The term supply chain is not only a discipline or a service-providing department of any company but also a concept that has been advancing for some time. It consists of the flow of information, goods, and money through different agents of a supply and demand system, hence forming a chain. However, like any other system, it is not always perfectly structured or remains functional as a perfect system. Market dynamics are well explained by the principles of economics. According to these principles, the demand and supply are never in equilibrium and there is always a scarcity of resources. It is this disequilibrium in the demand and supply that also creates inefficiencies in supply chains. Know more about Supply Chain Optimization
Supply chain optimization refers to practices adopted to reduce inefficiencies in a supply chain. The supply chain as a discipline has three main subdivisions namely sourcing, planning, and operations. Sourcing refers to the practices employed to find, contact, evaluate, negotiate, and purchase goods and services from buyers. Planning refers to planning the demand, production, and supply of goods and services in a supply chain. Operations include execution of the supply chain strategy at the ground level by managing the manufacturing processes, warehouses, and transportation system so that the goods and services can reach the customers. Supply chain optimization can be performed to make these processes efficient and waste-free. It includes redesigning, resizing, and recalibrating the systems of each sub-division. Some of the most recognized optimization approaches include lean manufacturing and the Just-In-Time (JIT) strategy.
Value creation projects are the heart of the supply chain optimization strategy. These projects are intended to reduce the existing supply chain costs while maintaining the same level of operability. Sometimes, cost reduction and operational convenience are the objectives of the supply chain together to facilitate the overall system simplification. Supply chain managers are always trying to create more value from existing resources for the system to counter inflation or enhance productivity. For example, increasing the space in warehousing while negotiating lower rates for storage can facilitate the supply chain to be able to carry more stocks in a certain location, while doing so at a lower cost.
Why is supply chain optimization important?
Supply chains are always vulnerable to the environment. Microeconomic and macroeconomic environments impact them, so the companies frequently struggle to survive such economic shocks. One of the greatest examples of recent times is COVID-19 which impacted supply chains globally. Bans on international transportation were imposed so the movement of goods was restricted. Furthermore, marketplaces were shut down due to lockdowns, and goods and services were abandoned for much of the time during the day. Flexible supply chains survived these shocks while those that could not adjust their inputs and outputs according to these market changes faced extinction. Many businesses had to shut down or go through extensive layoffs and divestitures to survive.
By optimizing supply chains, companies can become robust and evade such market shocks. For example, a company with a good sourcing strategy and a vast array of suppliers can always negotiate good prices better than their competitors. Hence a good sourcing strategy acts as a competitive advantage. Similarly, good sales and operations planning always keeps the stocks balanced between supply and demand. Therefore, the company never stocks goods in excess or runs out of them. So the vast array of suppliers and a good sales and operations planning cycle contributed to supply chain optimizations that were once carefully planned to avoid adverse outcomes.
New trends in supply chain optimization
- Using block chain and Artificial Intelligence (AI) along with the Internet of Things (IoT) to manage data better, and to drive meaningful results from complex large datasets
- Using Enterprise Resource Planning (ERP) software to have visibility, comply, manage, plan, and operate on data and goods better
- Employing one-window Fourth Party Logistics (4PL) partners to manage and provide the visibility of the overall logistical network
- Using robotics to enhance efficiency and produce agility in the movement of stocks in a warehousing facility
Conclusion
Supply chain optimization includes all the activities that supply chain managers carry out to reduce inefficiencies and costs in an existing supply chain. By improving systems and adopting best practices, supply chain optimization leads to lowering wastage in a supply chain. Supply chain optimization is important since it enables organizations to shed risks caused by environmental changes. Furthermore, it leads to the profitability of an organization and adds to its robustness through difficult times. Extensive optimization can lead to unmatched competitive supply chain advantage.
Frequently asked questions (FAQs)
- Is there any limit to supply chain optimization?
Answer: No. It is an ongoing process, and many organizations have Continuous Improvement Managers to design and implement supply chain optimization strategies frequently. The basis of supply chain optimization lies in continual improvement, a process that is always ongoing unless the cost of implementation is greater than the benefits expected.
- How can supply chain optimization be monitored?
Answer: Each initiative follows the traditional Plan, Do, Check, Act (PDCA) cycle. The initiative is planned and if found beneficial in terms of benefit to cost analysis, it should be implemented. The progress should be monitored and then corrected if it deviates from the desired path.
