The Great Enabler: Supply Chain Management

September 18, 2018 | Dr. Stephen Timme

In the past, supply chain management (SCM) was viewed as a method for slashing logistics costs while relentlessly optimizing inventory. Today, SCM is viewed as a critical enabler of enhancing financial performance.

According to a recent survey by Finlistics and Tompkins International, the top priority for SCM organizations is driving top-line growth. Sure operating expenses will always be important, but they’re increasingly being evaluated in a broader strategic context.

Why the change?

We all know the stories about disruption in industries that have caused companies to become more customer-centric. However, this shift has also lowered profitability.

To accommodate the transition in customer expectations and profitability, the supply chain must also be transformed.

This has heightened the need for SCM managers and solution providers to clearly show executives the value of their SCM initiatives as it relates to company goal alignment and financial performance enhancement.

Enabling Top-Line Growth

SCM provides multiple ways to help grow the top line. Figure 1 shows the connection between revenue growth and examples of SCM enablers.

Enhancing the customer experience is one of the primary ways SCM is being leveraged to drive the top line. Figure 2 shows the relative performance for some of the SCM enablers using median and 1st quartile.

Source: Finlistics Solutions

In this chart, we used the retail industry as the example.

For on-time deliveries and in-stock position, median performers are 97 percent to 98 percent effective. Customer order cycle time, on the other hand, is 50 percent less effective. It takes the median company a little over three days longer to deliver goods once they are ordered.

This partly explains why many companies are implementing initiatives such as locating inventories closer to customers, investing in technologies to better forecast demand, and improving inventory visibility. 

In Achieving Revenue Gains from Distributed Logistics, it was predicted that enhancing the customer experience through distributed inventory would increase online sales 3.7 percent.

Illustrating the related benefit of lowering returns by 3.0 percent, the top line benefit is an increase in revenue of $6.7 million per $100 million in sales.

Enabling Bottom-Line Benefits

Managing SCM costs has always been a top priority. But today they are being managed within the context of a company’s goals and overall financial performance.

As shown in Figure 3, SCM provides a wide range of enablers to enhance the bottom-line profitability.                 

Initiatives are being implemented to manage SCM better; this is partly due to decreasing profitability related to factors such as increased competition, labor costs, and regulation.

Keeping with our retail example, from 2013 through 2017 the gross profit margin for apparel stores dropped a staggering 430 basis points. This means that for each $100M in sales gross profit is $4.3M lower. A similar pattern is exhibited for many other industries.

Source: Finlistics Solutions

Figure 4 shows the bottom line in the retail industry before taxes.

In this example, there are benefits to moving from the median to the 1st quartile performance for some of the SCM enablers. Remember that the goal is to optimize overall financial performance, which often involves trade-offs between the top-line and bottom-line.

The results show that while improvement in all areas yields significant results, better management of reverse logistics delivers the greatest value.

The outcome is not surprising.

For many years, companies have focused on better management of transportation, warehouseing, and inventory. But today, companies who focus on driving reverse logistics efficiencies can manage the bottom and top line better.

Next steps

Whether you are an SCM manager or solution provider, it’s imperative to show how your proposed solution aligns with a company’s goals and strategies.

Demonstrate how better management of SCM enablers enhances financial performance. Then tie the benefits to the top-and-bottom line.

With that being said, good luck and good night.

Want to learn more on top SCM KPI’s? Download: Does Your Supply Chain Management Solution Drive Growth?

Posted in Key Performance Indicator