Why is it important to increase your capabilities in logistics and Supply Change Management (SCM)?
Supply-customer networks all over the world have practically collapsed. However, few people realize that even before their collapse, the competitiveness of companies depended on the ability to manage them.
Between 2018 and 2019, we asked companies questions inspired by a previous study by Deloitte. Despite several simplifications, we obtained results that confirm the original idea.
Img.1 The Impact of Complexity and Capabilities in Supply Chain Management on Company Profitability.
From our survey, it is evident that 47% of companies have a simple value chain where they achieve lower profitability (value chain – y).
We will consider 47% of companies with initially lower complexity and lower profitability as the baseline (i.e., 100% with which we will continue to work), and we will assess how much their performance (profitability) increases when the company increases the complexity of its value chain or enhances its capabilities in supply chain management.
Companies that utilize more complex value chains increased their profitability by at least 32%. Firms with higher complexity in the value chain and low capabilities in SCM constitute 32% (upper-left quadrant).
Conversely, if companies did not increase complexity but enhanced their capabilities in SCM, their profitability increased by 49%. There are only 12% of such firms (bottom-right quadrant).
The presented results indicate that SCM capabilities have a higher impact on profit and are also more challenging for companies to improve. That’s why fewer firms are heading in this direction for improvement. However, what happens if we increase both the complexity of the value chain and our capabilities in SCM?
These two parameters (complexity of the value chain and implementation of Supply Chain Management capabilities) create a significant synergistic effect. Therefore, the increase in profitability is understandably more than the sum of the growth in these two quadrants. Companies that excel in both disciplines have demonstrated an increase of more than 164%.
But there are only 9% of companies that excel in both disciplines. You must be wondering what these top 9% of companies are doing differently. These differences can be categorized into five key areas of simplicity.
Complexity – geographic location, unique product, demanding customer
Flexibility – in how they produce and distribute (right amount, right time, right place)
Transparency – stability in customer demand, transparent supply chain
Collaboration across SCM – work with customers and suppliers, communication instead of transactions
Technologies – invest in technology that supports the achievement of all of the above (connected MRP, use of blockchain for quality of supply)
Each of these topics involves a lot of work and a lot of know-how that is available in the world today.
The results cannot be achieved without a significant amount of work, and this work should be done as soon as possible. The gap between typical companies and more advanced ones in terms of complexity in the value chain and knowledge in SCM widens very quickly.
At our practically oriented trainings, we also present an example of optimizing the supplier-customer network in one international concern. We focused on the following measures:
- Mapping the connections within the supplier-customer network.
- Value stream mapping (VSM) within the company as well as in the entire supplier-customer network.
- Setting basic metrics for individual companies within the supply-customer network, e.g. the time frame in which the company is able to achieve correlation between inputs and outputs.
- Analysis of profitability and losses within the supplier-customer network and elimination of artificial variability of the supplier-customer network (the so-called bull whip effect)
- Alignment of logistics concepts and risk analysis for logistics concepts and planning.
- Increasing logistics efficiency in various components of SCM (Supply Chain Management).
- Setting the principles of Total Flow Management (TFM).
- Support with the help of digitization and smart solutions.
These measures led to an increase in the profitability of the entire supplier-customer network by more than threefold.
If you are addressing similar questions, we would be happy to share our experiences and discuss your intentions in the field of logistics, SCM, or digital transformation of logistics.
