monitored and all parties meet on a regular basis to review the situation and make improvements.
A company’s supply chain is critical area for a company to meet or exceed customer performance and to reduce costs. There are many companies that will handle 3rd party or 4th party logistics functions. This allows the business owner amazing flexibility when wanting to open business in an emerging market without establishing their own warehouse and logistics space.
 Conclusion
Squeezing out costs and protecting your supply chain can be achieved easily using our Profits Plus Supply Chain Management Accounting system. Whether you bring in goods from China or Vancouver, our profits plus supply chain accounting system can provide a formula to review and react to changes in your supply chain to allow for effective delivery of goods while putting more cash in your pocket.
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