Does your team create problems for the supply chain?

    Mycroft assistant: When building a supply chain, it is important not only the automation of work and abstract quantitative values ​​as such, but also the solution of organizational issues and the solution of problems with interaction in the company. Management should take into account and be aware of the difficulties associated with building an effective supply chain, and organize at the appropriate level the interaction between the various departments. If this is done, then the synergistic effect obtained as a result of solving organizational issues and the application of automation methods will give a much greater effect for constructing an efficient supply than the use of only one single component. For our part, we can solve the automation issue (by offering the Mycroft Assistant expert inventory management system),

    The main problems associated with communication within the company in the context of building an efficient supply chain were well described in an English article by the well-known consulting firm McKinsey (founded in 1926; specializing in management consulting; 17,000 employees), which we bring to your attention in the Russian translation .

    Does your team create problems for the supply chain?

    Coordinated work between departments is an important step towards building a modern supply chain.
    (C) McKinsey, January 2011 | byChristoph Glatzel, Jochen Großpietsch, and Ildefonso Silva

    Creating a global supply chain that will work great in our world with ever-increasing complexity and uncertainty is much more difficult than new asset approaches or creating long-term strategic assessment forecasts risks in production and supply. Organizational problems also make a significant contribution, since decisions related to the supply chain influence (and are subject to influence from the outside) both the sales department, and the marketing, production and other departments.

    In any case, as a result of the work, we can only get a set of compromises. For example, should a company transfer production of goods to a factory with a low cost of production in order to reduce costs if this entails an increase in delivery time? Will the reduction in the company's assortment, designed to reduce production costs, affect the ability of the marketing department to reach out to the client? When will the benefits of a quality service cover the costs that the company will bear to provide this service?

    Procurement, sales, and marketing specialists often see these problems through the prism of their own problems and areas of responsibility, and this often leads to misunderstanding between them. In this light, a recent global company management study by McKinsey, revealed the lack of awareness in various departments of the company that each of the parties influences the formation of the supply chain in the form in which it operates, and the absence of this awareness is the main barrier to starting a compromise.

    Ineffective cooperation has long been a sore point for the good organization of supply, but despite this, the problem is not solved, and the costs associated with this problem are constantly growing. If today the company does not have the opportunity to agree even on one working supply chain, then there will be a lot of problems when the company will deal with several integrated supply chains, each of which requires an individual approach. In this situation, for example, to ensure short-term and long-term goals, a “simple” decision can be made: transfer production to a more expensive, but at the same time, closely located plant, to protect against demand volatility and reduce transportation costs.

    In solving this and more complex problems in the organization of supply, one cannot do without the participation of top management of the company. The result is visible when leaders work together to find points of interaction where their joint work can best influence the outcome. We distinguish three problems where the interaction between departments can give the best effect to create a flexible and efficient supply chain.

    Issue # 1: Supply and Sales

    In organizing efficient supply, a constant struggle is being waged against volatile demand. Since the unexpected peak of demand leads to the unexpected expenses associated with the need to ensure this demand. Also, there is a problem when a poor sales forecast leads to a shortage of goods in a warehouse, missed sales, or an excess of goods in a warehouse that can only be sold at a discount. Each of the sales and supply departments spends a lot of effort to predict demand and demand volatility, and then blame each other if their predictions do not match reality.

    If these departments worked together, then they would be able to discover the underlying causes of volatility and together influence it. Such an approach will lead to significant, and, most importantly, rapid, qualitative changes in the work of the company. The result of joint work - in the long run, such interaction will allow you to quickly and consistently respond to unforeseen circumstances. This is the most important result, taking into account the uncertainty that will always be present in even an established supply chain. Here are a couple of examples that demonstrate the effect of collaboration.

    The first is an auto parts supplier, whose sales department receives quarterly bonuses for sales. Buyers know this, and trying to win on this situation, hold orders until the end of the quarter, knowing that they will be given big discounts to close quarterly sales goals. And for logisticians this is a headache, since it is necessary to ensure the entire quarterly volume almost at the same time, by the end of the quarter, which significantly loads the company's logistics capabilities and increases costs. To solve this problem, the procurement director and the sales director worked through the issue, and came to a decision on how to make the demand more predictable, and it was possible to distribute the demand evenly throughout the quarter. The key decision was made as follows: cut the opportunity to provide discounts at the end of the quarter, but instead, gave the opportunity to give discounts on sales, loyalty and when participating in marketing events. The company also developed a new structure for rewarding sales managers for ensuring an even distribution of goods supplies throughout the quarter.

    The second example is a global manufacturer of manufactured goods. The company determined that conducting marketing campaigns among only five customers leads to a significant change in demand, which makes the main contribution to the overall volatility of the company's demand. Although the marketing plan was designed to increase company profits, marketers did not take into account the impact of supply volatility on supply. With the help of the opportunity to stretch the marketing campaign for several months, and, when selling the campaign, taking into account the needs and possibilities of the supply chain of the company, the company managed to smooth out the volatility of the demand by 25%.

    But when the company released a new marketing plan, managers saw another problem: many customers, without effectively managing their level of service, sporadically placed an order for unreasonably large volumes of goods. The company was able, through the joint efforts of its supply and sales departments, to work out with its customers a single effective process for generating orders. As a result of teamwork, the uniformity of the process of ordering and delivering goods was ensured, from which both sides benefited.

    Problems like these are common to most supply chains. Without paying attention to these problems, companies may benefit in the short term, but lose in the long term, when the joint work of departments allows us to build an effective and stable supply chain of goods.

