Supply chain disruptions brought on in recent years by war, climate change, and shipping delays have companies taking a closer look at how to better handle emerging and potentially costly supply chain risks outside of their control.
Coming out of the COVID-19 pandemic, companies recognised the limitations of the traditional just-in-time (JIT) inventory management method, devised in the 1970s to eliminate overhead costs, reduce warehousing needs, and increase efficiency. In today’s business environment, refreshing supplies only as needed risks having empty shelves and losing business.
Establishing buffer or safety stocks, also known as just-in-case (JIC) inventory management, makes for a more robust supply chain, which is why companies have shifted towards a more stock-focused approach.
Our interviews with industry experts from the manufacturing, retail, fast-food, and service sectors suggest companies not only apply JIT and JIC inventory management methods strategically but also customise their supply chains. This is done, for example, by finding alternatives to scarce supplies or finding multiple suppliers for one item in different countries. That is seen as a more robust way forward than adopting JIC strategies wholesale, considering the practicalities and cost implications of higher inventory levels.
Customisation has to take into account the cost structure and where the value is in the supply chain. It also aims for unbroken supply, enhanced business resilience, and improved contingency planning. To build the supply chain model that is right for a specific company, all factors that impact the value chain have to be looked at to ensure optimal consumer and customer satisfaction and the desired growth, profitability, and capital efficiency. (See the sidebar, “How to Optimise Supply Replenishment,” at the bottom of this article.)
For example, the UK’s National Health Service developed its own stock of essential personal protective equipment (PPE). A fast-food operator recognised the need to move from a JIT to a JIC approach, given the exponential growth and disruptions the company experienced, but is very concerned about the capacity of its restaurants to allow higher inventory levels. A global food manufacturer responded by multi-sourcing products, including local sourcing, and investing in automation to manage supply chain issues. And a pizza manufacturer changed its recipes to replace ingredients that were difficult to obtain.
As the examples show, making supply chains more resilient can differ from company to company. But cost efficiency and consumer/customer satisfaction are key drivers regardless of customisation, and interviewees suggested finance consider cost drivers and value propositions.
Data management and collaboration
Data transparency throughout the value chain, from the purchase of raw materials to manufacturing and selling the final goods, is crucial to optimise a supply chain.
The more data is available, the better companies can manage supply chain relationships, map dependencies, identify chokepoints in the supply chain, and make informed decisions. Interviewees also highlighted the importance of identifying the pros and cons of JIT and JIC inventory management, using opportunity cost data, and having reliable data sharing in place.
One interviewee stressed the importance of cross-functional analysis and having a well-developed sales and operational planning process for managing supply chain relationships.
Additionally, interviewees from a food manufacturer and a major grocery retailer emphasised the importance of data management and customer collaboration, particularly in cases of sudden and acute demand surges. They also emphasised the importance of data sharing across stressed supply chains for better utilisation of resources.
A senior data analyst touched on the potential of technology tools for data sharing and open-book accounting. Blockchain-based smart contracts, for example, allow for the secure and anonymous sharing of cost data across the value chain. A Canadian grocery retailer uses blockchain-based smart contracts to resolve discrepancies with logistics suppliers.
Some data marketplaces, which are platforms for trading data, use cryptoassets to incentivise data transparency across the value chain. The senior data analyst was sceptical of those data marketplaces because they leave the quality assurance of the data entirely to community dynamics.
Product prioritisation
During the pandemic, some manufacturers, facing difficult issues related to workforce availability and supply chain shortages, had to inform customers that they were having to reduce the range of SKUs (stock-keeping units) available. For example, these manufacturers limited the package sizes of certain products or stopped selling difficult-to-source products that were in low demand.
Restrictions on daytime deliveries in cities led fast-food chains to product prioritisation. The limited space available in the delivery vehicle meant that they figured in the optimum product mix to be included to satisfy most customers, even though certain products were significantly reduced in volume or omitted altogether, to maximise profitability.
