What is supply chain optimization?
Supply chain optimization is the process of refining the structure and operation of a supply chain. It aims to make the best use of resources and technology to extract greater efficiency and performance from the supply chain network. Well-optimized supply chains enable businesses to meet their broader objectives, whether that’s to maximize profit or build resilience against external conditions.
There are three fundamental phases in the supply chain optimization process:
- Design – Involves the creation of a supply chain network, which covers analyzing needs, setting objectives, designing fulfillment workflows, and establishing inter-departmental communication lines.
- Planning – Involves the creation of a supply chain strategy that maximizes the effectiveness of the designed supply chain network, covering the approach to inventory management and deployment of assets.
- Execution – Involves the ongoing management of supply chain activities, covering supplier management, deployment of supply chain financing, boosting supply chain visibility, supply chain performance reviews, and more.
Given its broad scope, supply chain optimization is a process that never really ends. The economic and competitive landscape businesses operate in is constantly changing, so supply chain optimization is a continuous process – something to maintain as a business priority long into the future.
Why is supply chain optimization important?
Supply chains are fundamental to the operation of practically all businesses, so improving how they operate through supply chain optimization can have wide-reaching benefits.
Most importantly, it gives businesses more confidence in their ability to meet customer demand efficiently. Well-optimized supply chain networks function better than unoptimized ones in their core purpose – procuring raw materials or inventory on time and for a good price to facilitate timely manufacturing and order fulfillment.
At the same time, supply chain optimization can uncover and contribute to opportunities to fuel business growth or resilience. This is a critical edge in times of economic uncertainty paired with high business competition. Businesses with optimized supply chains can out-compete through efficiency gains, giving them more working capital to use as they achieve broader business objectives.
Speaking more widely, taking a sophisticated approach to supply chain network optimization forces businesses to look at their supply chains critically, which can result in plenty of other benefits, including:
- Better supplier performance, achieved through a more considered supplier selection and evaluation process
- Stronger lines of communication with suppliers, established through the use of centralized software
- Lessened inefficient maverick spend, resulting from clear purchasing policies and procedures
- Cheaper inventory storage and transportation costs from a more appropriate approach to inventory management
Methods of supply chain optimization
Supply chain optimization is a holistic process – it works best when every phase and facet of the supply chain is optimized. However, some stand-out supply chain optimization techniques see wide adoption. They include:
Increasing supply chain visibility
Improving visibility over the supply chain is a critical part of optimization. Without this visibility, businesses struggle to understand where inefficiencies lie and can’t make reliable improvements. Supply chain visibility can be increased in several ways, the most notable being real-time inventory tracking solutions and prioritization of data capture.
The former allows businesses to see bottlenecks in the flow of goods or materials through their supply chain, providing insights into where suppliers fail to meet performance standards or which processes are least efficient. The latter enables better awareness of potential supply chain risks, meaning they can be mitigated or countered ahead of time.
Reviewing supplier relationships
Supply chain networks are made up, in no small part, of suppliers. Businesses can therefore optimize their supply chain by optimizing their supplier base. Weeding out the weakest suppliers and replacing them with higher-performing alternatives can significantly boost overall supply chain performance.
Reviewing supplier relationships is also helpful for achieving more specific supply chain goals. Both lean and resilient supply chains are partly characterized by their approach to building a good supplier base. Businesses can look at their existing supplier relationships and evaluate how well they suit their unique supply chain objectives, uncovering opportunities for refinement.
Implementing supply chain finance solutions
Some of the greatest potential returns from supply chain optimization can be found by considering available financing opportunities. Businesses with extensive supply needs, and therefore significant supply chains that feature many individual suppliers, can extract huge value from solutions like reverse factoring and dynamic discounting.
Reverse factoring, otherwise known as supply chain finance, offers the chance to hold on to working capital for longer by utilizing third-party funding to cover accounts payable. Dynamic discounting presents an opportunity to capture a risk-free return on cash by securing a discount on invoices by paying early. Even better, both solutions can benefit suppliers, too, which can lead to stronger supplier relationships.
Integrating automation throughout the supply chain
Artificial intelligence assisted automation can improve efficiency in all aspects of business, and things are no different when it comes to supply chains. Supply chain activity is full of repetitive manual tasks, which are critical to effective performance despite their monotony. Automation offers the opportunity to remove the element of human error from these tasks while also reducing costs.
The accounts payable, inventory management, and supplier management processes all contain elements that are relatively easily automated. Using the right software solutions, businesses can ensure their supply chains operate at maximum efficiency while giving their human resources more time to work on other ways to improve performance.
Supply chain optimization best practices
Along with specific methods of supply chain optimization, there is a range of best practices that can benefit performance when held as central tenets of supply chain design, planning, and management:
Prioritize strong lines of communication
Communication between business departments and suppliers is critical to effective supply chain management. Businesses should prioritize building clear, constant, and instantaneous communication channels to get the most from their supply chain network.
This can breed all sorts of benefits, from the quicker resolution of disputes with suppliers to greater cooperation between different departments involved in purchasing decisions.
Ensure centralized access to data and tools
Adopting a centralized system for supply chain management makes relevant data and tools more easily accessible to the people who use them. This means that staff involved in supply chain activities, spanning the range of internal departments, are all on the same page, reducing delays and issues like duplicate payments.
Boost your cash forecasting capabilities
More accurately predicting future inflows and outflows of money is a significant help to businesses looking to optimize their supply chain. With better cash flow forecasting capabilities, businesses can make decisions that capitalize on their situation, prioritizing resilience when required and otherwise putting working capital to its best use.
In fact, cash flow forecasting can practically dictate supply chain strategy, making it far easier to tell what the best supply chain model is and how to optimize it to make the most of upcoming cash movements.
Carry out regular reviews
Finally, but perhaps most importantly, businesses looking to get the most from their supply chain should focus on reviewing their optimization strategy regularly. The conditions in which a supply chain exists are constantly changing.
Staying aware of how a supply chain is currently performing, rather than assuming optimization is complete and resting on laurels, is how supply chain optimization can provide a long-term competitive edge.