- A whopping 79% of surveyed companies say that using supply chain optimization techniques improves revenue significantly
- Supply chain optimization is the process of adjusting your supply chain to operate at peak performance
- Use a multichannel approach to build a responsive supply chain
Supply chains are the lifeline of your eCommerce business. Whether you’re a manufacturer, distributor, or retailer, you’re part of an intricate web of logistics.
Supply chain optimization is the process of refining your supply chain to operate at its best. This means finding ways to better align your operations, inventory, purchasing, and distribution.
If done well, optimizing your supply chain can create a competitive advantage for your business. The benefits of supply chain optimization are increased efficiency, reduced costs, and improved overall business performance.
A whopping 79% of surveyed companies say that using supply chain optimization techniques improves revenue significantly. In the age of Amazon, a more streamlined supply chain also translates to happier shoppers, and the superior revenues that accompany investing in customer experience.
This blog walks you through the steps of supply chain optimization. You'll learn the best practices of supply chain optimization, how to improve supply chain management in 10 ways, and the benefits of making these key upgrades.
Table of Contents
What's Supply Chain Optimization?
Supply chain optimization is the process of adjusting your supply chain to operate at peak performance. This means ensuring the optimal placement of inventory and minimizing operating costs, including:
- Manufacturing costs
- Transportation costs
- Distribution costs
- Fulfillment costs
- Customer service costs
What does success look like in supply chain optimization?
If you're delivering products at lower costs with higher profit levels, your'e succeeding. The goal is to achieve the lowest costs and the highest margins while ensuring customer satisfaction.
An examination of key performance indicators (KPIs) like total operating expenses and gross margin return on inventory will show your results. Since the supply chain brings together the production, sales, and financial sides of your business, creating a results-orientated, efficient supply chain can be tricky.
Challenges of Supply Chain Optimization
Supply chains around the world are in a state of flux following the COVID pandemic. Logistics companies are recalibrating to the surge in eCommerce, the subsequent price increases for warehousing, and ongoing political shifts like the US/China trade war.
In other words, supply chain optimization is constantly changing. Being responsive is the best approach. The first step in supply chain optimization is identifying your problem areas. These may include:
- Inventory management: Markets are growing and channels are proliferating. So what's the best placement for your inventory in supply chain? Maybe you can cut last mile delivery costs by storing inventory in warehouses nearby your customers.
- Efficiency: Speedier supply chains tend to be more cost-effective. Look for areas to eliminate bottlenecks and smooth out delays.
- Risk mitigation: From port closures to pandemics to tariffs, it pays to anticipate supply chain disruptions. Build resiliency into your supply chain processes with the right tools, adequate forecasting, and reliable third-party logistics (3PL) relationships.
- Demand forecasting: A key source of pressure on supply chains meeting demand. By anticipating demand with optimal supply, you can better source and distribute goods in a timely, cost-effective way.
- Customer expectations: Customer expectations for shorter lead times and more responsive service (aka The Amazon Effect) is warping the modern supply chain. This strains operations, increases fulfillment costs, and leads to a greater need for technology.
Benefits of Supply Chain Optimization
Creating a responsive supply chain lets you adapt to logistics trends and demands without incurring high costs. Here's what you can expect from success in supply chain optimization:
- Improved inventory management: An accurate sense of inventory levels is vital to cutting costs and ensuring you can meet demand. This lets you avoid out-of-stock scenarios while preventing the purchase of excess products, and the higher shipping costs that come with, plus the added costs of storing excess inventory.
- Better order fulfillment: Streamlined operations lead to faster delivery times and happier customers. By identifying faster transport methods and more efficient delivery methods, you improve fulfillment.
- Customer service: Reliable, timely deliveries lead to fewer returns and lowered customer service costs.
- Optimal decision-making: Better visibility of costs helps you choose the best path forward. Analyzing your cost balance of transportation, distribution, and manufacturing will reveal savings opportunities and operational efficiencies.
- Minimize operating costs: Common areas for savings include planning, managing teams, sourcing, transportation, last mile delivery, and more. Benchmark your costs to compare yourself to industry norms, then adjust from there.
- Better supplier relations: Lean supply chains involve collaborations with key providers that help you reduce inventory, accelerate fulfillment, and ensure product availability via party logistics.
Best Practices of Supply Chain Optimization
An effective supply chain optimization strategy hinges on effective analysis followed by planning. Begin by examining the current state of your supply chain, including:
- Transportation costs
- Provider relationships
- Operational practices
Next, analyze your supply chain with an eye for demand forecasting. How does your current model for production, inventory, transportation, and delivery work to meet this forecast?
To optimize your supply chain, you'll need to bridge the gap between forecast demand and current operations.
Every company's situation varies according to their customers, production, and supplier relationships. There's no standard fix for supply chain optimization, but you should pay attention to a handful of key metrics in your analysis, including:
- Fill rate
- Inventory turnover
- Supply chain time cycle
- Cash-to-cash time
- Days sales outstanding
- Perfect order rate
- Gross margin return on investment
Benchmark your company against industry standards to gauge your performance. Once you've identified areas to save, accelerate or streamline – plan to make these changes in an appropriate window of time.
10 Tips for Optimizing Your Supply Chain Process
If you've decided to take the plunge and look at how to better manage your supply chain, there are a few steps you can take. Here are a few ways to optimize your supply chain network:
1. Outsource Business Activities
If you want to streamline your business, then you may need to consider outsourcing certain aspects of it. Often, businesses shoot themselves in the foot by trying to do everything in-house. Outsourcing things like procurement, logistics, or even customer service can benefit your business and put it on an optimal path for success.
