6 Trade-offs CEOs face in Managing their Supply Chain
[Also posted on LinkedIn]
With the ever-present challenge of sustaining revenue growth, making the supply chain more effective and efficient is always an opportunity to deliver business objectives. Managers, however, sometimes fall into the trap of focusing improvement in one component of the supply chain without realizing they are simply shifting the burden to another. Optimizing the supply chain often involves trade-offs.
Inventory versus service. Sales professionals normally request high inventories to ensure meeting their customers’ orders. Finance professionals, however, prefer lower inventories to keep working capital low. Executives thus have to choose between building inventories to ensure availability to customers against the cash they can free up by reducing their stock levels. For perishable products or items with expiration dates, lower inventories would be the preferred course. Fast-moving consumer good firms may opt for higher inventories to sustain competitive market share.
Large batches versus frequent runs. It’s no secret that manufacturing plant managers prefer scheduling production at one item at a time at the largest lot size or batch possible. Single runs are convenient and offer more efficient output at less down-time from fewer changeovers. Running multiple times at fewer quantities, however, results in lower inventories as output would synchronize more effectively with demand. Running more frequently also saves on storage space though at the expense of lower production capacity utilization. Automotive firms have learned to change over more often but would still tend to invest in multiple assembly lines to minimize frequent runs.
Large orders versus small orders. Some vendors tempt business clients with discounts for large order quantities. For the customer, the price discount means lower costs in materials or components translating to better profit margins for finished product. Large volume orders, however, also mean higher inventories over a period of time, a higher risk of obsolescence, and increased storage costs. Smaller orders delivered more frequently would not only solve the inventory, obsolescence, and storage issues but also can improve service to end-users as probability of run-outs are avoided because vendor delivery lead times are likely shorter. Commodity traders offer lower prices for high bulk orders but some buyers, like supermarkets, balk at buying at high quantities because their profit margins are sensitive to the costs of inventories. Some retailers have set up large warehouse clubs to minimize the inventory costs and take advantage of bulk discounts as customers buy at the same site where the vendor delivers.
Local versus global sourcing. Sourcing from international vendors generally brings lower material pricing opportunities but because of the geographical distance, would mean longer lead times and slower capability to respond to changing demand. Local sourcing on the other hand provides quicker response to changing demand but carries the risk of higher vendor prices especially if clients prefer local suppliers to keep inventory and deliver at small lot sizes. Several European furniture dealers source products from Asia because of high prices of local tables & chairs at their home countries. Asian producers, however, are challenged to match the high standard of quality of European consumers not to mention deliver orders on-time.
Multiple depots versus single distribution centre. A single distribution centre allows for more storage cost efficiency but drives distribution costs higher due to the higher spread of customers to serve. Multiple depots imply closer availability of products to customers and thereby, more responsive order-to-delivery with flexibility of smaller delivery lot sizes. Multiple depots, however, also implies higher overhead expenses. Beverage firms prefer multiple depots because of the high sales volume to many customers in contrast to other industries where one distribution centre is favoured for lower cost.
Full loads versus LTL’s. Firms often face the quandary of whether to wait till orders fill up a truck or deliver less-than-truckload (LTL). The former optimizes freight costs while the latter emphasizes customer service. Many small- and medium-enterprises opt for smaller trucks or motor-cycle couriers to deliver goods fast to customers. Large flour distributors usually will stick with fully loaded large delivery vehicles as their profit margins are sensitive to high freight charges.
Trade-offs are part and parcel of every supply chain strategy and are part of the realm of top management decision-making. Managers need to balance the effect of their strategies over the unique functions of their operations as one benefit in one area may mean higher costs in another. How the company positions itself determines what supply-chain strategy is more appropriate.
Mr. Jovy Jader is a Supply Chain Advisor and Regional Speaker on Supply Chain Management. He has directed and implemented Business Improvement projects both local and international which have resulted to company-wide improvements in revenue, working capital, total cost, and customer service levels. Mr. Jader is the author of the book Speed Kills … your Competition: Driving Growth Through Supply Chain Excellence – a book on Supply Chain Insights and Best Practices. Should you have questions or comments, please e-mail them to firstname.lastname@example.org.