Managing a productive, fine-tuned supply chain is hard work. And yet, it’s also one of the most critical business processes, responsible for delivering value across the entire organization. Keeping it running smoothly is a tremendous challenge, but that’s where supply chain optimization (SCO) can help.
In this guide, we’ll explore the basics of SCO. From what it is and why it’s important to how you can get started, read on for all you need to know about improving your global supply chain network.
What Is Supply Chain Optimization?
Supply chain optimization (SCO) is a systematic approach used to improve the efficiency of supply chain operations. This involves streamlining processes to enhance productivity, reduce costs, and ensure timely delivery — or in simpler terms, anything that will help the supply chain work better. Therefore, SCO covers everything from the procurement of materials to the distribution of finished products.
Typically, this unfolds over three phases:
1. Supply chain design
The design phase focuses on structuring the supply chain to support your overall business strategy. It involves creating an architecture that improves supply chain performance in terms of cost, service, and speed. For example, this stage includes:
- Network configuration: Determining the number and location of suppliers, production facilities, warehouses, and distribution centers. This involves geographic analysis to minimize logistics costs and optimize service levels.
- Technology integration: Selecting and implementing technology solutions that enhance visibility and control across the supply chain. This could require systems for supply chain management (SCM), enterprise resource planning (ERP), or customer relationship management (CRM).
- Partner selection: Identifying and selecting strategic partners, including suppliers, third-party logistics providers (3PLs), contract manufacturers, and technology vendors. This process includes negotiating terms that align with strategic goals and operational requirements.
2. Supply chain planning
The planning phase prepares the supply chain to deliver products efficiently and effectively. It translates the strategic decisions made during the design process into operational plans, like a blueprint for a construction site.
Key activities at this stage include:
- Demand forecasting: Using historical data and predictive analytics to estimate future customer demand. Advanced tools may incorporate machine learning to enhance forecast accuracy over time.
- Inventory management: Developing strategies to maintain an optimal inventory level across the supply chain. This includes setting reorder points, calculating safety stock, and seasonal demand planning.
- Production scheduling: Creating detailed schedules that align manufacturing output with demand forecasts and inventory requirements. This involves planning for maintenance, downtime, and changeovers.
- Resource allocation: Distributing resources like labor, materials, and machinery to maximize efficiency.
- Risk management: Identifying potential supply chain risks (such as supplier reliability, logistics disruptions, and market fluctuations) and developing contingency plans to mitigate them.
3. Supply chain management
The execution phase is where plans are put into action. It involves the management of physical and informational flows to ensure that products are produced, moved, and delivered as planned. In other words, it encompasses daily supply chain operations, such as:
- Order fulfillment: Managing the complete order-to-delivery process, including order receipt, picking, packing, shipping, and delivery. This stage ensures that customer orders are fulfilled accurately and on time.
- Warehouse management: Overseeing warehouse operations such as goods receipt, storage, and dispatch. Modern warehouse management systems (WMS) often utilize automation and robotics to improve efficiency.
- Transportation management: Coordinating the logistics of moving goods from suppliers to production sites and from manufacturing facilities to customers. This includes route planning, carrier selection, and freight auditing.
- Quality control: Implementing quality assurance processes throughout the supply chain, from incoming inspection of materials to in-process checks and final product testing before shipment.
Why Is Supply Chain Optimization Important?
An organization’s supply chain network is one of its most important business functions. For most firms, it’s the greatest source of business value and can make or break its long-term growth and profitability.
However, they’re not easy to oversee. Supply chain managers are facing several daunting challenges, including:
- Customer expectations: As customer demand increases, so do needs and expectations. In 2022, 18% of consumers said knowing a product’s origin and ethical credentials was important, but that number leaped to 43% the following year.
Failing to meet customer expectations can lead to dissatisfaction and loss of business, making it crucial for supply chain managers to maintain a customer-centric approach to their operations. SCO increases supply chain visibility, enabling organizations to give consumers their desired transparency. - Global competition: More competitors are eyeing the audience’s attention than ever before. SCO can help overcome this obstacle by enhancing operational efficiency, reducing costs, and improving responsiveness, enabling companies to better compete on price, quality, and delivery speed in the global market.
- Supply chain disruption: Interruptions in the global supply chain, such as natural disasters, geopolitical tensions, or resource shortages, can severely impact operations and profitability. On average, organizations experience months-long disruptions every 3.7 years, often costing significant business value. However, SCO can help strengthen resilience through optimized demand planning, analytics, and risk management. At APEX 2020, SCOOP TV caught up with Ron Keith to discuss the topic in depth. Watch the interview here.
- Supplier relationships: Managing suppliers is critical for ensuring efficiency. With the right supply chain optimization initiative, companies can enhance communication, align goals, and improve collaboration for mutual benefit.
SCO and contract manufacturing
The complexities of supply chain management particularly impact organizations that outsource manufacturing overseas. In an offshore contract arrangement, original equipment manufacturers (OEMs) typically lack visibility into daily operations. Without experts on location, it’s difficult to enforce quality control processes, reduce lead time, protect intellectual property, and ensure customer satisfaction.