    Problem No. 2: Supply and Service

    The second problem, which has existed for a long time, but becomes more acute when the company is trying to build a flexible global supply network based on the client level of service. How fast should the delivery be? Should some customers receive goods faster than others? What should be the minimum level of commodity security? In our experience, companies mainly rely on the sales department in these matters, who make decisions without understanding and not taking into account implementation problems and the costs incurred to ensure the set indicators.

    When the supply and sales departments work together, then, taking into account the factors arising from the accepted indicators of the level of service, they can avoid problems that arise from the wrong decisions. This stage was passed by one supplier of chemical goods, whose sales department forced the logistics department to reduce the delivery time from three days to two. This goal was achieved, but only by increasing the storage space and using more labor, while loading vehicles was carried out in a less efficient way than before the change. All this led to an increase in logistics costs up to 5%.

    This might be acceptable, under certain conditions, but upon closer examination with the participation of the head of the logistics department and the head of the sales department, it was revealed that most customers do not mind that the delivery of goods was instead of two days - three, four or even five days . For customers, service was really important only in the first 24 hours. So, returning the delivery time of orders back to three days, the company returned back its level of distribution costs. At the same time, the company additionally launched a special 24-hour express delivery with a premium rate. As a result, this did not significantly increase the company's costs, but made it possible to expand its business.

    With the increasing complexity of the supply chain and the growing assortment of the company, the importance of making the right decisions about the level of availability and speed of delivery of goods is only growing. A company that wants to cope with this task should increase the level of interaction between the departments of supply, sales and service.

    Problem No. 3: Supply and Extension

    Addressing key issues that complicate supply chains is the next positive result of teamwork. We take the difficulties resulting from the expansion of the product range. The sales and marketing department is actively working to add new products to the assortment, expand market niches, and meet customer expectations. In the process of this, the assortment is actively growing and many niche products are appearing. For example, from one manufacturer, we found that approximately one third of the 6400 SKUs in their assortment together account for only 1% of all revenue.

    Such problems lead to high costs, since products with a low volume of production are more expensive to manufacture than products that produce a large volume (economies of scale). The same company estimated that the cost of niche products was 129% higher than bestsellers. Also, working with such products led to additional administrative and organizational costs. And finally, this leads to costs in the field of supply - maintaining a high level of accessibility of goods is complicated by the growth of the assortment. When the company calculated all the costs incurred, the result was overwhelming - it turned out that 25% of their assortment was just “dead” money.

    Seeing these figures, the company decided to reduce the range. But, you also need to understand that rashly cuts in the assortment, based only on the sales volume of the goods, is also bad practice. Some low-speed goods must be represented in the assortment, and only the joint work of the supply and sales department will be able to correctly identify positions that are reasonable to leave. This work does not exclude the need for optimization and segmentation of the supply chain, but allows you to correctly prioritize.

    To summarize

    Top management of the company is a place where all the problems stated above should be solved. But, as practice shows, many managers do not devote too much time to supply problems. From the data that we collected, it follows that no more than 26% of respondents indicated that joint work is being carried out within the company on issues related to supply chains. More than 38% said that the manager does not take part at all, or very rarely takes part, in resolving supply issues.

    We believe that this is a mistake. The leader gives a plan for his team, and in the hands of the leader inspire and demonstrate by his own example the need to solve supply issues with the participation of all departments of the company. But do not limit yourself to that. In one of the best established supply chains in a company that we have ever seen, a manager took part in procurement with missionary zeal. This manager always tried to keep abreast of supply issues in the company, visiting stores he always asked the line staff about how his decisions influenced the work of the store, including in terms of logistics. He collected feedback and discussed at meetings problems with the procurement and supply departments, which inspired the managers of these departments to work independently “in the field” in a similar way.

    In order to get the most out of it, the manager should start by asking himself five questions that (in our experience) will identify problems in the interaction that prevent the supply department from fully realizing its potential

    1. The production facilities are in the right place, and for today, and for tomorrow’s situation?

    2. Does the sales department do everything possible to ensure that demand is uniform and predictable?

    3. Are customers offered the level of service that they really need?

    4. Does my marketing department ask me to expand my assortment to many niche products whose cost is too high?

    5. When deciding on a purchase, were our supply capabilities considered?

    Low levels of interaction and narrow thinking often prevent companies from getting more out of their supply chains. In the future, with the increasing complexity of supply chains and instability, solving these eternal problems will become an urgent necessity from the usual competitive advantage.

    The authors

    Christoph Glatzel is the head of the McKinsey Cologne branch, Jochen Großpietsch is the head of the Barcelona department, and Ildefonso Silva is the head of the São Paulo branch.

    For our part, as a company engaged in the automation of supply, we can only confirm that indeed - not all problems lie only in the area directly related to quantitative indicators and automation of work. Issues of interaction within the company are no less acute, and management should make every possible effort to establish normal interaction within the company between departments. As a result of this, it will be possible to organize high-quality and efficient supply, which will ultimately reduce costs and improve the quality of the company.

    Well, with questions relating to forecasting automation, inventory management, building plans and other related work with the supply - you can contact us at Mycroft with this. Our automated expert inventory management system Mycroft Assistant helps small and medium-sized businesses avoid overstocking or shortages in stock, reduce costs and expenses, and increase company profits. By analyzing sales history and current balances by department, Mycroft Assistantforms a forecast and gives recommendations on which goods need to be purchased, and on which trade delivery is required. And also forms a plan of sales and purchases in future periods. The system replaces manual analysis and work with Excel, which allows the company to develop and work efficiently without attracting additional staff.

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