by Michael Croasdale, Senior Project Analyst
Companies are beginning to view supply chain management and procurement as a rising priority. Procurement has traditionally been a cost-driven model, finding suppliers that can provide the best product at the lowest cost. In today’s economy, however, the complexities of supply chain management have grown and a more strategic approach is being taken as companies look to fully integrate supply chain management into the overall business strategy. Driving factors other than cost are emerging in the supplier selection process. These factors include, but are not limited to, response times, sustainability, proximity to service locations, proximity to emerging markets, transportation costs, and supplier innovation. Consequently, forward-looking companies are able to streamline the process by reducing the overall number of suppliers and develop long-term supplier relationships leading to key strategic suppliers. These strategic suppliers are typically viewed as partners and are integrated into the company, assisting in product and service innovation, research & development, and risk mitigation, as well as overall cost and lead time reduction.
Many market leaders such as Dell, Walmart, Cisco and Lenovo have proven that aligning supply chain management with business strategy directly correlates to improving performance. In a 2013 survey completed by PricewaterhouseCoopers (PwC), companies that recognize supply chain management as an integral part of their organization achieve 70% higher performance. These high performance companies are considered Leaders. For example, through Walmart’s development of a strategic supply chain management system, they have been able to optimize their logistics, procurement, and inventory management system which has been a key factor in reinforcing their everyday low price promise. The PwC survey found that these supply chain leaders are able to deliver on time, in full, over 95% of the time and have, on average, a 15.3 inventory turnover. These two findings indicate that companies that have integrated supply chain management into business strategy are operating not only with efficiency but with high levels of customer satisfaction. On the opposite side of the spectrum, companies with disjointed supply chain and procurement programs, commonly classified as Laggards, achieve only 7.3% margins on average earnings before interest and taxes, whereas the Leaders are achieving 15.6%. Further weighing themselves down, the survey notes that the Laggards operate, on average, with a 3.8 inventory turnover.
Incidentally, less than 50% of the companies included in the survey think that their companies value the supply chain as a strategic asset. This shows that supply chain managers need to prove to their companies that, not only should supply chain management be tied to business strategy, but that an effective and strategic supply chain management program has a measurable impact on the bottom line. That said, what does supply chain management need to do in order to improve their supply chain and procurement programs, align them to the overall business strategy, and become industry Leaders?
Managers, of course. must focus on cost management. There are many pieces to that puzzle, however. In order to have both an effective and efficient supply chain, managers should be focused on trying to achieve perfect order delivery as well as having not only a cost effective supply chain, but a flexible one. In today’s economy, because the market is so volatile, trendy, and competitive, flexibility is key to success. In order to respond to customers’ ever-increasing requirement demands, market leaders have positioned themselves well by continually investing in new key performance indicators, additional technology, improved supply chain networks, and streamlining efforts. This helps to maximize flexibility and overall responsiveness. With increased flexibility, leaders recognize that supply chains must be adjusted to meet different customer needs. Knowing each customer segment and its needs can help supply chain managers develop a clear focus and a clear go-to-market strategy. For these reasons, companies must recognize the impact of developing an integrated, strategic, flexible, and complex supply chain management program and the correlation the program has on their bottom line.