What is supply chain optimization?
Supply chain optimization refers to the tools, technologies, methods, and best practices that can be used to boost the efficiency and overall quality of a supply chain.
Supply chain optimization aims to establish dependability, accuracy, interconnectedness, and quality, from the earliest stages of procurement to post-delivery interactions with customers. Monitoring and analyzing relevant data trends is critical for enterprises looking to optimize their supply chain.
Optimization is also used to establish end-to-end visibility. It allows companies to have a better understanding of what is running smoothly and to establish where improvements are needed.
Fundamental steps of supply chain network optimization
The specific path that an organization must take to establish a better supply chain depends on the intended scope of the optimization.
Local vs. global
A company implementing a local supply chain optimization seeks to focus on one area of the overall process, so the appropriate team would simply jump into the specific step that it wanted to improve.
For example, if the facility’s management team was laser-focused on inventory optimization, it might try implementing a more sophisticated and accurate inventory management system. This would help ensure that raw materials were always available when needed. Alternatively, the logistics team might want to make sure each ground shipment (e.g., by truck) carries the most possible goods each time.
But there's a notable shortcoming of local supply chain optimization. It sometimes neglects the butterfly-effect consequences that happen when adjusting only one element within the supply chain. In the case of maximizing the capacity for each truck shipment, logistics personnel would have to be sure that there is enough inventory space to sustain consistent shipments at that volume. As such, local optimization should generally be restricted to situations where a business specifically wants to quantify how one process affects others.
Global supply chain optimization, by contrast, refers to process improvements that affect the whole chain, whether the enterprise is literally global or not. Because of a supply chain's inherent scope, the global approach is usually best.
SCO phase by phase
The supply chain itself is commonly divided into three phases—design, planning, and execution. Optimization is best approached in the same order.
Supply chain design largely focuses on sales, inventory, and operations planning. Key tasks include picking the locations of warehouses or trans-shipment points, scheduling manufacturing processes, and forecasting demand. When seeking to optimize these steps, supply chain management teams look at their effectiveness and tweak them with the goal of driving improvements.
For example, locations for warehousing and logistics facilities might be chosen based on an analysis of demand in key markets and/or the efficiency of routes between potential trans-shipment sites and regions where many customers are located. Meanwhile, with manufacturing, it makes sense to schedule the assembly of certain projects based on priority, determining which existing items have steadily generated strong sales and which newly announced products are sparking consumers' excitement.
Optimizing the design phase of the supply chain network often means focusing on an enterprise's big-picture goals and long-term vision. As such, upper management and the C-suite may have the most influence over supply chain optimization decisions.
The planning phase of supply network optimization most closely overlaps with the sourcing, procurement, and development stage of the chain, though elements like production and logistics are still taken into account.
For example, while working to optimize this phase, supply chain professionals are designing the organization's literal supply chain: the path from the production facility to a warehouse, warehouse to the fulfillment center, fulfillment center to a trans-shipment point—if applicable—and finally from the delivery vehicle to the customer.
But true optimization requires focusing on other aspects of supply chain operations while plotting the chain's structure to establish a path that flows smoothly from the get-go. For instance, the supply chain team would also have to look at procurement procedures and improve them where necessary. This is essential to ensure key raw materials are obtained not only on time, but also at quantities that match demand and production goals. Planning effective inventory tracking systems—for materials or parts in the warehouse and/or finished goods in the warehouse, depending on specific needs—should also be part of the supply chain planning phase.
Optimizing supply chain execution and operation starts with putting into action all of the designs and plans that have been established in the previous phases.
Beyond putting product into warehouses and getting it onto ground transport vehicles or shipping containers, supply chain professionals also must monitor any changes and adjustments that have been made, in the interest of optimizing key processes. This assessment helps establish whether the alterations made actually improve the flow of goods through the supply chain or otherwise benefit the production and logistics network in some tangible way.
Some questions to ask as part of this review include:
- Do the changes reduce the costs of design, manufacturing, or shipping?
- Has products' overall time to market improved because of the adjustments, and has fulfillment and shipping gotten faster?
- Do any of the optimization actions help improve sustainability throughout the supply chain? This has become quite important to enterprises—and consumers—in recent years.
