“As supply chain practitioners, we hate waste.” This comment from John Lund, head of Gartner’s Global Chief Supply Chain Officers program and a former CSCO at The Walt Disney Company, neatly captures our profession’s traditional mindset when it comes to efficiency.
Whether it’s money, time, energy or other resources, we pride ourselves on ensuring they are used in the most efficient way possible. This obsession is taken to its pinnacle in the finely tuned, just-in-time supply chains pioneered in the automotive industry and pursued by other sectors ever since.
However, the way we think about efficiency has been challenged by a number of big trends in recent years. One is the “Amazon effect” in e-commerce, which is changing expectations about cost and service levels among end consumers and business customers alike. Another is the evolution away from product standardization to customization and personalization — to “lot sizes of one” in some cases.
Set against these growing demands and greater complexity, supply chain efficiency has acquired a somewhat negative connotation. It is seen by many as associated with cost-cutting rather than value creation, and internally focused rather than customer experience oriented.
Hence, rethinking efficiency — what it means in terms of productivity and performance — is an important part of defining supply chain’s mission and purpose in a fast-changing world.
Efficiency at Three Levels
Last month’s Gartner Live Americas Peer Forum event in Miami, where Lund spoke, sought to do exactly this. Through its theme of “Supply chain efficiency revisited,” the conference addressed the topic at three levels:
- People efficiency. Technologies such as robotic process automation, artificial intelligence and advanced robotics are starting to eliminate some supply chain tasks and jobs. At the same time, new skills and new ways of working are needed to address a growing talent gap and empower people to be more productive. In a keynote presentation, drinks giant Diageo identified employee engagement, diversity and inclusion as part of the efficiency equation.
- Material efficiency. Resource scarcity affects key inputs such as water, ingredients and raw materials too. Sustainability and circular economy initiatives have moved from side projects and public relations exercises to the heart of supply chain strategy. A great example is Dell, which won a Power of the Profession Award at the conference for its pioneering initiatives in areas such as mineral reuse and ocean-bound plastics recycling.
- Network efficiency. Omnichannel fulfillment and customized products are forcing companies to rethink and reconfigure their manufacturing and distribution operations. But another big disrupter is the breakdown in global trade stability as a result of the United States’ imposition of tariffs, its trade war with China, and the United Kingdom’s decision to break away from the European Union. The result is uncertainty around sourcing costs and market access, to name just two issues.
Expanding the Efficiency Equation
Talking to senior supply chain executives for a new report on network efficiency highlights the fact that while cost remains a key variable in the efficiency equation, speed and service have grown in importance during the past few years.
For many companies, this is about reducing lead times and ensuring better product availability. At one high-tech manufacturer, this year’s goal is to cut the average three-month order-to-shipment cycle in half. And at Lenovo, a relatively new metric of “serviceability” is being used to gauge how well the company meets customers’ product needs during this process.
Indeed, supply chain efficiency is increasingly being measured from the customer’s perspective, not just the producer’s. In the retail and consumer goods sectors, for example, key performance indicators such as on-time, in-full have been joined by those like on-shelf availability that focus more directly on the consumer’s experience — and on the performance of the entire value chain.
Flexibility and agility in being able to respond to changing customer needs and market opportunities is another key dimension, as reflected in the graphic above. Strategies such as supply chain segmentation by product, channel and customer type, and late-stage postponement are among those being used here.
At leading supply chain organizations, the definition of efficiency also factors in the need for greater resilience across the global network. This includes risk mitigation around international trade, as well as for supply disruptions caused by weather events, natural disasters and political upheaval.
Payback in the Face of Uncertainty
It was notable during our executive interviews how prior investment in flexibility, agility and resiliency has paid off during the China trade dispute.
Companies that have actively addressed this from a network standpoint have been able to diversify away from China more quickly than those that have not. This includes switching products to alternative internally run factories and booking spare capacity at contract manufacturer plants in countries like Vietnam and Malaysia.
One firm that has done this is ARRIS, a communications equipment maker. Jerry Cederlund, its senior vice president of supply chain operations, says: “Resiliency is one of the highest-level things we think about in efficiency terms.”
That’s a much broader way of looking at supply chain efficiency than simply cost optimization or even making better trade-off decisions in pursuit of speed and service targets.
But in a world characterized by volatility, as well as greater connectivity, this expanded definition of efficiency surely makes good business sense.