Synchronizing Supply Chain Functions
Supply chain management can also be described as integrating three of the functions inside an organization: purchasing, logistics, and operations. Each of these functions is critical in any company, and each of them has its own metrics. But these functions are interdependent, so making good decisions in any of these areas requires coordination with the other two.
The purchasing, logistics, and operations teams often have conflicting goals without realizing it. Managing these functions independently leads to poor overall performance for your company. Supply chain managers need to make sure that the objectives of these groups are aligned in order for the company to meet its top-level goals.
The simplest top-level goal for many supply chain decisions is return on investment. Focusing on this one objective can often help everyone see the big picture, and look beyond the functional supply chain metrics such as capacity utilization or transportation cost.
Purchasing in supply chain management
Purchasing (or procurement) is the function that buys the materials and services that a company uses to produce its own products and services. The basic goal of the purchasing function is to get the stuff that the company needs at the lowest cost possible; the purchasing department is always looking for ways to get a better deal from suppliers. Some of the most common cost-reduction strategies for a purchasing manager are
- Negotiating with a supplier to reduce the supplier’s profit margin
- Buying in larger quantities to get a volume discount
- Switching to a supplier that charges less for the same product
- Switching to a lower-quality product that’s less expensive
On the surface, any of these four options looks like a simple, effective way to reduce costs and therefore increase profitability. But each of these options can have negative long-term effects, too. For example, driving a supplier’s profit margin too low could make it hard for them to pay their bills — or even force them out of business. While you might save money in the short term, you may have to end up spending even more time and money to find a new supplier in the future. In other words, it would actually increase your total cost. Many purchasing decisions can also have direct effects on the costs for other functions within your company. For example, sourcing lower-quality raw materials might lead to higher costs for quality assurance. Buying in larger quantities might lead to an increase in inventory costs.
Your total costs include all of the investments and expenses that are required to deliver a product or service to your customer.
Logistics of supply chain management
Logistics covers everything related to moving and storing products. This function can go by different names, such as physical distribution, warehousing, transportation, or traffic.
Inbound logistics refers to the products that are being shipped to your company by your suppliers. Outbound logistics refers to the products that you ship to your customers.
Logistics adds value because it gets a product where a customer needs it when the customer wants it. Logistics costs money, too. Transporting products on ships, trucks, trains, and airplanes has a price tag. Also, whether a product is sitting on a truck or gathering dust in a distribution center, the product is an asset that ties up working capital and probably depreciates quickly. The goals of the logistics function are to move things faster, reduce transportation costs, and decrease inventory. Following are some ways that a logistics department might try to achieve these goals:
- Consolidating many small shipments into one large shipment to lower shipping costs
- Breaking large shipments into smaller ones to increase velocity
- Switching from one mode of transportation to another, either to lower costs or increase velocity
- Increasing or decreasing the number of distribution centers to increase velocity or lower costs
- Outsourcing logistics services to a third-party logistics (3PL) company
You can see an example of the conflicts that can occur between logistics and purchasing: Logistics wants to decrease inventory, which may mean ordering in smaller quantities, but purchasing wants to lower the price of the purchased materials, which may mean buying in larger quantities. Unless purchasing and logistics coordinate their decision-making and align their goals with what is best for the bottom line, the two functions often end up working against each other and against the best interests of your company, your customers, and your suppliers.
Operations of supply chain management
The third function that is key to supply chain management is operations. Operations is in charge of the processes that your company focuses on to create value. Here are some examples:
- In a manufacturing company, operations manages the production processes.
- In a retailing company, operations focuses on managing stores.
- In an e-commerce company or a 3PL, the operations team may also be the logistics team.
Operations managers usually focus on capacity utilization, which means asking “How much can we do with the resources we have?” Resources can be human resources (people) or land and equipment (capital). The operations department is measured by how effectively and efficiently it uses available capacity to produce the products and services that your customers buy. Some common goals for operations teams include
- Reducing the amount of capacity wasted due to changeovers and maintenance
- Reducing shutdowns for any reason, including those caused by running out of raw materials
- Aligning production schedules and orders for raw materials with forecasts received from customers
Although increasing operations efficiency sounds like a great idea, sometime it actually creates supply chain problems and does more harm than good. Companies may invest in increasing their capacity only to find out that their suppliers or logistics infrastructure can’t support the higher production levels.