Likewise, OEMs may lack skilled personnel familiar with the territory or who don’t speak the local language. Not only does this make it hard to work with suppliers, but it also means organizations will have a tougher time identifying contingencies in case of a supply chain disruption. Of course, there are also compliance considerations, as offshore manufacturing involves a complex web of standards and regulations.
The good news? Many SCO strategies address these concerns head-on. From supply chain management software to strategic workforce solutions, OEMs can gain more control over daily operations, even from afar.
Benefits of Supply Chain Optimization
Why optimize the supply chain process? In short, doing so can unlock substantial advantages for your business and customers alike:
- Greater operational efficiency: SCO increases efficiency by integrating and automating supply chain operations. This includes synchronizing supply and demand, improving warehouse management, and streamlining procurement processes. Moreover,
Aadvanced analytics offer actionable insights that allow managers to make informed decisions quickly, reducing downtime and enhancing productivity. - Increased cost savings: A focused SCO strategy can reduce costs by up to 25%. These savings typically come from resource optimization, lower procurement and holding costs, eliminated inefficiencies, and fewer workforce-related expenses.
- Improved lead time: By optimizing the supply chain, companies achieve faster production cycles and more agile responses to market changes or customer expectations. This flexibility allows businesses to launch products more quickly and adapt to unexpected disruptions, which significantly enhances customer satisfaction as they receive products faster.
- Stronger resilience: SCO increases supply chain visibility, empowering companies to pinpoint processes vulnerable to disruption. Addressing these weaknesses can strengthen the value chain and keep the business running smoothly.
- Better product quality: SCO tools and techniques monitor production in real time from raw material sourcing to final product delivery. This consistent oversight ensures any deviations in quality are quickly identified and corrected.
How To Optimize Global Supply Chain Operations
There are countless SCO strategies to consider when launching your first supply chain optimization initiative. Let’s break them down into three categories: cost, inventory, and network.
Cost optimization
Cost optimization focuses on reducing expenses without compromising quality or customer satisfaction. In truth, all techniques in some way support cost reduction, but these strategies are especially impactful:
- Lean manufacturing is a production philosophy that emphasizes minimizing waste as much as possible. It’s about eliminating non-value-added activities in the manufacturing process, thereby reducing costs associated with excess inventory, wasted materials, and inefficient labor. Lean principles encourage just-in-time production, which streamlines operations and leads to fewer operational expenses.
- Transportation management targets distribution processes, like vehicles and shipping, through strategic route planning. By minimizing delays and reducing mileage, organizations can significantly lower fuel costs and enhance overall supply chain efficiency.
- Staff augmentation can help OEMs optimize contract manufacturing costs by placing skilled professionals precisely when and where they’re needed in the production cycle. For example, SCRG’s Talent on Demand service reduces the need for permanent overhead costs, adjusts staffing levels to match project demands dynamically, and mitigates the financial risks associated with underutilization or overstaffing.
Inventory optimization
This area aims to maintain the ideal balance of stock at all times — enough to meet customer demands but not so much that it incurs unnecessary costs or risks becoming obsolete.
Some relevant strategies include:
- Just-In-Time (JIT) inventory management is a tactic in which companies receive the exact amount of material they need exactly when they need it. That way, they don’t need large warehouses. And, it’s much less expensive to pivot without shelves of old products waiting to be cleared.
- Artificial intelligence (AI) and machine learning tools simplify inventory management, automatically analyzing historical trends and using predictive analytics to forecast future demand.
- Proper supplier selection is crucial for maintaining lean inventory without sacrificing quality. Outsourcing the process to a third party can help OEMs identify partners that can provide reliable and timely delivery, minimizing the risk of production delays, stockouts, and more. At SCRG, our experts leverage local expertise and a global database of providers, aligning options to your business objectives.
Network optimization
Finally, supply chain network optimization involves configuring the value chain to maximize service levels across the entire distribution and fulfillment network. This could include:
- Route optimization uses algorithms to determine the most efficient routes for transportation vehicles. This not only reduces fuel consumption and delivery times but also maximizes the utilization of vehicle space. Modern GPS and routing software can adapt in real time to traffic conditions, weather, and other variables to keep the supply chain moving efficiently.
- Facility analysis is about choosing strategic locations for manufacturing plants, warehouses, and distribution centers. This strategy involves analyzing factors like customer distribution, transportation costs, and local labor markets to determine optimal locations that minimize logistics costs and delivery times.
- Factory audits are essential for ensuring manufacturing processes are up to standard and that suppliers comply with contractual obligations. By regularly auditing facilities, SCRG helps you verify that production is efficient and effective, minimizing disruptions and delays in the supply chain. We uncover operational inefficiencies, quality control gaps, and more to improve productivity and drive business value.
Maximize Efficiency with Talent on Demand
Global supply chain managers are tasked with ensuring their organization’s most vital business function stays on track. With overseas contract manufacturing a key piece of the puzzle, that’s much easier said than done — but luckily, SCRG is here to help.
Our strategic workforce solutions provide access to skilled professionals who understand local markets, languages, and regulatory environments. From the supplier selection process to flexible Talent on Demand services, you can harness the expertise you need at any point in the product manufacturing cycle.
No need to recruit, hire, train, or compensate — we have it covered. That way, you can focus on what you do best: innovating excellent products for your customers.
Ready to optimize your supply chain? Contact us to augment your team with offshore engineering talent today.