There are a host of lessons to learn when getting to grips with the nitty-gritty of supply chain management. Some of the lessons are complex and challenging, but learning them will be worth the time and energy you put in, as the rewards will prove to be way better than expected.
Here are three important issues worth getting your head around in 2020:
Understanding and Calculating Cost to Serve
What is cost to serve? Simply put, it’s an accountancy tool that allows you to calculate the total cost of servicing your customers, taking into account expenses related to such items as processing of orders, packing & delivery, invoicing, and customer support.
Why is it Important? Many businesses today still adopt a one size fits all policy, resulting in some customers being under-serviced and others being over-serviced—and adding to logistics costs. By calculating cost to serve, a business can identify which customers, products, and orders are unprofitable.
My Logistics Bureau consultants have come up with the following facts after conducting cost to serve audits since 1997 at hundreds of companies in a large number of countries:
- Some 20 % of customer orders made negative profits
- 5-10 % of products made no contribution whatsoever
- Around 12 % of customers were unprofitable.
Over the years, the Logistics Bureau team has developed specialist Cost To Serve tools, but even with a simple database and a set of spreadsheets, you will be able to carry out a basic analysis. You will be surprised how much you will learn about your business’ cost to serve model!
Understanding and Measuring Essential KPIs
What is a key performance indicator (KPI)? The term is mostly used when it comes to benchmarking and tracking performance in the supply chain. KPIs provide a means for companies to measure performance in activities such as projects, products, and workflow, and allows them to determine their progress towards business goals and objectives. The metrics can also be used to compare a business’s performance against that of its competitors.
So, What KPIs Should be Measured?
Every company’s supply chain is unique, but there are some KPIs that, for most organisations, are the most reliable sources of performance data.
- Perfect Order: The most important KPI as it measures on-time delivery, in-full delivery, damage-free delivery, and the percentage of orders that include accurate documentation.
- Fill Rate: This measures order fill, line fill, and unit fill.
- Cash to Cash Cycle Time: This metric is a pointer to how well your supply chain assets are being utilised.
- Inventory Days of Supply: This KPI calculates the number of days your inventory would last without running out.
- Customer Order Cycle Time: This measures the length of time between receipt of a purchase order and delivery to the customer.
Of course, we are only skimming the surface here. Take time to really get your teeth into the subject, possibly starting with this easy-to-understand introduction to KPIs.
Learning to Negotiate With a Supplier
For some people, the art of negotiation comes naturally, but most of us find it prudent to follow a few basic ground rules when trying to secure the best deal from suppliers.
Here are some negotiation skills that may work for you:
- Sell yourself as a loyal partner who will give a great deal of business over the long term
- Don’t accept the first offer—see it as an opening bid
- Negotiate with multiple suppliers and let each of them know that you are looking for the best deal
- Think about transferring all your business to one supplier—this is often enough to coax good business deals out of them
- Create leverage with a supplier by making a 50-70 percent deposit
- Don’t be afraid to walk away if the supplier won’t budge on pricing.
And the most important tip of all: get to know your prospective supplier BEFORE launching into negotiations.
If you can get to grips with these three elements of supply chain management, you will be well on your way to understanding the finer points of the industry—and to streamlining your business for greater efficiency and profitability.