What is supply chain optimization?

Supply chain optimization is the adjustment of a supply chain’s operations to ensure it is at its peak of efficiency. Such optimization is based on certain key performance indicators that include overall operating expenses and returns on the company’s inventory. The aim is to provide customers with the products at the lowest total cost possible while retaining the highest profit margins. To achieve these goals, managers have to balance costs incurred in manufacturing, inventory management, transportation, and fulfillment of customer expectations.

Considering how complex supply chain optimization is, it’s best to tackle this business process as a long-term activity. What works is a blend of cost and service changes over time that take into account variations in resource costs, carrier changes, customer demographics, and other factors that require constant examination.

If a company is considering a merger or an acquisition, or is concerned with financial results, supply chain optimization is the first option to examine. Upon investigation, an organization might find several causes, such as high transportation costs, service levels that are not optimal, or unhappy service providers along the supply chain.

As the number of suppliers increases, expectations change or may grow ad hoc. The response to intense demand from the market has led to e-commerce companies diving into direct-sales capabilities without integrating them into other channels. This approach often leads to higher costs and fragmented management. Supply chain optimization is what helps create better supply chain standards.

What is the process of supply chain optimization?

The supply chain optimization process begins with a systematic and in-depth analysis based on forecast demand. This step is followed by creating a production and inventory plan based on the existing forecast. The entire exercise considers incoming raw materials or elements, the manufacturing process, transportation, and distribution. During this step, organizations should also examine every possibility for better e-commerce integration via omnichannel strategies.

Most companies work with professional services providers or consultants to implement technology and the organizational changes necessary to achieve tangible, real-world results.

There are three phases to a successful supply chain optimization process:

1. Design

This phase focuses on network design processes such as the location of warehouse facilities, the flow of products to and from suppliers and customers, and all the strategic objectives of manufacturing operations, including demand forecasting, supply establishment, planning, and scheduling.

2. Planning

This phase focuses on creating a strategic deployment, planning inventory, and coordinating assets to optimize the delivery of products, services, and information that flow from suppliers to customers. The purpose of this phase is to balance supply and demand.

3. Execution

This phase addresses all execution-based applications and systems such as warehouse and inventory management, management of transportation facilities and efficiency, and international trade management. It also investigates execution-based applications that play a support role in the supply chain process, including real-time decision-based support systems, supply chain visibility, and order placement management systems.

A supply chain network is a dynamic ecosystem. As it grows, so does the risk and uncertainty associated with activities across the supply chain. The factors that affect performance may be internal or external; they could be competition-driven or environmental. Considering the wide range of factors, numerous supply chain models have arisen. The model an organization chooses is based on specific supply chain optimization issues that are business-specific.

There are a number of components that commonly make up an organization’s supply chain optimization model:

  • Inventory
  • Receipt of product and their storage
  • Processing orders
  • Despatching and distribution
  • Customer support and service systems

When placed together, these elements allow a business to tackle most supply chain optimization issues and create a well-rounded, seamless operation, ensuring work with all trade partners goes smoothly.

What are the benefits of supply chain optimization?

There are many benefits a business can expect from quality supply chain optimization software:

Cost reductions

With supply chain optimization, many unnecessary costs can be eliminated, streamlining expenses of business operations. All repetitive or ineffective processes can also be eliminated or automated as needed. The focus can be moved to meeting customer needs with timely, accurate deliveries. With supply chain cost optimization, a company can have a lower inventory which helps free funds prevent stock from becoming obsolete. Additionally, supply chain infrastructure expenses can be better managed by optimizing delivery processes, logistics, and warehousing capabilities.

Increased revenues and profits

With supply chain optimization tools, managers can get an insight into all activities and work on speeding up supply chain processes. The customer is likely to be more invested in the process and can have a better experience. Orders are accurately delivered, on time, and the company becomes more responsive to customer requirements. The result is a reduced investment-to-return-on-investment cycle and quick settlement of invoices, which supports customer loyalty.

Better supplier performance

Digitizing the supply chain enables access to real-time insights into the supply chain. Suppliers’ performance can be evaluated, which paves the way for improved performance where needed and rewards it, too, where appropriate. It lays the foundation for a system of continuous supplier performance improvement that’s essential to strategic sourcing decisions.

Enhanced supply chain collaboration

The organizational ecosystem comprises suppliers, partners, vendors, and all the interfaces connected to them. Bringing these entities together in a single supply chain optimization solution enables better collaboration and innovation.

Every stakeholder can access updated information, and as an integrated team, they can make smarter business decisions, supporting better supply chain continuity and avoiding risks.

Integrated supply chain management

With supply chain optimization software, you can integrate and manage all supply chain capabilities from a single point. Companies can gather insights on a host of elements that are part of the supply chain system–from its visibility to sales forecasting, management of cash flow, customer loyalty, timely delivery, and credit control. Such end-to-end visibility of the whole supply chain system allows for transparent operations.

Better quality

Managing quality in a supply chain involves an end-to-end production system from procuring raw materials to product delivery. Supply chain optimization techniques help organizations bring in quality at each stage, allowing for improved efficiency and waste reduction. These techniques also provide a foundation to support supply chain planning optimization, ensuring the process follows established quality standards at every stage.