2. Establish Communication Between Suppliers and Retailers
This is perhaps the most important aspect of optimizing the supply chain. It’s crucial that there is good, transparent communication between the retailer and supplier or manufacturer.
This ensures timely fulfillment of demand and avoids any confusion. If you’re using more than one supplier, then this is even more important as you’ll need to build good communication with each one.
3. Use Mobile and Internet Technology
For retailers, mobile technology can be very helpful for marketing, direct sales, and information. The internet is also very important because it allows retailers to communicate by email.
Further, social media allows retailers and customers to judge trends and be proactive. Similarly, retailers can leverage these technologies to offer things like location-based discounts and services to increase sales.
4. Use Centralized Management Software
Optimizing the supply chain process requires all the facets of a business to work cohesively as a single unit. There are many management softwares available that integrate a business’ different departments so they work effectively with each other.
For example, the right software can help your sales, inventory, and finance systems work together. These softwares can make the relevant data available in a centralized database which all the different systems have access to, allowing all business processes to be streamlined.
5. Use a Multichannel Approach for Demand and Supply
Use a multichannel approach to build a responsive supply chain. Inventory management is very important for an efficient eCommerce business, and demands must be communicated to suppliers quickly and effectively. Plus, a multichannel approach will help you plan ahead for your business and assist with forecasting trends.
6. Ensure High-Quality Products
Optimizing your supply chain also means getting superior quality products at affordable rates. For that, you need to understand your manufacturer or supplier very well. You need to know where their strengths are, and what their limitations are.
Shop around until you find one that suits your business’ needs. Create a proposal and request quotes and information from a few prospective suppliers or manufacturers until you find the right one.
7. Plan Ahead
Planning is crucial for timely order fulfillment - it will help you avoid all manner issues with your logistics chain. Urgent order fulfillment doesn’t mean you have to pay more for shipping or air deliveries. However, if you fail to plan, you will rack up significant costs very quickly. Think ahead to ensure appropriate inventory management and order fulfillment.
8. Align with Your Customers’ Demands
Knowing what your customers want (and when they want it) allows you to judge future trends and keep your stock at appropriate levels. Analyze your sales data to determine future demands and trends and communicate these to your supplier(s). This will help you with your inventory management.
9. Use analytics tools
There are many tools available to help you analyze whatever data you have so that you can better understand your market and customers. It’s very important to know things like what your customers want, how they shop, and what seasons are good for your sales. Make sure you’re analyzing your data properly before you make pivotal business decisions.
10. Negotiate and Renegotiate
It’s very important to negotiate with your suppliers to get the best rates possible. But don’t forget that you can go back to renegotiate whenever appropriate. Cost-cutting is the ultimate goal of the optimization process, so you should take every opportunity to do this. Remember: if you can reduce the cost of your inventory, you’ll be able to improve your profit margins.
5 Models of Supply Chain Management
Here are five models of supply chain management to follow:
1. Supplier management
To optimize your supplier completely, you need to remember that your manufacturer also has their own suppliers. They get the parts of raw materials from their suppliers and then manufacturers the products which you buy. This means that there is a two-tier system in place, and you need to negotiate at both levels. That’s because any costs your suppliers save in getting raw materials will ultimately be passed on to you.
2. Management of Supplier inventory
This is a supply chain network optimization model which balances your demand with your supplier’s inventory. If your supplier has too many of your products, then either he or you will need to store it. But, if he doesn’t have enough inventory of your products, then you can lose sales and revenue and your orders may be delayed. So, you need to maintain a careful balance of inventory that must be managed through proper communication.
3. Cost Management
Ultimately, the cost of production is a huge factor in your revenue. The lower your production costs, the higher your revenues. That’s why it’s important to negotiate - and renegotiate - with your suppliers to find a balance between good quality and affordable rates. Some regions - like Asia - offer the best value for money proposition because cheap labour means your costs will be lower.
4. Managing Logistics
Careful logistics management can help you get reduced shipping costs so you can get your orders to your customers at the best rates. You may want to use third-party logistics and warehousing to optimize your shipping and delivery, especially for international sales. Easyship can help with this, so make sure you check our shipping rates calculator to find a courier solution that works for you!
5. Resource Management
To optimize your supply chain, you first need to ensure you’re managing your in-house resources appropriately. You need to check that the staff you have, the systems you use, and the technologies you’ve invested in are all pulling their weight to grow you business. If your technology is outdated or your staff is untrained, you will lose customers and orders, no matter how well you manage your inventory and fulfillment.
How Easyship Can Help
If someone tells you that properly managing your supply chain is the key to performance and revenue growth, you’d do well to listen. If you want to ensure that your business has the best chance for success, then you need to find the flaws in your business processes and remove them.
Once you’ve streamlined your systems, you’ll have achieved what we call supply chain network optimization. Your customers will be happy with their experiences with you, while you’ll benefit from increased sales and revenue. And, now that you’ve ready this question, you know exactly what is supply chain optimization and how to implement it.
Supply Chain FAQ
What are the 4 attributes of the supply chain?
- Integration: the processes and tools that connect the supply chain functions.
- Operations: the day-t0-day activities that move goods and coordinate production.
- Purchasing: the sourcing of goods and services to enable operations and distribution.
- Distribution: the supply chain ends with the customer, and companies use various tools and partners to ensure shipments are delivered in a timely fashion.
What are the benefits of supply chain optimization?
The benefits of supply chain optimization are increased efficiency, reduced costs, and improved overall business performance.
Who has the best supply chain optimization software?
According to software review website G2, the highest rated supply chain optimization software is SAP Integrated, Anaplan, and Oracle SCM Cloud.