A troubled economy has changed the way many of us make decisions and caused some supply chain professionals to come out of alignment with the long-term strategies of their companies. Given the anemic pace of the recovery and the uncertain future of our economy, today is an opportune time for each of us to re-examine the components of the supply chain we influence.
In this post and in upcoming posts, I will dissect the major elements of the supply chain and discuss how to make improvements.
Before going into these elements, what are the key reasons to take a fresh look at your supply chain?
- Fundamental economic shift. Our current economy is different than the one leading up to the recession we are recovering from. Regulations have changed, globalization continues to add complexity to supply chains, and uncertainty still plagues businesses.
- Short term thinking. Short term initiatives implemented during the recession to combat decreased revenues have become policy at many organizations. We need to evaluate these tactics for their effect on supply chain efficiency and integrity.
- New expectations. Supply chain personnel are expected to do more with less, with cost cutting success a driving measure of performance. Improved cash flow and reduced working capital needs are more emphasized today than before. To be effective, we must take a holistic view of the supply chain instead of limiting ourselves to traditional purchasing techniques.
It starts with you
The reality is that we are facing a changed environment. As I have come to grips with this in my work evaluating our supply chain practices, I have realized that, whatever your role in the supply chain, you need to ask yourself “Am I in alignment with my company’s strategy?” Many decisions we make or policies we perpetuate have merit on their own, but if they are not in agreement with your organization’s mission, they will not lead to long term success.
Supply Chain Evaluation Process
The five basic elements of any supply chain that should be evaluated are:
- Distribution Center Operations
- Reverse Logistics
Let’s start with sourcing and purchasing. I will expand on the other elements in upcoming posts.
Sourcing and Purchasing
Procurement should strengthen a company’s strategic position by driving competitive advantage, finding new ways to use supplier capabilities and reducing risk. But market uncertainty over the past several years has pushed many procurement and sourcing organizations to focus on short term goals.
One way to move out of this mindset is to examine how the materials and services you source and buy are classified. Classification focuses your team’s efforts, resulting in adopting a more strategic perspective, and requires buyers to adopt a more long term view. Utilizing Peter Kraljic’s Product Purchasing Classification Matrix1 is a great place to start. Kraljic’s Matrix has been used and referenced for over twenty-five years because it is easy to apply and can have an immediate positive impact on your procurement/sourcing processes. The matrix breaks purchased goods and services into the four categories described below.
Generic/Non-Critical Items (low profit impact, low supply risk)
With limited impact on profit and multiple vendors, generic/non-critical items are a low supply risk. Procurement of these products tends to be more transactional. Spot buying, short term contracts or P-cards are effective methods for purchasing these products.
Leveraged Items (high profit impact, low supply risk)
Leveraged Items are important because of your volume purchased or percent of your overall spend. However, they are still essentially commodities with multiple sources. When developing procurement strategies for these items, leverage your procurement spend by reducing the number of vendors, partnering with your supplier to decrease transactional costs and consolidating your spend from multiple divisions.
Bottleneck Items (low profit impact, high supply risk)
Bottleneck items are unique or specialized items with a limited set of sources, yet with a limited dollar impact on purchasing budgets. As a result, they consume a disproportional amount of your time relative to their value. When working with these items, the goal is to simplify the procurement process in order to move the item to another quadrant.
Strategic Items (high profit impact, high supply risk)
Strategic items are the items and services most financially critical to your organization, yet with limited suppliers to provide them. When developing strategies to source and procure these items, collaborate with your supplier partners. With collaboration, you will find opportunities for early supplier involvement, ways to reduce total cost of ownership and areas for innovation and continuous improvement. Long term relationships and contracts are imperative in creating a robust supply chain for these items.
When viewed at first glance, some of the chemicals Doe & Ingalls’ customers purchase could easily be misclassified as generic/non-critical category. Isopropanol is a great example. This solvent is readily available from numerous domestic and international suppliers who will provide spot pricing. However, your requirements such as packaging, cGMP compliance, low metals count or contact with an end product, may change the classification to Strategic.
Classifying your products or services, then examining your sourcing and procurement strategies, will have an immediate positive impact on your supply chain. Why? With a clear understanding of what is being purchased, its impact and its supply chain, a sourcing group can better manage its supplier relationships for a stronger and more efficient supply chain.
My next blog post will be on transportation strategy. I will illustrate by discussing how D&I was successful in implementing its Core Carrier initiative. Until then, we always appreciate feedback from our supply chain partners, so please share your thoughts on the ideas I have put out in this post.
1Matthews, Darin; Stanley, Linda, Effective Supply Management Performance. (Institute for Supply Management, Inc. 2008)