“LOGIKO aims to help overcome these knowledge, alignment, and results deficits and implement your top-notch strategy together with you.”
– LOGIKO TEAM
On one side, we have input elements of the supply chain, such as:
- Procurement and suppliers, along with related sourcing strategies,
- Storage, including the network of distribution centers and the quantity of stock in them,
- Production with its capacities,
- Types of primary transport and related costs, and lastly,
- Types of channels (distributors, retail, online sales, etc.) through which goods will be distributed.
On the other hand, we have output elements or outcomes such as sales data, costs, and profits. When we simply list all these elements and add various strategies such as outsourcing (off-shoring) and backsourcing (near-shoring, on-shoring), and scenarios like labor shortages, rising energy costs, and other disruptions, then we get a complex system that is very difficult to manage. Even if you are a smaller company, you likely have a widespread supply chain around the world. Even if your suppliers are in Europe, they probably have suppliers from China or some other far-eastern country.
Why Create a Supply Chain Model?
“Plan for what is difficult while it is easy, do what is great while it is small… That is why wise (business) people never do what is great, and therefore, they achieve greatness.”
– Sun Tzu, The Art of War
SUPPLY CHAIN MAPPING
Main Elements of the Supply Chain Model:
Procurement and Suppliers
When I talked to some clients during the lockdown, they shared how they were surprised to find out that they are part of a longer chain than they initially perceived. Initially, they thought they shouldn’t experience shortages and procurement issues for products sourced from suppliers in Italy. However, they then realized that their suppliers source their components from China. This was a wake-up call for those who hadn’t grasped that they are part of global supply chains and believed that their chain only extended as far as the eye could see.
The Covid crisis has highlighted how sourcing strategies, such as whether to have multiple suppliers with surface (transactional) relationships or one to two suppliers with deeper relationships, can mean the life or death of a company. In many industries, procurement optimization has become more critical due to the adoption of multi-sourcing practices and growing concerns about supplier risks, sustainability of procurement practices, and the impact of procurement on corporate responsibility. Even Toyota, a longtime advocate of sole sourcing strategy (a strategy with one supplier per product category with whom deeper relationships are built), has shifted to dual or multi-sourcing strategies.
My favorite analogy from lean management is the one that says, “Inventory hides problems.” The image depicts a lake (whose level indicates the inventory level) where a company sails, and sharp rocks (problems and deficiencies) lie beneath the lake’s surface. This analogy suggests that if we have high inventory levels, they will temporarily conceal issues in our processes, bottlenecks, unreliable suppliers, planning problems, etc. However, the management’s task is not to hide problems but to solve them.
Striking the right balance between material costs, transportation, inventory capital, and service levels to customers is crucial. With mapped inputs such as the cost of capital, logistics capacities, and transportation, decisions on optimizing cyclic and safety stocks can be easily made. These decisions can have significant financial effects and impact the service level.
In the manufacturing sector, strategic decisions related to production planning, including the location of facilities and machine capacity, are directly linked to tactical decisions on the utilization of these resources. The most common segment in which I have assisted clients in recent years is – how, after the reopening of the economy that was closed due to the pandemic, to ensure sufficient capacity (human, production, and logistical) for increased demand. Often, the issue is not a lack of capacity, but rather processes being clogged with artificial bottlenecks, organizational misalignment with the company’s strategy and goals, and a lack of proper planning.
“The most common segment in which I have assisted clients in recent years is – how to ensure sufficient capacity (human, production, and logistical) for increased demand.“
– LOGIKO TEAM
These organizational deficits and tactical decisions that need to be made directly impact procurement decisions and the downstream supply chain, serving as key drivers of overall efficiency. Therefore, the supply chain model we aim to design should have tools that connect strategic and tactical decisions with operational outcomes in the supply chain.
“With mapped inputs such as the cost of capital, logistics capacities, and transportation, decisions on optimizing cyclic and safety stocks can be easily made, which can have significant financial effects and impact the service level.“
– LOGIKO TEAM
In package delivery, distribution, and retail industries, transport planning has a strong impact on strategic planning. This particularly applies to inbound transport and ‘last-mile’ distribution, where decisions on the allocation of transport resources and the choice of carriers or transport methods must align with the company’s network design and goals.
Therefore, it is crucial to determine whether the strategic goal is to increase market share and coverage or if the main goal is cost reduction and profitability. The configuration of logistics facilities and their proximity to the customer affect the company’s ability to capture a larger market share but can also increase costs.
For example, deciding on the configuration of logistics facilities without considering last-mile transport costs can dramatically increase distribution costs. Therefore, the design of the distribution network should include a more detailed assessment of transport and routing costs, considering elements such as customer density, logistical infrastructure, and the expected level of service.
SUPPLY CHAIN MODEL
To overcome supply chain complexity, and avoid incongruence of supply chains with corporate goals, every serious company needs to create a simple supply chain model that incorporates all the listed elements, their relationships, and outcomes. This way, you can test various decisions from procurement to distribution through various scenarios and what-if analyses.