It will likely take some time to gather and analyze the key performance indicator (KPI) data necessary to arrive at any sort of actionable conclusion and make any necessary adjustments.
Supply chain optimization benefits
If a supply chain optimization plan has been well-executed—and all of the successful changes that were made during the process are maintained—enterprise organizations can realize significant near- and long-term benefits.
Increasing visibility across the supply chain allows greater clarity regarding many essential processes, including inventory management, order fulfillment, delivery workflows, and communications with business partners. It helps eliminate the blind spots that easily lead to shortfalls in the inventory level for key materials, production delays, inaccurate deliveries, and other problems.
The adoption of critical supply chain optimization techniques has the potential to benefit enterprises' bottom lines in various ways. Constantly striving to improve each supply chain operation can help reduce or at least stabilize costs by minimizing disruptions.
For example, consider a machine learning (ML) algorithm-based application trained to monitor equipment for certain problematic behaviors. When enough warning signs pile up, the app generates work orders for high-priority maintenance. This keeps equipment running longer, mitigating the possibility of costly downtime, repairs, and production bottlenecks that disrupt the supply chain.
Virtually any decision made at any point of the supply chain is capable of affecting most or all subsequent phases of the chain. Certain optimization efforts, such as adopting the technologies and methods to run real-time data analytics, give production, warehousing, and fulfillment personnel a constant, active window into operations. As such, these teams are better equipped to make effective decisions that contribute to product or process improvements.
Enhanced customer satisfaction
Successfully optimizing the supply chain often contributes positively to the customer experience. While buyers may not be directly aware of every change businesses make in this area, they'll see benefits ranging from faster or less expensive shipping to higher-quality products. A satisfied customer base—especially one that speaks positively about individual experiences on review sites or social media—can be an incredible competitive advantage.
Best practices for better optimization
The potential upsides of supply chain optimization are clear, but the processes associated with it have to be implemented properly. There are certain ways any enterprise can boost the chances that its optimization efforts will succeed.
The planning segment of supply chain optimization is arguably the most critical. It must involve looking closely at every potential process change, assessing its likelihood of bringing about bottom-line gains, and looking at other aspects of the supply chain it might affect. For example, creating an accurate demand forecast is so important because it helps supply chain managers project inventory holding costs—which represent a large part of a product's overall cost.
Proper planning should also account for worst-case contingencies that are unlikely to occur but would be devastating if they did.
Improved inventory oversight, streamlined production processes, efficient operational planning, and numerous other aspects of supply chain optimization all contribute to making organizations more agile. Enterprises capable of supply chain assessment and adjustment on short notice can more readily respond to gradual or abrupt changes in their sectors or regional markets.
Focus on the customer
It's critical for enterprise leaders to remember why they're optimizing their supply chain. Even companies with largely inelastic demand can't forgo customer satisfaction. Changes to the supply chain should benefit businesses, but they should also be positive for customers in some way, even if indirectly or far down the funnel.
Outsource where necessary
If it's cost-effective and sensible to outsource a given supply chain task, don't hesitate to outsource it. This doesn't have to be limited to obvious areas like logistics. Third-party manufacturers, for example, can pick up the slack if first-party facilities are experiencing manufacturing problems, such as sudden parts shortages or equipment failures.
Choose the right technology
Resources ranging from dedicated supply chain optimization software to agile enterprise resource planning (ERP) platforms can effectively support efficient supply chain processes. ML and other advanced automation should also be leveraged wherever possible.
The value of supply chain analytics
Effective reporting and analytics are essential for every aspect of supply chain optimization. Teams across the supply chain must use integrated data and the right KPIs to determine what issues need to be fixed, project supply and demand, manage inventory, analyze routes, and monitor delivery quality. Large organizations have an abundance of data that can help here, but it has to be properly categorized, integrated, and accessible.
A high-level analytics platform and database management system (DBMS) like Teradata Vantage is ideal for leveraging supply chain analytics as successfully as possible. Vantage is well-equipped for demand planning and forecasting, omnichannel inventory management, sustainability monitoring, customer analysis, and other key factors of supply chain optimization.
Check out our brochure to learn more about what Vantage can do to help organizations create a dynamic supply chain.
Learn more about dynamic supply chains