Modern supply chains are often large and complex, meaning they're typically fraught with challenges to overcome. Addressing these challenges can seem intimidating, but success in doing so can bring about improved supply chain efficiency and all of the benefits that come with it.
Global supply chains are more complex than ever. In today’s challenging market, companies face multiple challenges, from shortages of crucial components to port congestion, high shipping costs, logistics delays and uneven customer demand. At the same time, companies are paying more attention to the importance of ESG and creating a sustainable supply chain, and the role that automation and efficiency can play in minimizing the need for time and resource intensive processes.
To address these challenges, and improve their ESG credentials, companies need to focus on supply chain efficiency as part of their overall approach to supply chain management. But what does that mean in practice, how does it differ from supply chain effectiveness, and what can companies do to make their supply chains more efficient?
What is supply chain efficiency?
Supply chain efficiency can be defined as optimal use of resources, from financial to technological, in supply chain management. An efficient supply chain may feature reduced operational costs, lower lead times, and less time spent on management compared to an inefficient one.
A supply chain is a complex combination of activities involved in producing goods and services and supplying them to customers. This encompasses steps such as sourcing raw materials from suppliers, the movement of materials through the relevant manufacturing operations, and the distribution of finished goods to consumers. As such, an efficient supply chain is one in which each step has been optimized to ensure orders are fulfilled by suppliers on time while the costs involved in operation are minimized.
While every company will have different priorities, a number of metrics can be used to measure supply chain efficiency. Commonly used metrics include:
- Inventory turnover – the number of times a company’s inventory cycles on an annual basis. Calculated as cost of goods sold/average inventory.
- Days Sales Outstanding (DSO) – the number of days taken to collect payment from customers. DSO is calculated as accounts receivable x number of days/total credit sales. The lower a company’s DSO, the sooner it is collecting payment from customers.
- Days Inventory Outstanding (DIO) – the average number of days a company holds its inventory before turning it into sales. Calculated as average inventory/cost of goods sold x number of days in the period. The lower a company’s DIO, the faster it is converting its inventory into sales.
- Cash conversion cycle (CCC) – the number of days taken to convert cash into inventory and then into sales through the sales process.
- Customer order cycle time – the number of days taken to complete a delivery once an order has been placed by a customer.
- Supply chain cycle time – the time it would take to complete a customer’s order if inventory levels were at zero when the order was placed. The shorter the cycle, the more efficient the overall supply chain is – and the better placed the company will be to respond effectively to market changes.
- Perfect order measurement – the percentage of orders that are not affected by any errors. The fewer errors, the more efficiently the supply chain is running.
- Fill rate – the percentage of orders that can be fulfilled at a particular time with stock that is immediately available, without backorders or missed sales.
Supply chain efficiency vs supply chain effectiveness
Supply chain efficiency and supply chain effectiveness are both commonly used terms to describe measurement of success, but what are the differences between them? The main contrast is that, whereas an efficient supply chain is one that includes streamlined processes and uses resources in the best way, an effective supply chain is one that successfully meets the needs of its stakeholders, including customers, suppliers and other partners.
As such, both concepts are important in different ways. An efficient supply chain could deliver the finished goods to customers on time, but fail to ensure those goods are of the required standard. Conversely, an effective supply chain that meets customers’ expectations where quality is concerned could still include inefficiencies and delays.
An efficient supply chain is arguably likely to also be considered effective, but the two don’t always come together. It’s important, though, that supply chains are both efficient and effective if they are to make the best use of resources, generate cost savings, and minimize delays, while also fulfilling customer expectations.
How to improve supply chain efficiency
There are a number of ways that companies can improve supply chain efficiency, including by speeding up supply chain processes, reducing errors, driving down costs, freeing up staff from manual activities, and improving communication with suppliers. In particular, businesses should focus on the following four areas of improving supply chain management to see increases in its efficiency:
1. Automate processes where possible
The more automation you can build into your processes, the more efficient those processes will be. By automating key processes, companies can free up staff from manual activities and allow them to focus on value-adding tasks. Automation can also play an important role in minimizing the risk of error.
