Supply Chain Efficiency

Definitions, Metrics and Steps to Improve

What Is Supply Chain Efficiency?

Supply chain efficiency is about how effectively a company gets its products to the right
place at the right time and at the lowest possible cost and how well it uses resources to
produce and deliver goods. Improving supply chain efficiency is a key part of any
business’ overall supply chain management practice.

Why Is Efficiency Important in Supply Chain?

Supply chain efficiency is important because excellence in this area can save a company
money while keeping customers satisfied. An efficient supply chain means shorter order
processing times, better inventory management and faster delivery. It also often means
higher profits.

Supply Chain Efficiency vs. Responsiveness

Supply chain efficiency focuses on delivering quality products to customers at the lowest
possible cost by maximizing such resources as materials and labor.
Supply chain responsiveness focuses on customers’ expectations and strives to provide
a quality product faster.

Supply Chain Efficiency vs. Supply Chain Effectiveness

Supply chain efficiency describes how well a company uses resources to make and deliver
quality goods. Supply chain effectiveness defines how well a company satisfies its
customers with those products.

Experts consider supply chain efficiency to be an internal standard, while supply chain
effectiveness is an external standard that reflects how well the business is meeting the
wants and needs of customers. Experts often equate “supply chain effectiveness” with
“supply chain efficiency,” but it’s possible for a company to have an efficient supply chain
that is not effective. Or, it can have an effective supply chain that is not efficient. The
most successful companies strive for a balance.

Companies can cause themselves expensive problems when they strive for too much
efficiency, as the past several years have shown. A 2014 study, “Reducing the Risk of
Supply Chain Disruptions,” found that companies that made their global supply chains
very lean could suffer costly disruptions. For example, the study cited how Toyota Motor
Corp. incurred billions of dollars in lost sales because of 2010 product recalls. Those
recalls were primarily caused by the car company relying on a single part from a single
manufacturer.

More recently, companies that had embraced just-in-time manufacturing often found
themselves caught short. Leaders need a way to continuously monitor the performance
of their supply chains and must carefully consider the potential for disruptions when
deciding how efficiently they wish to work.

How to Measure Supply Chain Efficiency

You can measure supply chain efficiency through supply chain efficiency metrics. These
metrics often focus on the time it takes for a production step to happen, the cost and
the final product’s quality.
Here are some valuable metrics that measure supply chain efficiency:

▪ Perfect order index:

This is the percentage of orders delivered on time, complete, without damage and
with the proper documentation.

▪ Service rate, or on-time deliveries:

The frequency with which orders arrive is within the promised timeframe.

▪ Inventory turnover ratio:

How often your company sells its inventory in a specific period. Read our guide
on inventory turnover ratio to learn more.

▪ Order accuracy:
The percentage of orders accurately taken and conveyed to your production and
delivery teams.

For companies that want to get more in-depth on measuring, a publication from the
Lulea University of Technology in Sweden, titled “Measurements of Efficiency in a Supply
Chain,” details the 12 top supply chain performance metrics that the Supply Chain
Council recommends through its Supply Chain Operations Reference, or SCOR. The paper
also proposes a new way to measure supply chain efficiency through the Average Logistic
Index.

The SCOR model provides benchmarking tools that help organizations improve their
supply chain processes.

What Is the Supply Chain Efficiency Curve?

The supply chain efficiency curve measures the cost of your supply chain on one axis and
the performance of your supply chain on the other. In general, increased performance
means increased costs.

Companies with efficient supply chains have an efficiency curve that is flatter than
average. Their supply chain performance increases more than their costs do.
Ways to Improve Supply Chain Efficiency

Experts recommend a few ways companies can improve their supply chain efficiency.
Those recommendations range from better use of data and automation to building
better relationships with suppliers.

Here are some top tips to improve supply chain efficiency:

▪ Increase supply chain visibility.

Visibility means better tracking of your product through the supply chain, from
finished production to warehousing and inventory, then to your team for packing
and shipping the product to customers. All of this is considered part of supply
chain execution.

Visibility helps you understand your inventory levels and your efficiency of
deliveries. It can even help suppliers better understand your inventory levels and
adjust their deliveries in response.

Advances in technology are giving companies information on every specific step

throughout the supply chain. Technology is also helping companies respond in
 real-time to problems. A tracking device on each item, for example, tells
companies when a shipment enters a facility. Technology can then provide data
that planners can analyze to predict when a load might be late and make
adjustments.

