Supply Chain Optimization: An End-to-End Approach to Success
An efficient supply chain can lower customer churn. It’s essential that customers receive the products they order in a timely manner. Further, your company must deliver products efficiently to keep your costs low. In essence, you’ll be applying supply chain optimization.
This post will help you understand what a supply chain is and how you can use it to earn loyal customers.
What is Supply Chain Optimization?
Supply chain optimization is the process of analyzing product pipeline infrastructures to make them more efficient at the lowest cost possible. This process is often ongoing and can include running supply chain network optimization scenarios to learn about and improve the processes.
A supply chain is the ecosystem of your business. However, many of the components of your supply chain are beyond your control. The processes of your suppliers (and their suppliers) are black boxes for most business owners. It’s difficult to optimize any process when you don’t know how they work.
You’re the customer of your supplier, which means you have a voice. You can proactively seek information about their processes to learn more about how to help them improve. Also, you can have them competitively bid to gain insight about their responses and procedures. This information will shed some light on those black boxes.
4 Tips to Optimize Your Small Business Supply Chain
When your business is ready to optimize your supply chain, you may learn about third-party logistics (3PL) providers who offer to help. These 3PL companies often have formal approaches, such as supply chain optimization modeling. While this can help find the strengths and weaknesses of your business strategy and supply chain processes, it may be overkill for the small business owner.
This post concentrates on using four tips that have been effective in optimizing supply chains. It’s divided into two sections: internal and external processes.
The internal processes include inventory control, analyzing current logistical procedures, and handling requests properly. This is a good place for most business owners to start when optimizing any part of their supply chain.
The external processes require contacting supply chain managers and their suppliers (Tier 2) and seeing what optimizations can be made via agreements.
Exercise Inventory Control
There’s no easy answer to the inventory level control problem. While you never want to run out of products to sell to customers, you don’t want to produce in excess of demand. With technology, more companies are turning to Just-In-Time (JIT) inventory procedures.
Current technologies are more efficient to help determine demand. The forecasts produced by artificial intelligence (AI) algorithms are more accurate today, due to big data and better processing power. This development can help companies forecast their production cycles more accurately.
If you think these AI algorithms are out of reach to small business owners, know that there are cloud solutions available from Microsoft, Amazon, and IBM that are affordable and often paid for on an as-needed basis.
Step Back And Inspect Your Logistics Processes
Inspecting your logistics processes will help you gain the insight you need to determine changes to make. Technology will play an ever-increasing role in learning about the interconnected pieces that make up a supply chain. It’s difficult to track these complex networks manually.
Companies are implementing machine learning algorithms to handle the job of optimizing logistics processes, and by extension, the supply chain. As machine learning excels at error reduction, it’s the perfect technology to analyze all the interconnected nodes and layers that make up the supply chain.
Traditional methods of analyzing logistics processes often treated each component in isolation, making it difficult to know how the parts reacted to one another. Machine learning removes that constraint. Of course, this requires staff that’s knowledgeable in working with machine learning algorithms.
Handle Requests Appropriately (RFQ, RFP, RFI)
Information is your best ally when optimizing your supply chain. When looking for new suppliers or trying to negotiate with current ones, have them go through the request process. There are a few types of requests that you can use:
- Request for Quotes (RFQ) – When you’re ready to contract with suppliers, you can submit an RFQ. This often occurs after you’ve gathered information and asked for proposals (RFI and RFP).
- Request for Proposals (RFP) – This document is more detailed and helps vendors understand what types of problems you’re looking to solve in your production process or for customers.
- Request for Information (RFI) – When you ask for an RFI, it’s usually for suppliers that exist in your supply chain. This document allows you to learn more about their processes and position within the network.
Breaking Down Supplier Management Strategies
Every aspect of the supply chain is negotiable. One obvious item is discounts. Be willing to ask for discounts often from your suppliers.
There are other more subtle aspects of the supply chain where you can use the power of negotiation to help increase your profits, lower your costs, or both.
Tier 2 Suppliers
If you haven’t heard the term Tier 2 suppliers, it simply means the suppliers of your suppliers. When you learn about these vendors, you can reach out to them directly. There’s nothing wrong with this practice, as it’s part of your discovery process when optimizing your supply chain.
Ultimately, you’ll be in a better position when you know about all the components of your supply chain. However, you may also help your direct suppliers save money in the process. On occasion, Tier 2 suppliers may want to work with you directly, but this isn’t always the case.
Supplier Inventory Management
When you receive orders, will your suppliers have the raw materials your company needs to fulfill those orders? If you’re guessing during this process, you may run into problems at some point in the business cycle. When you work with your suppliers and discuss your product plans, they can either prepare or alert you that they won’t be ready.
This interaction is crucial to your production process. If they aren’t able to fulfill your orders, you can make the decision to work with other vendors. Although you can still choose to work with this supplier, the ultimate goal is to ensure that your customer receives the order as quickly as possible.
Supplier COGS Management
Most business owners will try to cut costs, including your suppliers. When you learn about their cost-cutting efforts, feel free to renegotiate contracts to grab a part of those savings.
Your ability to negotiate will depend on business conditions and the competitive landscape of your suppliers. During recessionary periods, suppliers will be more willing to give in to your demands. However, no matter what the business condition, a supplier that has no competition won’t likely budge on deals.
Money isn’t the only negotiation tactic. If you can offer suppliers something that helps them save money, they’ll likely pass some of those savings onto you. Establish great relationships with your suppliers. Also, work together as a team to ensure that customers are getting the products they want when they want them.
Our Final Word: Plan Customer Demand Cycles
It’s possible to use the data you collect from your customers to analyze their demand cycles. Your customers may not be good at forecasting their demand, however, which means your forecasts may not be as accurate as you would like.
Conversely, when you work with suppliers (and Tier 2 suppliers), you may get access to demand information and trends that you would not have available otherwise. This helps you better forecast your customer demand cycles. You’ll increase your reach and your business knowledge, which allows supply chain optimization to happen.
At Fora Financial, we strive to help small business owners succeed. We offer tips to help your business navigate the complex arena that many small business owners face. When you sign up for our newsletter, you’ll have instant access to these tips. You’ll be one step ahead of your competitors!
Frequently Asked Questions
Will the Credit Scores for a Business Affect Supplier Negotiations?
When working with suppliers, they may run a credit check on your business, or even you as an individual. Therefore, it pays to maintain great credit.
It’s still possible to work with suppliers when your credit score isn’t great. However, the suppliers may not extend credit or may ask for personal guarantees.
What Is a Good Strategy to Find Suppliers?
There are many strategies that can yield great results. However, one method that has withstood the test of time is trade shows. You’ll gain several contacts when you attend these events.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.