Where supply chains are concerned, there are a number of processes that can benefit from automation. These include:
- Invoice processing. Inefficient invoice processing can result in significant delays that may affect the overall efficiency of your supply chain. Invoice automation solutions enable firms to receive invoices electronically from their suppliers, automating the accounts payable process and minimizing or eliminating the need for human involvement in the process. This, in turn, can reduce processing costs and the risk of error, as well as speeding up the process and creating more opportunities for suppliers to access early payment solutions.
- Inventory management. Automating your inventory management processes can help your company ensure that goods are in the right place at the right time – and that makes it easier to identify when more items need to be ordered. By automating their inventory management, companies may be able to identify opportunities to reduce obsolete stock, as well as reducing human error and minimizing warehouse and storage fees. Inventory management automation also enables companies to reduce long in-transit lead times, which can make it easier to align the arrival of goods with production demand.
- Cash flow forecasting. Many companies struggle to manage their future cash flows accurately, particularly when this involves collating data manually from a variety of sources in disparate formats. But with an automated cash flow forecasting solution, you can gain a clearer view of future cash positions much more easily. This, in turn, means you can minimize the need for manual data collection and reduce errors, all while making better-informed business decisions and creating opportunities to invest excess cash in your supply chain using tools such as dynamic discounting.
2. Improve visibility over your entire supply chain
The more visibility you have over your supply chain, the easier it will be to spot any bottlenecks and inefficiencies that may arise. This means having a clear view over where your inventory is at every stage of your sourcing, production and distribution processes, and tracking your logistics and transport activities. The more visibility you have over your inventory, the better placed your organization will be to respond to any changes in customer behavior or unexpected disruptions.
One way of achieving improved supply chain visibility is through the use of a sophisticated inventory management solution that can provide greater visibility over your inventory, tracking the movement of goods from origination to destination and helping you avoid any shortfalls. A sophisticated solution like Taulia’s inventory management solution may even be able to take ownership of your goods in-transit, or at a third-party logistics warehouse close to your premises, thereby supporting just-in-time operations while improving your balance sheet position as well as that of your suppliers.
3. Build better supplier relationships
Achieving supply chain efficiency is, by definition, an effort that requires companies to consider more than one party – and any inefficiencies that can arise on the supplier side of the supply chain can have a knock-on effect on your overall supply chain efficiency.
The reality is that not every supplier will perform equally well. As such, one way of improving your supply chain management is to weed out any suppliers that are underperforming, while fostering strong relationships with suppliers that are better suited to meeting your business goals.
When it comes to building strong supplier relationships, supplier management software can fulfil a valuable role by improving the flow of information between you and your suppliers. Communication is a two-way street, so the right solution should allow you to provide suppliers with updates on their purchase orders, invoices and payments, as well as ensuring that your supplier information is up-to-date.
By giving suppliers access to the information you need, you can reduce the number of queries you receive from those suppliers – saving time for everyone concerned, and increasing the efficiency of the overall supply chain.
4. Continually seek improvements
Finally, supply chain efficiency is not something you achieve once, and then forget about. New inefficiencies can spring up over time as a result of changes to the business environment or internal processes. Conversely, new technology can present additional opportunities for supply chain improvements.
In other words, once you’ve taken the steps needed to build a more efficient supply chain, maintaining that efficiency is where the real value lies. To keep everything working smoothly, you should audit the efficiency of your supply chain on a regular basis and identify any opportunities for efficiency that may have arisen. And if needed, you should be ready to make further updates and improvements.
Boost supply chain performance and efficiency
In today’s challenging environment it’s important to ensure your supply chain is operating as efficiently as possible. By using the right metrics to gauge the efficiency of your supply chain, and by using suitable technology to automate and streamline your supply chain management, you can harness efficiencies in many different areas of your supply chain. This, in turn, will enable you to eliminate errors and delays, reduce costs, increase visibility over inventory, improve relationships with your key suppliers, and help you achieve supply chain performance boosts.
Contact us to learn more about how Taulia can help you improve the efficiency of your supply chain processes.