▪ Develop strong relationships with dependable suppliers.

Good relationships with reliable suppliers are vital. Your suppliers should be
consistent in delivering the products and materials you need, so cost should not
be the only factor in choosing your partners.

To build and maintain good relationships, communications must be consistent.

The supplier must inform your team promptly of issues so you can respond quickly
to changes.

▪ Perform consistent vendor management.

To build products, companies often need many suppliers, with some providing
relatively small amounts of material. Ensuring your systems manage all suppliers
in the same way, to the same standards, can improve efficiency and save money.

▪ Form strategic partnerships that are mutually beneficial.

When choosing partners, especially suppliers, craft contracts that work for both
sides. If one succeeds, both succeed. True partners will work to understand your
requirements and deliver what you need, when you need it.

▪ Automate supply chain processes.

Technology can perform many tasks within your supply chain automatically.
Allowing technology to perform those tasks instead of your staff will reduce errors.
It will also save money.

Automated technology can perform many tasks more quickly and accurately than
humans. That frees your staff to work on higher-level decisions.

▪ Use integrated supply chain software.

As you automate your processes, integrated supply chain software can allow you
to more efficiently accept and fulfill customer orders and manage multiple
 warehouses. And it will help you use supply chain analytics to understand how
everything is working.

▪ Implement and optimize inventory management processes.

You should also use technology to track and manage inventory. That will help you
keep the optimal level of supplies, avoid inventory stockouts and improve your
inventory forecasting.

▪ Enact and optimize a returns management system.

A sound returns management system benefits your customers and your company.
A solution that lets buyers initiate returns quickly and efficiently increases
customer loyalty and satisfaction.

An integrated returns management system can also point out trends and highlight
issues with suppliers so that you can make changes to decrease future returns.
Changes might include better online descriptions or improved quality testing of
certain products.

▪ Use real-time supply chain data.

Inefficiencies can arise suddenly. So don’t just track supply chain metrics quarterly
or even monthly — track daily or at least weekly, with data that’s as “real-time” as
possible.

Real-time information helps you make needed changes quickly. Ensure your supply
chain software can help with continual monitoring.

▪ Leverage new technologies.

You need up-to-date software and other technologies to do the best possible job
in understanding and improving your supply chain efficiency. That might mean
new computerized shipping and tracking systems or mobile device applications
that allow company leaders to make changes when they’re away from the office.
There are new technologies in many other areas that can help your company boost
the efficiency of its supply chain.
▪ Engage and consult with your IT department.
Too many leaders engage with their IT colleagues only on a per-task basis. Instead,
consult with IT regularly. IT leaders have a broad understanding of what the
newest technologies can and cannot do. They will have ideas that others in your
company won’t on ways to improve your supply chain technologies and processes.

▪ Assess and invest in employee development and training.

Humans are still more vital to your supply chain than technology. Therefore, your
company must ensure your employees are well trained in how your supply chain
works and how they contribute to success.

Make sure you routinely provide employees with formal training on your supply
chain systems and processes as well as on-the-job training and mentoring. Well-
trained employees empower your company to improve its supply chain processes
and make them more efficient. Conversely, employees who aren’t well trained
may become overwhelmed and prone to errors.

▪ Research and initiate green shipping and packaging.

More and more of your customers expect companies to engage in business
practices that reduce their carbon footprints and are environmentally friendly. In
supply chains, one area these engaged customers are watching is how you package
your products. More and more shippers are using “ships in own container” — or
SIOC — packaging. That means the product is shipped in its original packaging only
and not placed within another box. Also consider using packaging and filler
materials composed of biodegradable materials.

▪ Develop a supply chain efficiency plan and continuous improvement processes.

Your company, its leaders and employees should have a comprehensive plan to
ensure you’re consistently working to improve supply chain efficiency, not just
maintaining the status quo.

A comprehensive supply chain efficiency plan will guide company leaders to

create, monitor and adjust processes. Nothing stays the same for long in the
business world. To succeed, companies must continually adapt and improve.
▪ Start a supply chain council.
Many companies create supply chain councils made up of company leaders and
employees who understand the inner workings of the supply chain. The council
makes sure systems and processes are as efficient as possible and fit with the
company’s overall business strategies. Councils are also tasked with choosing and
tracking metrics, addressing issues with suppliers and evaluating new
technologies.