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How to Optimize Your P&L (Part 2)
How a Supply Chain Digital Network improves service levels and lowers operating costs
In my first post we looked at how supply chain impacts your profit and loss statement. In this post, I will discuss how a demand-driven supply chain network can have widespread impact on your financials, by lowering costs and improving revenue.
Safety Stock Won’t Necessarily Save You
Your service levels and inventory are closely related. In fact, your operational processes, your lead times, and the availability of your inventory, will have an impact on your service levels.
It is key not just to have enough inventory to meet demand, it has to be in the right place at the right time.
And of course, you have two factors to consider with inventory, your planning lead times and your cycle stock; and then there’s your buffer inventory to cope with demand variability, supply variability and lead times.
So naturally, if demand variability is going up, or supply variability is going up, your safety stock is going to go up. And then if your demand variability is means that you don’t know where you need to position your inventory, you may be increasing your safety stock without it necessarily being in the right place, and therefore being available to meet customer orders. And so while inventory is going up, service is going down because of that OTIF metric, you are not hitting your on-time and in-full targets.
Reducing Lead Times is Crucial
What we really want to do, is reduce the lead times as much as possible. There is nothing much we can do about physical lead time, but we can significantly reduce (even eliminate) information lead time.
This alone will have a major impact on safety stock. It’s also going to make your supply chain more agile.
So how do you eliminate or reduce your information lead times?
Reducing Variability & Inventory
Then there’s supply variability. This is largely out of our control. We can’t control the availability of raw materials needed to manufacture chips, but what we can do is get earlier visibility to those supply variability issues.
One thing we can do, is embed collaboration processes across all tiers of supply. Then we can run predictive and prescriptive analytics to help identify when there is, or is likely to be, a supply issue, and what impact that will have on your ability to meet demand. So, you can mitigate some of the impact that supply variability has.
Demand variability provides a similar challenge. While you can’t control how the consumers going buy their products, you can put in tools and techniques that allow you to create a more agile response to that demand variability.
This means you must be able to react to demand variability, not just within your own organization, but together with your suppliers, and your suppliers’ suppliers. Encourage your suppliers to become more agile too, help them by sharing regular, timely data. If you want a healthy business, you need healthy suppliers, suppliers that are profitable, because your supply chain is very much dependent on them.How to Optimize Your P&L with Your Supply Chain (Part 2) – Shirell James dissects the ways your supply chain can be used to drive increased sales, while reducing costs…. Click To Tweet
That in turn helps you reduce your safety stock. Eliminate the information lead times, so your demand supply matching is better, and you can bring your safety stocks down.
Real versus fake lead lead times. Planning cycle stock is based on the planning lead times. And they tend to be fake lead times, they tend to be inflated to provide further protection against variability.
Now we can reduce inventory levels. Once you’re reducing the variability, and you’re getting visibility to real-time execution data, you can start to bring those planning lead times down. This in turn helps you bring the cycle stock down.
Demand supply matching. Once we have brought down the inventory, we can do a demand supply match. Demand variability is all about knowing where you need to put your inventory. So, hold your inventory as far back in the supply chain as possible, and then push it forward based on the demand that’s coming in from the channels and retail stores. You can then use demand supply matching and global available to promise, to identify where you need to put the inventory. This allows you to position your inventory to meet your service levels, based on the latest demand and supply conditions.
On-time metrics. Again, information lead times play a crucial role here. If you eliminate information lead times, you’re going to have real-time visibility, and be able to run your processes much faster.
Maximizing Your P&L
To maximize your P&L, you need to get your product to customers on-time, at the lowest cost, while reducing your inventory. How do you accomplish that?
You need a digital supply chain network. A digital network connects all the parties together, and eliminates those lead times. Data is made available to all the (relevant permissioned) parties in real time, so that all can respond in an agile way to variability, allowing that entire ecosystem to synchronize supply and demand."The Digital Supply Chain Network is a win-win for you and your supply chain partners. It enables all partners to operate faster, run at optimal inventory levels, and react to variability at speed and scale" -Shirell James Click To Tweet
This is the big win-win. In the past, we see companies working within their enterprise, maybe going down to their tier one suppliers. But really, this is about the whole ecosystem, because if your tier n fails, everything else is going to fail. So, you really need to optimize and balance demand and supply across the entire network, so everyone is able to meet that consumer demand and generate that revenue.
With everyone connected, you have the rapid execution and service excellence necessary to resolve issues quickly. This is in contrast to the typical way of working in a silo, and simply passing an issue on to someone else, where it takes significantly longer to resolve, and usually it’s far from the best solution.
And now with the network, you can gather all that data to understand why those issues are occurring. So if you have an OTIF problem, it’s not necessarily the same cause across your product range and company. In one brand, it might be one thing, and in another brand, it might be something else. And, in a different region of the world, it might be something else again.
