As a company grows, it typically develops processes and makes decision using the current options available and in the best immediate interests of itself. While this is critical for short-term success, these decisions tend to build a system of ad-hoc supply chain structures that can work against each other as the organization’s size and complexity grow. Because of this, it’s not uncommon for a business to find itself with an inefficient supply chain system over time, unaligned with its strategic focus. In an extreme case this may even reduce a company’s competitive advantage.
As a result, one common question we hear a lot is, “Why don’t companies simply realign their supply chains to make themselves more competitive?”. We find that companies are often too focused on the cost and risk of adjusting their supply chain structures to truly vet new opportunities for cost and risk reductions; you know the old adage, “If it isn’t broken, then don’t fix it”. Unfortunately, this strategic attitude tends to stymie large-scale operational improvement, a focus critical to long-term success. The hard truth is that a company must be constantly testing their supply chain assumptions and exploring cost-cutting options, which is more straight forward than you’d think.
Below are five low-risk steps for exploring and testing new optimal supply chain structures.
5 Low-Risk Steps to Explore Alternate Supply Chain Structures
1. Brainstorm Ideas
A great way to attack the above question is leveraging the “The 5 Whys” lean methodology. In a brainstorming session with your team, list the supply chain challenges your firm currently faces and ask why each of them are occurring, five different ways. This will help your team get to the root cause(s) of your identified challenges.
Once the root cause(s) are identified, work with your team to hypothesize alternative supply chain structures that’ll mitigate the current symptoms. Some ideas will be great and some will be completely unfeasible, but this first step is getting them out in the open for all to discuss.
2. Estimate Cost, Timing, & Risk Implications
Now that you’ve identified a number of options to potentially improve your supply chain, the next step is to estimate the cost and risk implications of adjusting its structure. This analysis is only a starting point. In the subsequent steps, actual information will be obtained that’ll either reinforce or breakdown your initial assumptions.
Focus on how each potential supply chain structure will impact cost (variable and fixed), timing (initial and repeated lead times), and supply chain disruption risk. This exercise will not only force you to put some deeper thought into the options produced by your team, but it’ll also help triage the options to help your team better allocate finite resources.
3. Identify & Qualify Suppliers
The supply chain structures and information developed in the previous step all depend on assumptions developed from your team’s understanding of the current marketplace. These may be flawed by a narrow view of said marketplace. Because of this, it’s critical to test these assumptions and adjust strategies accordingly. It’s simple to test these, but it does take time.
First, identify suppliers that could meet the needs of your desired supply chain structure. It’s important to identify multiple suppliers here that fit the same need (commodity, process, etc.) because throughout this step, many suppliers will opt out on their own or won’t meet your specifications.
We typically expect an attrition rate of 60% on engaged suppliers. So, if your goal is to obtain cost and timing information from 5 suppliers that can accurately perform the desired functions, you’ll need to engage roughly 13 suppliers. This changes based on whether you’re exploring a commodity versus a very specialized process, as specialized processes tend to have a higher supplier attrition rate.
Furthermore, it’s important to obtain quotes from many diverse suppliers. This will help ensure your that team has insight to what the actual market pricing for your need is. Once capable suppliers are identified, work with them to obtain cost and timing for the need you’ve engaged them for.
4. Analyze the Data
Now that your team has obtained actual market information, it should compare the data to the analysis assumptions made previously, and then update them as necessary. This may completely change your analysis, or, it might only require you to make some minor tweaks. Whatever the case, you’re smarter than you were before and can use this information to make better decisions moving forward.
Once the analysis assumptions are optimized, the next step is to review the potential supply chain options and determine which ones are worth exploring further. Consider the best option for further exploration based on the expected impacts of cost, timing, and risk.
5. Pilot the Optimal Supply Chain Structure
The final step toward exploring a new optimal supply chain is to pilot the supply chain on a small scale with the option to grow volumes as success is achieved. The goal is to keep the initial pilot volumes low while maintaining your current supply chain structure. This will significantly limit your risk exposure during the pilot phase.
As new information becomes available through the pilot, adjustments should be made to improve performance. Finally, as successes are captured, and risks are mitigated, the volume manufactured in the optimal supply chain structure should be thoughtfully increased to a point that maximizes value for your organization.
Exploring alternate, potentially optimal supply chains isn’t too difficult or risky of an endeavor, it just takes a solid work ethic and the determination from leadership to focus on risk mitigation and time. By thoughtfully working through the steps outlined above, your company can position itself to achieve success through a new supply chain structure optimally matched to its needs.