Charting a new course for effective supply chain management

BY ANDREW MCGLASSON

Special to The Wholesaler

While the primary reasons distributors pursue supply chain effectiveness continue to be lowered operating costs, improved customer service and increased profitability, the complexities and challenges within today’s marketplace have driven similar changes to the strategies needed to achieve these savings. Today’s globalized, multi-level supply chains require a completely different approach to address changing market conditions, and distributors who fail to recognize this may not survive.

Multiple forces are pushing supply chain efficiencies to the top of the priority list for wholesale distributors. On the demand side, manufacturers are moving factories to low-cost labor countries, forcing distributors to follow and pushing already inefficient supply chain infrastructures to the breaking point. Manufacturers continue to move in the direction of build-to-order or lean systems, requiring distributors to meet increasingly short lead times and achieve perfect on-time delivery performance. Additionally, the combination of cost pressures on their margins, coupled with a more complex set of supply partners and redundant inventories, forces distributors to increase their efficiency just to keep profits steady. Without proper attention to supply chain effectiveness, performance improvements can only come at the expense of the distributor’s bottom line.

Likewise, retailers have been relentlessly pushing up performance requirements for distributors. Web-based electronic commerce systems have brought new market entrants plus more direct selling and competition from distributors’ traditional suppliers. All this has occurred against a backdrop of aggressive ‘cost-down’ sourcing, supply-base rationalization, and supplier performance management by procurement organizations of the distributors’ retail and manufacturing customers.

These demand-side forces have been compounded by the distribution industry’s traditional, focus on top-line growth -- whether by acquisition, expansion into new geographies, addition of new suppliers and product lines, or aggressive commitments to customers on price, lead times, on-time delivery, inventory levels, or payment terms. As a result, many wholesale distributors are now pursuing top-line growth without a similar focus on the costs to supply the additional demand, driving growth at the expense of bottom-line profitability.

To mitigate this risk, it’s imperative that wholesale distributors quickly chart a new course for supply chain effectiveness. They must regain control of their operations and match their investment with demand levels to ensure future profitability.

Changing distribution market dynamics

Regardless of size, today’s wholesale distributors often find themselves interacting with trading partners across multiple time zones with different language and transportation requirements -- most commonly in the procurement of goods, but increasingly to serve global customers and target markets. Global supply channels and offshore manufacturing are now more and more commonplace. What once sufficed for supply chain optimization is now just “the price of admission.” In the emerging economic model, true competitiveness comes from tight integration among trading partners and sophisticated information management among all parties in the supply network.

To formulate long-term business strategies that balance top-line growth with bottom-line profitability in a dynamic market environment, distributors should ask:

• How can we continue to add top-line growth while remaining flexible enough to react to change?
• How do we reduce the risk of doing business internationally while capturing the economies and efficiencies of scale? Where is the risk? Where is the variability?
• Where are the synergies with the new business areas -- geographic, supplier-related, or new categories of inventory -- which we are moving into?
• How can we maintain margin and profitability to make that growth/expansion pay off? What are the associated costs and how can I manage them?

Strategies for success

Optimizing a distribution business within the new, extended supply chain environment is a serious undertaking. Distributors can no longer expect to follow a single, straightforward supply chain model. Today’s model consists of multiple process flows -- some needing optimization, others needing integration. And the model will change continually as suppliers, customers, outsourcing partners, locations and geographies are added and removed over time.

Even with such challenging issues to plan around, and a changing environment in which to execute, there are distributors achieving substantial success in supply chain optimization. They are thriving because they are willing to devote the time and planning energies needed to structure multiphase, long-term approaches that incorporate the following five strategies:

• Make a clear choice between top-line growth and profitability.  Then put a sharpened focus on the financial metrics of that choice. Top-line growth initiatives like acquisition, new products, or new geographies impact many business processes for which distributors must plan. While profitability measures such as targeting day in inventory (dii), cost of goods sold (cogs), margin, or time-to-market, tend to be more technology-driven practices which impact the bottom line.
• Chose one entry point.  Every journey begins with a single step. For example, a long-term strategy for reducing/ optimizing inventories involves choosing a specific point of focus, such as demand visibility, supply chain execution, perpetual inventory visibility, etc. Each distributor has its own unique challenges that help to determine the best entry point.
• Limit the functional or operational scope targeted for improvement. Useful exercises for determining project scope include charting future growth needs, identifying processes that will be affected, identifying data dependencies (both inbound and outbound), and isolating specific departments or categories for pilot and roll out.
• Track specific metrics. Outcomes will vary, so easily quantifiable metrics -- like dii and cogs -- must be balanced against other, less quantifiable results. Once scope is set, distributors must establish baselines for measuring success. Whether they be operational metrics (such as dii), employee-related efficiencies, or regaining missed service levels, the best measures for success chart effectiveness in the emerging supply chain management model.
• Focus on adjacent or related areas of impact to apply the model. As supply chain optimization initiatives move forward the next areas of value or opportunity often become apparent. Questions that can help identify those opportunities: Are there other departments with similar conditions? Are there up- or downstream operations that will have a similar impact on the same metric?