Post-pandemic, product prioritisation has, in some cases, led to a more flexible and responsive approach to product manufacturing.
Sustainability considerations
Behavioural changes are accompanying the conceptual changes in supply chain management. Awareness of climate change and its environmental contributions, such as greenhouse gases, has increased. As a result, companies are moving away from disposable products, incentivising suppliers to be more sustainable, and generating revenue streams from reusing and upgrading products.
Swedish furniture retailer IKEA, for example, started buying back its used furniture and selling it second-hand at a discount but above acquisition cost. In the UK, some high-street businesses are adopting similar strategies. Retailer John Lewis announced it is working with retail service provider Timpson on repairing customers’ clothing; and retailer Marks & Spencer is working with Sojo, a clothing alteration and repair startup.
These fledgling efforts help companies meet sustainability targets, and they remove waste from supply chains and impact supply chain costs, but it is unclear to what extent such initiatives are mainstreaming.
Supply chain finance
Increasingly, supply chains are regarded as quasi-organisations and, with secure technology and cost data transparency, greater efficiencies can be achieved. To that extent, there has been considerable growth in the utilisation of supply chain finance, where a highly rated customer arranges through a finance house for their tier 1 suppliers to be paid earlier than previously, at a very low discount. The customer retains cash for longer (extending their accounts payable period) without penalising their suppliers.
Enthusiasm for this source of finance, which enables the benefits of early payment to cascade up the supply chain to all tiers, has not been dented by the collapse of Greensill Capital. The finance house used supply chain finance to cover “prospective receivables” — leading to the collapse of the company and eventually the demise of Credit Suisse as a separate entity. The UK Parliament’s Treasury Committee conducted an inquiry into the activities of Greensill, to which this article’s lead author gave evidence. Financial reporting disclosures were tightened as a result.
As corporate social responsibility and sustainable resilience are viewed as important, there’s also a move to utilise supply chain finance to motivate behavioural change — for example, by offering supply chain finance at a lower discount rate to suppliers who sign up to the customer’s ESG (environmental, social, and governance) commitments.
Best-in-class consumer goods companies design their optimal supply replenishment strategy by balancing cost, sustainability, customer satisfaction, on-shelf availability, and freshness. Execution of the strategy determines the overall costs along the value chain that are right for the company, from buying and holding raw materials to manufacturing and supplying the finished goods.
Best-in-class companies take into account a sequence of seven key factors when deciding whether just-in-time, just-in-case, or something in between is the best approach for the company, consumer, and customer:
- The importance of a particular portfolio/SKU (stock keeping unit), which is determined by an SKU’s shelf life and its profitability for the business.
- The frequency and velocity of production (daily/weekly/monthly) based on how quickly and how much of the goods are sold.
- Consumer and customer consumption patterns based on, for example, electronic point-of-sale (ePOS) data from cash registers and how much the company sells to the customer (sell-in) compared to how much the customer sells to the consumer (sell-out).
- Considerations regarding nodes in the logistics network, such as the location of a factory compared to the location of a distribution centre and customer points of consumption.
- Current safety stocks across the value chain, which are determined by forecast accuracy (the lower the forecast accuracy, the higher the safety stocks).
- Current customer ordering patterns and replenishment lead time.
- Balance of current inventory carrying cost, transportation cost, and sustainability impacts (such as greenhouse gas emissions from truck deliveries) compared to the cost of new replenishment requests.
Richard Bruce, Ph.D., FCILT, is lecturer in supply chain accounting and finance, and John Cullen, FCMA, CGMA, is Emeritus Professor of Management Accounting — both at Sheffield University Management School in the UK. Srini Burra is former global head of supply chain performance management at Nestlé and honorary ambassador at the Grantham Centre for Sustainable Futures at Sheffield University. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at [email protected].
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Articles
“How to Use Digital Technology to Upgrade Your Supply Chain“, FM magazine, 6 July 2023
“Untangling the Supply Chain Every Day“, FM magazine, 4 March 2022
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