The Role of the Supply Chain in Profitability

These past few years have challenged businesses both small and large in controlling (not managing) costs, delivery times, product availability, customer satisfaction, and profitability. Whenever there is a problem somewhere in the system between availability of inventory to point of sale, we are told that there is a supply-chain problem. How enlightening a solution – now go find what is broken! Do you really “manage the supply chain” or do you react to failures within the system? 

Every company has a strategy around different segments of the supply chain, so let’s look at the obvious and acknowledge the traditional approaches to managing the supply chain:

Inventory:  Tradition tells us that we need to manage the amount of raw and packaging materials, work in process, and finished goods in the warehouse or on store shelves. Let’s be honest, inventory is the net of sales forecast and actual sales and there is either more than planned or out of stock on store shelves. The truth is that no one manages inventory – rather they need to fully understand the business processes that cause inventory to be produced. Understanding the decision-making processes that cause inventory to be produced is the first step to improving profitability.

Sales Forecast:   Why do we forecast? In most organizations, large or small, the forecast is used as a sales target. This target becomes very important to achieving the plan especially if you are paid on commission.  

In the traditional supply chain, the focus is on efficiency and cost. Companies seek to design business models better than competitors. Success depends upon the ability to design, produce and deliver high-quality, low-price items that customers want. Within the design, produce, deliver model, time is the competitive edge. 

The goal of supply chain management is to use technology and teamwork to build efficient and effective processes that create value for the end customer. For the customer, that value is quality items always in stock at fair prices. For the business owner, the value is a product available for sales when the customer wants to make a purchase. Most companies focus on technologies and/or 3rd party providers of inventory management. For many small businesses, these solutions are cost prohibitive. Regardless of the size of your business, managing your Supply Chain is essential to satisfy customers and manage cash flow. 

Perhaps you’ve heard of the bullwhip effect in supply chain management. This is a phenomenon caused by small fluctuations in demand at the retail level that prompts a larger response from supply chain partners and creates highs and lows in inventory. The result is excess inventory, some of which will become ‘waste’ depending upon your product line. Inflated demand also causes increased costs for products that did not need to be produced. In some cases, this could delay production of products that are needed in the marketplace. 

For small businesses, you can manage your inventory without sophisticated technology. Start by focusing on your top sales items and record your inventory. Then look at your unit sales of these same items beginning with your top selling items for one week.  You can quickly determine your stock to sales ratio. The amount of inventory that you carry is then a function of delivery and production cycles. How much inventory of the items that you carry are in stock at your producer? If you receive deliveries weekly, your minimum inventory should be your average weekly sales plus safety stock and promotions.

Remember, reducing excess inventory increases cash flow and profitability. Today’s businesses compete on time from design to manufacturing to delivery to the store. How fast does your supply chain respond to new products or increased demand from existing products? Efficiency within the supply chain increases profitability. Focusing on your supply chain optimizes the use of resources (people, materials, cash). It reduces operational costs for materials, manpower and time.