Saturday, April 26, 2008

Driving Complexity out of Your Supply Chain

Recent research from consultancy PRTM has found that there are major differences in the way companies manage supply chain complexity, which have significant impact on cost and profitability.

The Impact: “Simplifying” Supply Chains is one of the most frequently heard executive themes of the past few years. This research offers some practical ideas.

The Story: An article in the most recent issue of the Supply Chain Strategy newsletter from Harvard and MIT includes an article on “Driving Complexity out of Your Supply Chain,” by Rick Hoole from PRTM.

Based on preliminary research from a study PRTM conducted on supply chain complexity, Hoole notes what most SCM professionals know only too well: the supply chains of most companies, especially manufacturers of industrial and hard goods products with broad bills of materials, are increasingly complex.

The biggest driver: SKU proliferation, as the choices and configurations offered to buyers have exploded over the past decade. Shorter product lifecyles and rapid order-delivery cycles also play an important role in growing complexity.

“Complexity makes a supply chain inflexible and inefficient,” Hoole writes. “It also hampers on time delivery and creates problems for product quality.”

So what’s company to do?

Hoole offers three good suggestions:

Use the Right Metrics:

Most companies don’t really use metrics that track complexity, Hoole argues. Supply chain leaders focus more rigorously on product and component rationalization, he writes, and use metrics such as the number of configurations offered and the number of component parts more effectively than others.

Align the Supply Chain and Product Platforms

Centralization of the Supply Chain function is important in reducing complexity because of the leverage it provides to eliminate duplicate efforts and standardize components and processes. More importantly, it is critical that supply chain have strong representation on product development teams, looking for opportunities for parts standardization and to reduce complexity. A supply chain executive must be a member of the new product approval committee.

Focus on SKU rationalization

A supply chain executive needs to maintain a strong voice for continual pruning of weak, low volume and unprofitable SKUs.

Does reducing complexity impact the bottom line? PRTM’s preliminary research says definitively yes.

The top 20% of the study respondents in terms of adopting approaches such as rigorous product lifecycle management and frequent SKU rationalization has profit margins 3% higher than average, with significantly lower inventory levels versus their industry peers.

Summing it up, Hoole writes: Complexity is best addressed at the CEO level, because remedies such as product-portfolio reduction may be seen as putting revenue at risk. But a supply chain executive can have an important impact by understanding the problem and helping the company move forward on the issue.”

How do you think companies can best get their arms around supply chain complexity? Is reducing complexity really possible, or is the key to manage whatever level of complexity you have? What would you add to Hoole’s suggestions? Let us know your thoughts.

Article Research: Courtesy of the Supply Chain Digest Journal

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