Surprisingly few companies understand the importance of the supply chain, and few have a formal strategy in place for managing global supply chain risk in the years ahead. This is especially dangerous given the volatility and uncertainty in trade relations between the US and China as well as other scenarios around the world. Besides geopolitical uncertainty, having the right talent, a holistic perspective, and appropriate technology may all figure into the supply chain risk factor.
Surveys from the Global Supply Chain Institute (GSCI) at the University of Tennessee, Knoxville’s Haslam College of Business found that only 16 percent of companies surveyed have multi-year strategies for achieving supply chain excellence. In a separate 2018 Maine Pointe survey of 50 private equity firms, executives ranked supply chain functions as “relatively unimportant” in driving cash and growth – indicating a lack of understanding on how critical supply chain is in these areas. The result is often a performance gap that leads to companies falling behind competitors.
Maine Pointe collaborated with GSCI in a recent white paper titled “Driving shareholder value with your supply chain.” The paper highlights research based on interviews with senior executives and investment analysts, and notes potential blind spots on how supply chain impacts share price performance as well as best practices in supply chain optimization.
Redefining the supply chain
Best practices begin with re-defining supply chain excellence and broadening its scope. Rather than seeing supply chain as having a primary focus on procurement and logistics, it is about optimizing the entire end-to-end supply chain, from the supplier’s supplier, to the four walls of the business, to the customer’s customer.
Rather than thinking of the supply chain as a functional mechanism for sourcing and for driving cost savings, supply chain excellence involves a talent management strategy to recruit and retain the best personnel, leveraging new technology, a win-win collaborative process, breaking down silos, mitigating risk and creating a disciplined multi-year strategy. Instead of seeing it as a tool for managing cost, successful executives view it as a tool for creating value.
Best practices for driving shareholder value through supply chain optimization can be easily implemented in any company for concrete results. Supply chain is important to every bucket of economic profit, defined as profit less cost of capital needed to generate a profit. Best practices begin with “seeing the impact” – a process that begins with identifying a cross-functional team, a task that will help in visualizing the entire supply chain, its complexity and its impact on financial metrics. Doing so will help link supply chain decisions to company financials, and create conversations with both internal and external stakeholders that will lead to benefits that go far beyond simple cost reduction.
Following increased visibility and cross-functional team-making, focusing on the right metrics is the logical next step. Supply chain management generates an overwhelming number of metrics, but many of those metrics do not speak to how supply chain optimization impacts the company’s financial performance. Making that connection will allow the supply chain manager to better visualize how supply chain decisions impact the entire company.
Another essential best practice in supply chain optimization is building relationships throughout the entire company and starting conversations with the CFO and other key executives. This may be a challenge as some supply chain managers may feel too far removed from the executive level, but getting past that resistance, offering insight and creative solutions will help forge key allies in supply chain optimization efforts and to better create and execute strategic supply chain initiatives that go beyond basic cost-cutting measures.
Long-standing supply relationships have value, but disruption of those relationships can be devastating. A fundamental building block of supply chain excellence is risk management. There are plenty of examples of a single catastrophic supply chain event – such as a trade war, tariffs, weather event or shipping disruption — having a major negative impact on shareholder value. Companies which have not yet adapted best practices have no formal documented risk management process and are missing out on key opportunities for value creation.
Those which have begun to mature have begun to identify risks in the supply chain, and do a risk assessment at the beginning of every major supply chain project. Those with the most mature levels of supply chain best practice will have a formal, documented and implemented process to identify, prioritize, and mitigate supply chain risks looking years ahead.
Cost, cash and growth
Companies use multiple tactics to generate economic profit, including introducing new products, launching marketing campaigns or undertaking acquisitions. Supply chains offer an effective, though less-frequently understood path to creating value through growth, driving down working capital, improving cash flow, and lowering cost.
Take one example, a manufacturer used the supply chain as a lever to add $600 million in cash flow, creating a plan to rationalize finished goods inventory to 50 percent of its current level without negatively impacting product availability. They did this by reorganizing the supply chain with four initiatives:
• Reduce the number of SKUs to manage inventory across fewer finished products
• Improve manufacturing flexibility to react faster to demand changes
• Address slow-moving inventory by segmenting product lines
• Manage demand more closely to match supply chain constraints using a Sales & Operations Planning (S&OP) process
The Total Value Optimization (TVO) framework promotes greater collaboration, integration and transparency. The framework focuses on finding value drivers for cost, cash and growth, and building an action plan to achieve those drivers by leveraging the end-to-end supply chain, implementing supply chain excellence and building on long-term risk management. This framework represents a pragmatic step-by-step approach to transforming the supply chain into a competitive weapon. An inextricable link exists between the creation of shareholder value, and supply chain performance.