What are the top supply chain optimization techniques?

There are several techniques to optimize the supply chain:

Cost optimization

Cost optimization involves a mix of short-term operational refinement and longer-term transformative changes. Every cost segment in the supply chain system is investigated to see where a reduction or saving may be possible. Costs can be related to orders and their payments, storage of raw material or products, transportation, and waste.

Inventory optimization

Inventory optimization helps organizations gauge the ideal inventory level they need to maintain to ensure customer satisfaction, and where, along the supply chain, inventory optimization should happen. It uses advanced algorithms to examine and quantify the causes behind demand-supply uncertainties. This evaluation occurs across a multi-level supply chain and offers possible solutions. With supply chain inventory optimization methods, a company determines the least quantity of inventory needed across the whole supply chain network.

Network optimization

To stay a step ahead of the competition and to ensure operations are at the highest possible profitability, companies must constantly examine how their supply chains will handle any change they may undergo. With network optimization, companies can compare their current supply chain systems to a range of possible scenarios and ascertain how they will react. Based on this, organizations can set strategic plans and goals, and on-board the right suppliers to achieve these goals. The outcome of supply chain network optimization is that an organization should be able to execute supply chain strategies at reduced cost and risk.

Software choices for supply chain optimization

There are many supply chain optimization software options that can deliver maximum performance across the entire supply chain:

Supply chain optimization platform

This is a model-based platform that employs artificial intelligence and analytics to clearly define the features of the international supply chain ecosystem. These highly effective models create platforms that account for every significant facet of the supply chain, from sourcing to manufacturing and distribution and related financial aspects of the whole operation.

B2B integration platform

This platform furnishes digital integration, automation, and the optimization of critical supply chain processes. These are processes that ascertain how an organization works with its customers, suppliers, and trading partners. Besides improving costs, digital transactions, speed, and productivity, additional benefits include enabling collaborative relationships and modern work practices. Companies have full visibility into the supply chain from a single platform, allowing them to work in close quarters with partners to securely enhance performance and expand business prospects.

Supply chain analytics platform

This type of platform offers visibility across the supply chain and provides the necessary actionable insights based on business-to-business (B2B) transactions. These insights help organizations handle crucial supply chain processes. The software uses predictive analytics to further optimize outcomes based on historical data and present-state transaction flows. It can make predictions on future supplier and customer performance, help refine trading partner performance, and drive revenue and profit.

Embedded applications

Embedded applications integrate into supply chain optimization platforms and provide core capabilities with extra functionality. These applications can address use cases such as supplier management or order and invoice processing, or product catalog management. The ideal service provider gives businesses a wide range of complementary applications that are easy to embed in a supply chain optimization solution.

Five best ways to implement supply chain optimization

There is no single formula that ensures success in a constantly evolving, dynamic market. However, there are five tips that organizations should consider with supply chain optimization:

1. Think global but act local

This aspect is important to consider when strategically examining supply chains or planning value chains. Businesses need to start thinking about global opportunities for procuring goods and services when working on their international needs. Manufacturers need to look into the various channels available to ascertain the supply chain process’s ideal levels of inventory.

Companies need to consider their carbon footprint levels and work toward becoming greener organizations. When creating a supply chain, it is important to optimize locally any investments in key resources of infrastructure, assets, or technology.

2. Focus on core competencies

Many companies make the mistake of taking on more than they can handle. In an ideal situation, shorter, intense jobs should be done in-house, with the longer repetitive tasks outsourced to a third party. This option is a better value proposition for the long term. Focusing on the core competencies of your staff can make a world of difference to operations.

3. Improve collaborative efforts

By improving collaboration between the manufacturer or supplier and the retailer for demand data-based forecasting and inventory management, organizations can reduce inventory and build on fulfillment rates and product availability at the specific point of purchase. Better collaboration helps ensure that a company has a lean supply chain, which improves margins and profitability. Today’s technology enables several collaborative opportunities, such as mining the massive proliferation of data and using computing power advances and better connectivity to optimize testing in various fields.

4. Use mobile-based technology

Mobile, cloud-based technology works toward improving field sales, merchandising, and marketing. Making available information on provenance, origin, contents of the item, and special information on demand (possibly related to sustainability, localized content, or manufacturing methodology) helps brands connect with their consumer directly.

5. Set up a responsive supply chain

A company can extract data from a range of places, including the point-of-sales or even social media. This information helps businesses identify changes in trends and demand before they happen. This knowledge helps the supply chain respond quickly to a sudden surge in sales and helps organizations improve service levels and organize inventory to gain optimal benefits. Such multi-channel programs can help manage and change expectations from supply chain forecasting and planning structures, and enable a responsive supply chain.

The future of supply chain optimization

Responding to customer mandates quickly and accurately, with fulfillment as a top priority, is crucial for supply chain managers. Supply chains are no longer linear; they have evolved to become complex international ecosystems with several stakeholders. With the goal of providing a premium customer experience, supply chain optimization can be a game-changer.

Supply Chain Optimization diagram