Putting strategy into action

Today’s distributor must integrate their business operation beyond the four walls. It’s no longer enough to connect the back-office to the warehouse; distributors now need to connect to their suppliers, customers and any one providing value-added services in the supply chain. Whether by choice or by circumstance, today’s supply chain demands you to connect to it as effortlessly and efficiently as possible.

The choices you make send a ripple through your supply chain, and those choices promise new opportunities for profit. Unfortunately, if your supply chain is not fully integrated, that ripple can also result in grossly multiplied waste, but there are a number of approaches distributors can take to ensure success in today’s evolving business environment. Let’s look at these more closely.

• Drive demand focus from planning through execution. At the outset, the distributor establishes buying levels by calculating the sku/location end-demand forecast with the intent of improving buying accuracy and cutting significant inventory from the operation. Subsequent planned steps should include driving the demand forecast through allocation planning; reconciling incoming levels against distribution center capacity requirements and inventory histories, and, eventually, applying the forecast to both labor and shipping requirements. This approach can reduce total inventory in the supply chain with nearly half of the reduction resulting from initial improved buying.
• Link sourcing with distribution through optimized execution. Distributors should look to deploy technology that provides holistic visibility across the enterprise, enabling them to link sourcing order activity with shipment builds, active in-transit monitoring, and event management.  Then the company can drive the resulting inbound visibility through the multi-tier distribution network. The results are lower costs through efficient use of transportation, more reliable shipments, and capital cost avoidance since distributors can forego building an additional dc for cross-docking shipments.
• Maximize warehouse utilization. This is critical, especially for distributors that have grown through acquisition. Although distributors may have previously experienced constraints in the supply network, acquisitions often times compound the problem by not entirely alleviating the issue of demand while also creating redundancies. This can leave distributors struggling to figure out which problem to fix first. One way to address this issue is to measure total inbound visibility and perpetual inventory within specific distribution centers as well as across the total distribution network. This enables distributors to balance activity with warehouse capabilities and route needs among them, making it easy to identify where capacity investments or divestitures are required.
• Collaborate with customers and suppliers to develop potential Vendor-Managed Inventory relationships. Distributors face increasing competition and must find better ways to forecast end-consumer demand based on shipments to various retail locations. Demand forecasting helps companies to not only improve inventory and account performance, but also to offer a value-added service to key customers by sharing optimal suggested buying and replenishment data in the forecast.
• As their retail customers get more comfortable sharing sales data by location, the accuracy of the distributor’s demand forecasts will improve.  Distributors need to position themselves competitively to achieve tight vendor managed inventory relationships with key retail accounts.

Additionally, distributors, who have relationships with their suppliers where inventory costs are shared, have the opportunity to extend the product lines being sold to their collective target markets while keeping costs low.

Conclusion

Distribution is a fast-paced and competitive industry with lots of moving parts. An organization’s success will depend on its ability to quickly source materials and work better with new suppliers by seamlessly integrating them into its end-to-end supply chain. Ready access to information about suppliers, inventory levels, outstanding orders, and shipments translates to cost control and rapid order turnaround.

The challenges in supply chain optimization are substantial, but not insurmountable. Managing an extended supply chain makes it imperative that distributors have broad coverage of important core business processes, such as plan, source, buy, make/assemble, ship, sell, and service. And, while supply chains have gained complexity in recent years, the process and technology solutions for achieving effectiveness in supply chain management have gained sophistication and become both more accessible and easier to deploy.

A comprehensive and integrated set of software solutions enables companies to gain functional oversight and effective control of their operations.  This holistic visibility allows distributors to move beyond the immediate to seek out and adopt new growth strategies, while maintaining costs and adding value to everything they do.                   

Andrew McGlasson is the director of industry and product marketing for Infor’s Distribution and Supply Chain Group, responsible for building on Infor’s considerable strengths in the Distribution industry to help drive measurable business growth among existing customer communities and distributors facing strategic change. McGlasson brings a rich history of successful selling, marketing, management, and strategic leadership in the wholesale, transportation, and retail technology sector.  To obtain additional information, contact inforinfo@infor.com.