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Optimizing the Supply Chain: Back to Basics

Written By: Khudsiya Quadri
Published On: December 29 2008

As economic conditions worsen, organizations are stumbling on variety of customer demands ranging from superior services to lower costs. These extra requirements not only cause added strain on the organization’s supply chain, but makes achieving financial goals difficult. Already many organizations are struggling to respond to customer demands due to shrinking margins caused by competition and slack in supply chain.

Companies are looking at additional ways to

  • maximize profit through manufacturing, planning, and scheduling best practices

  • deliver products on time and reduce finished goods inventory

  • reduce work in process by improving manufacturing response time by building on lean manufacturing models

  • capitalize on resource utilization across the organization


It’s not easy to uphold an excellent manufacturing organization. Poor manufacturing shows throughout the organization with unavoidable cost in areas of operations, customer service, and product manufacturing.

To overcome these issues, organizations have to react quickly to customer needs while maintaining low costs. To meet customer needs, organizations have adapted inventory optimization techniques. And depending on the nature of the business, optimization techniques could involve optimal stock levels or optimal staging.

Whether optimal stock levels or optimal staging is implemented, it’s necessary to use proper tools to evaluate information and optimize operations, which will help in making right decision at the right time. The tools could range from ERP system implementation to a standalone inventory optimization tool.

The supply chain of any organization starts and ends with the customer in mind; starting from customer demand and ending with delivery to meet the demand. The following are the key areas of supply chain network in most of the industries:

  • Customer: Customers start the process in the chain, when they wish to purchase a product from the company. The customer contacts the organization’s sales department to either get a quotation or place a purchase order for a specific quantity for delivery on a specific date. If the product requires manufacturing, the sales order will generate a requirement for the manufacturing facility. Distributor have to look at the seasonal demand, inventory levels should not run short or be in excess of short term demand.



  • Planning: As soon as the requirement is created by the customer’s sales order, the planning division will generate a production plan to manufacture the products needed to fulfill the customer order. To produce the products, the organization requests raw material which needs to be received in sufficient time for manufacturing.



  • Purchasing: To purchase the raw material for manufacturing, the purchasing division of the organization gets all the requirements from the MRP system.  Once all the requirements are gathered, the purchase orders are placed with selected suppliers to deliver the required material to the manufacturing plant at the requested date.



  • Inventory: Once the raw material is received from the supplier, it’s verified for quality and accuracy. The supplier sends an invoice with the shipment or later, depending on terms of the agreement signed with the purchasing department. The raw material is stored until the manufacturing plant or shop floor needs the material for consumption. Many organizations put in place just-in-time (JIT) or kanban processes to control the flow of material.



  • Manufacturing: Depending on the production plan, the material is ordered from the warehouse for the shop floor. Once the product is manufactured, the final finished goods are returned to the warehouse or shipped to the customer, depending on the delivery date.



  • Transportation: Finished goods which need to be delivered to the customer are sent out for delivery via the most cost-effective mode. Once the goods are shipped an invoice is sent for the delivered products.


For the optimization of the whole supply chain network, each portion of the network needs to be performing at its highest level of efficiency. For example, customer demand is so volatile in today’s economic conditions that the organization needs to have a flexible system in place where it can move the demand inward and outward like a spider web. As the demand changes, the planning and the purchasing team needs to work parallel to each other to provide better lead times from suppliers and offshore vendors.

Many techniques can be used to manage the inventory, including a consignment process or vendor management inventory methodology. Doing so helps an organization focus on its core competency while the VMI provider manages inventory efficiently, and cost effectively.  Another area where companies must show flexibility is in transportation, especially with fluctuating oil prices—many organizations are considering managing the transportation of inventory and finished goods through a 3PL.

Bottom line: optimization lies in the entire supply chain, not just in one piece of the puzzle.

Because information is critical to the performance of any business, companies (especially those operating with and within supply chains) cannot neglect the optimization of information. Information needs to be gathered, organized, and saved in one place for easy access and analysis. To achieve high revenue and greater customer satisfaction, companies are now using high tech tools by implementing supply chain management processes and enterprise level software to gather, mange, and utilize information in the most efficient way.

For an optimal supply chain network, the organization needs to remember a few key things about supply chain IT:

  • Choose an IT system which targets the company’s main success drivers.

  • Take baby steps when implementing IT systems and make sure each step brings value to the entire supply chain.

  • Management should understand that every IT system has a degree of complexity.

  • Many organizations wrongly think that once a supply chain system is put in place, they won’t have to manage any supply chain issues. This is a completely incorrect approach. Management should keep focused on the supply chain at all times due to changes in the customer landscape and competitive market place.

  • What the future entails nobody can predict. That’s why when selecting an IT system managers need to include the future state of the business in the decision process.


Organizations need to synchronize the supply chain including production, logistics, material, and other resources across the entire supply chain network. To reduce waste in the manufacturing process, it is necessary to have the appropriate tools and technology in place. Reducing inventory and lead times across the supply chain can drastically improve the performance of the organization. As companies around the globe look towards internal processes for reductions in cost, they are adopting more synchronized manufacturing to gain a competitive edge.
 
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