Q&A: Strengthening supply chains to create and protect value
The issue of supply chain resiliency has gotten quite a bit of attention over the past three years. Where are we today?
For private equity firms and their portfolio companies, the rapidly changing market environment and recent crises have made business continuity planning more important than ever. Now that we have seen how even the most well-planned supply chains can be disrupted, businesses have been increasingly strengthening and diversifying their supply chains and investing in redundant tooling and manufacturing to reduce their reliance on any single supplier.
While conditions have improved since the height of the pandemic, the supply chain still faces challenges, such as long lead times for capital improvements and regulatory changes that can delay projects. Businesses need to take a more proactive approach to risk management, by staying aware of the changing environment and investing in contingency plans to adjust their supply chain strategies as needed.
Read on for a Q&A-style exploration of how to set up a strong supply chain, optimize the one you have, and monitor it for ongoing and increasing success. Want more details? We recently hosted a webinar on this topic, featuring additional insights and real-world examples; register now to watch the full event on demand.
How can you tell there is a runway to optimize a supply chain? What are the red flags? What are potential solutions?
In addition to delays, other red flags that businesses should watch for include:
- Highly transactional supply chains. Decisions related to the supply chain are focused on short-term transactional costs and do not have a view to long-term strategy, risks, and opportunities.
- Lack of central coordination. Decisions about the supply chain are made at different levels of the organization without coordination across the full network, leading to inefficiencies.
- Lack of visibility. The business does not have good visibility into its supply chain and vendor spend, making it difficult to identify and address problems.
Consider these potential solutions to help improve the efficiency and effectiveness of your supply chain, toward reduced costs, improved customer service, and a stronger competitive position.
- Adopt a more collaborative approach to supply chain management. Work closely with suppliers and other partners to share information and coordinate activities – they can be the best source of supply chain intelligence. Strong relationships with suppliers can also help PE firms get better prices and terms.
- Implement a supply chain visibility solution. Look for tools and processes that give you real-time insights into the status of your inventory, orders, and shipments.
- Use a supply chain planning tool. This will help you to optimize your supply chain and make better decisions about inventory, production, and transportation.
- Optimize inventory levels. Proper inventory strategy will vary by company and item type. Companies need to be diligent about managing inventory to match ever-changing supply and demand environments. Balance the costs of carrying too much inventory against the cost of stock-outs – 100% fill rate may not always be the right target.
- Improve transportation efficiency. Optimizing transportation routes and schedules can reduce shipping costs and improve delivery times.
- Reduce waste. Implementing waste reduction programs can save PE firms money and improve environmental performance.
- Invest in training and education for your supply chain team. Make sure everyone understands the importance of collaboration, visibility, and planning.
What is the relationship between supply chain optimization and forecast accuracy?
A lack of data-driven decision-making in the supply chain can lead to inaccurate forecasts, leading to problems with customer demand, scheduling, and order fulfillment, as well as inefficiencies and missed opportunities for cost savings. Businesses should invest in data analytics and make sure that their supply chain and procurement functions are using data to make decisions.
Once that data is in place, explore these other ways to improve supply chain forecasting:
- Use an appropriate time horizon of historical data to identify trends and patterns.
- Consider external factors impacting demand, such as economic conditions, geopolitical risks, weather, and competitor activity.
- Collaborate with suppliers and customers to get their input on capacity, raw material constraints/surplus, and demand projections.
- Use forecasting software to automate the process and improve accuracy.
How might standing up a supply chain structure vary based on whether you’re in a small, middle-market, or large organization?
Smaller and middle-market companies may not have the resources or expertise to manage their entire supply chain, so they have to prioritize their investments and activities. This often means starting with a more tactical focus on procurement and negotiating with suppliers to get the best possible prices and terms, which takes time and commitment but doesn’t have to be capital-intensive.
Larger companies, on the other hand, can afford to have more specialized teams that manage different aspects of the supply chain, such as production, logistics, and inventory. This allows them to be more efficient and responsive to changes in the market, as well as make investments in the near term that set up larger returns on those investments in future years.
There are a number of ways to improve supply chain management without hiring a full-time chief supply chain officer and staff, such as:
- Using external advisors with deep supply chain capabilities to identify areas for improvement and transfer supply chain expertise to existing company resources.
- Top-grading the organization by identifying the most appropriate leadership for the function; move from teams of broad generalists to experts with more narrow and deep experience in their assigned areas of responsibility.
- Leveraging third-party providers or technology applications to improve efficiency and visibility. Often, your suppliers can be the best source of information and insight into your supply chain.
No matter what size your company is, it’s important to have a good understanding of what’s happening several levels back in your supply chain and how it affects your business. By understanding your supply chain at a more detailed level, you can identify areas where you can improve efficiency and profitability. You can also use your supply chain to build relationships with suppliers and customers, giving you a competitive advantage.
What does a well-organized supply chain structure look like? Which one is best for my organization?
Regarding supply chain management, there are three main models: centralized, decentralized, and hybrid. The best model for a particular company will depend on its size, structure, and needs.
In a centralized model, all supply chain decisions are made by a central authority. This can be an effective model for large companies with complex supply chains that have a high degree of interdependency across business units or functions. However, it can also be slow and bureaucratic.
In a decentralized model, each business unit is responsible for its own supply chain and promotes agility and efficient decision-making. This can be an effective model for small and medium-sized businesses with simple supply chains or those that have unrelated business units, each with very different supply chain requirements. However, it can be difficult to coordinate across business units, sacrificing critical scale/leverage and creating inconsistency across the enterprise.
A hybrid model combines elements of both centralized and decentralized models. This can be an effective model for companies of all sizes with complex supply chains. It allows for central coordination of key functions while giving business units the flexibility to make decisions that are best for their specific needs. The key to success here is well-defined limits around which aspects are controlled at the center and which rely on more localized business requirements.
Additional factors to consider when choosing the right supply chain model include:
- The size and complexity of your company
- The needs of your customers
- The capabilities of your suppliers
- Your budget
- Your company’s culture
Still need help choosing? Consider bringing in outside expertise with a proven track record in supply chain management. People who have worked in a business or industry for a long time may be too ingrained in “the way things are done” and may not be able to see the forest for the trees. Outside advisors can provide a fresh perspective and help identify areas where improvements can be made. Additionally:
- They may have experience working with a variety of companies and industries, which can give them insights that internal employees may not have.
- They can be objective and unbiased, which can be helpful when making difficult decisions.
- They can provide valuable training and development opportunities for internal employees.
How do you monitor the supply chain over time – and prove your optimization work is yielding results?
Monitoring the supply chain is essential to efficiency and profitability. It’s important to track the results of your management efforts to see what’s working and what’s not, and from there make continuous improvements.
There are a number of key performance indicators (KPIs) that can be used to monitor the supply chain, such as cash-to-cash cycle time, perfect order rate, days sales outstanding (DSO), and inventory turns.
It is also important to have regular check-ins with suppliers. This will help to ensure that the supply chain is running smoothly and that any potential problems are identified and addressed early on. Focusing on building and maintaining a “customer of choice” relationship with suppliers can pay large dividends.
Finally, it is important to be proactive in your monitoring of external supply chain factors. This means keeping a careful eye on potential disruptions, such as natural disasters or labor strikes, and having (and regularly testing) business continuity plans to mitigate their impact.
A holistic approach to supply chain management can help PE firms and their portfolio companies build a more resilient and sustainable supply chain that will benefit them for years to come.
For more information, listen now to our on-demand supply chain webinar, or contact our team to start building your optimization plan today.
Subject matter expertise
Principal, Performance Improvement
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