You don’t know how to improve OTIF if you don’t have that data. Once you have it, you can begin to understand where that OTIF problem was triggered from. Was it from a raw material supplier that wasn’t able to supply the manufacturer, who wasn’t able to then manufacture the goods to go to the retailer?
All of this together, increasing service levels, and driving down inventory, will help positively impact your P&L.
What is the Digital Supply Chain Network?
A Digital Network platform is a digital twin, it’s a digital representation of your network. Because it’s real time, it allows you to eliminate those lead times.
So as soon as something is made available on the network, it can be translated in real time to the other participants in the network. So if demand is changing unexpectedly at the retailer, it can be immediately visible to the manufacturer, and then it can be translated into demand at supplier (in the appropriate units).
Thus the network is eliminating the lead times, and then providing that real time visibility to every one of what’s going on, not just in terms of demand being propagated upstream, but also the supply response back downstream; and its tracking inventory in transit.
Collaboration for Optimal Responses. It also enables collaboration which is obviously really important. Again, you don’t want to be passing the problem to the next tier down, you want to be ensuring that they’re also able to survive, and hopefully thrive, in this difficult world. You need to collaborate with your partners on the best responses to the supply chain challenges.
Predictive and Prescriptive Analytics. Obviously, with all of that data, you need to use AI to help make sense of it. For example, for predictive analytics, to get early alerts to potential problems, and prescriptive analytics to generate possible resolutions.
This will help planners know where they need to focus their attention. For example, if I have a demand spike in one area, do I have enough capacity in my suppliers to meet that demand spike? A good network-based AI will tell you that almost immediately.
AI will help the planners identify where the big challenges are, and how they need to solve them.
In this way, it enables a natural response to demand variability. So you’re very easily able to see when there’s a demand spike, then collaborate with your partners by using the predictive and prescriptive analytics to help the planners and be able to come up with a much quicker response to that demand variability.
What that ultimately means is that you can unlock all the value in the supply chain.
You may ask, “Why should I care about partners? Really, I only care about my P&L. I care about my annual report.”
Well, you’re dependent on them, and particularly on your suppliers. Lots of companies now are single sourced. If your supplier goes out of business, you won’t have your supply to manufacture your products, which means it’s an impact on your business. But more importantly, the network really is a win-win for everyone. If you’re looking at network P&L, better alignment of partners, means more value for everybody in the network, everybody is able to operate faster and work at optimal inventory. Everyone is able to increase their service levels. Everyone is able to increase revenue.
How the Digital Network Drives P&L Improvements
Consider your income statement. You obviously want to boost your revenue. You do that by making sure the product is available to the customer, when they need it, so that your hard-won customers aren’t going to switch brands because your products never available. That means increasing your service levels so that your products available to the customers on shelf and to buy.
You also want to lower your expenses. So decreasing your transportation costs, using optimal modes and fewer expedites. Then you want to reduce your inventory, that means lower holding costs, operating costs, and overall cost of goods sold. The Digital Supply Chain Network™ helps bring all of those costs down.
Looking at the balance sheet, if you’re able to lower the inventories, you’re lowering your working capital, you can increase your cash flow, and that frees up funds to grow the business in other areas."Is a proposed supply chain technology solution optimizing your enterprise and maybe an adjacent tier, or considering the entire extended supply chain? You need to know, because your results will be dramatically different in each case." -Shirell… Click To Tweet
When you are looking at investments in supply chain projects, you need to pay attention to how those projects can positively impact both the income statement and the balance sheet.
The value potential here is enormous. You think about if you’re able to respond early and optimize and get all that real time visibility, so that everyone knows what’s going on, then you can all think about that working capital. So how do I optimize the inventory across the network? How do I release that working capital, liberate that working capital for everyone in the network, so everyone can benefit from it.
Implementing the autonomous supply chain solutions to balance demand and supply across the network, across every node and tier, will significantly drive down cost. Now, instead of having teams and teams of people constantly firefighting, those teams can be looking at how they can strategically improve the business.
Then identifying areas of opportunity. Ecommerce is obviously a big area of opportunity for supply chains right now. There’s opportunity to gain market share. So if you’ve got the product available, if you’re able to ship it to the customer on time, then you’re going to gain gain that market share. And that’s going to accelerate revenue growth.
This is not an exhaustive list, but I think it gives you a good idea of the huge impact your supply chain can have on your P&L, if you leverage the Digital Supply Chain Network. We have seen it over and over. It’s truly exciting when organizations like Partnership for Supply Chain Management, see the value and join the network, and then start seeing new opportunities in their network that they didn’t even know existed, but which the network now makes evident.
Look at all your options. Ask the hard questions of supply chain technology vendors. Get the value assessments. Question those. Then do the same with the Digital Supply Chain Network. I think you’ll see a dramatic difference in what is possible, and in your bottom line results.
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- How to Optimize Your P&L with Your Supply Chain (Part 2) - September 15, 2021
- How to Optimize Your Profit and Loss with a Demand Driven Supply Network - July 22, 2021