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What Is Supply Chain Optimization? An In-Depth Guide

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A smooth-running supply chain is essential to the success of any organization. In today’s competitive marketplace, consumers expect to get the items they want, when and where they want them. Things like inventory shortages can quickly cause customers to lose brand loyalty, so a well-optimized supply chain is essential for any organization’s growth.

What Is Supply Chain Optimization?

Supply chain optimization is simply the methods companies use to optimize supply chains to perform at peak efficiency. Supply chain optimization is measured by key performance indicators such as gross margin return on inventory invested, operation expenses, speed of product delivery and more. The goal of any supply chain optimization effort is to deliver products to customers as quickly as possible while keeping operating costs low. This requires supply chain managers to focus on balancing the costs and time invested in areas such as inventory, manufacturing, transportation and delivery, fulfillment, customer service, etc.

As you can see, the supply chain optimization process must address multiple factors simultaneously, and it can be complicated. To simplify things, the process is generally broken down into three steps.

What Are the Steps of the Supply Chain Optimization Process?

While each company’s supply chains may differ, there are three main phases to the supply chain optimization process. These include supply chain design, supply chain planning and supply chain execution.

1. Supply Chain Design

Supply chain design is the beginning of the supply chain optimization process. It focuses on network design processes, including demand forecast, supply planning, warehouse locations, etc.

2. Supply Chain Planning

Supply chain planning focuses on coordinating assets to optimize fulfillment and make sure customers get items on time. Supply chain planners look at delivery, inventory planning, etc. during this phase with the goal of balancing out supply and demand across the supply chain.

3. Supply Chain Execution

The goal of supply chain execution is to make sure execution-based applications and systems are being utilized effectively across the supply chain. These systems include tools for inventory management, warehouse management, transportation management and even international trade management. This phase also includes utilizing supporting execution-based applications such as order placement management systems and supply chain visibility software.

What Are the Objectives of Supply Chain Optimization?

Supply chain optimization strategies can vary dramatically across different businesses and industries. Simply put, no two supply chains will be identical. However, there are some overall goals that most supply chain optimization efforts will consider. Here are a few examples:

Inventory Optimization

Correctly balancing inventory levels can significantly raise overall profits for an organization. But inventory optimization can be tricky. On the one hand, having too much inventory in stock can lead to unnecessary storage costs. On the other hand, not having enough inventory in stock can lead to loss of business, as customers turn elsewhere to obtain the out-of-stock items.

Inventory optimization helps companies balance supply and demand by predicting what inventory to stock, when to stock it, and where to store it. This creates the proper supply and demand ratio that enables customers to purchase the items they want when they want them. It also helps with faster delivery times. With this in mind, it is easy to see how inventory optimization is one of the most critical components of optimizing a supply chain network.

Streamlined Shipping and Fulfillment

Modern customers expect to receive their orders in a timely manner, and companies with fast shipping and streamlined fulfillment processes consistently come out on top. Because of this, logistics is an important part of supply chain optimization. Having an order delivered quickly requires that manufacturers, distributors and retailers all play their part. If these different parts of the supply chain don’t work together to support logistics and shipping processes, it can have an overall negative effect on a company’s ability to fulfill orders. A well-refined logistics process, on the other hand, can help drive revenue, reduce shipping costs and increase customer satisfaction.

Efficient Processes

A well-managed supply chain is an efficient one. One of the main goals of supply chain management and optimization is to cut out unnecessary processes and make the remaining ones as efficient as possible. Since the elements of a supply chain are interdependent, making one process more efficient can have domino effect, increasing performance across the entire supply chain.

Higher Profits

As seen in the examples above, one of the main end goals of optimizing a supply chain is to increase overall profits. This is done in multiple ways, such as lowering “waste” (products that don’t make it to market), lowering delivery costs, lowering operating costs, etc.

Lowered Costs

On that note, lowering the costs of getting a product from manufacturing to fulfillment is another main goal of supply chain optimization. A good supply chain manager will focus on lowering both overhead (fixed) costs and variable costs. Fixed costs are costs that stay the same regardless of production volume, such as warehouse rent, staff salaries and machinery depreciation. Variable costs depend on the volume of product being moved along the supply chain and include things like the cost of raw materials, and distribution and delivery costs.

Customer Retention

Lastly, the ultimate goal of supply chain optimization is satisfied customers. Happy customers are repeat customers who will tell others about your product. Without them, there is no growth. Today’s marketplace is quickly evolving to deliver better products, faster service and lower prices, so it is important to put customer satisfaction at the forefront of any supply chain optimization strategy.

A good example of a way that companies lower labor costs while increasing customer satisfaction is real-time package tracking that allows customers to track their packages in real-time. This removes the need for a customer to call to check up on a package and eliminates the need for a call center with dedicated employees trained to deal with these requests.

How Is a Supply Chain Optimization Plan Created?

The first step in optimizing a supply chain is creating a plan. This includes:

Strategic Planning

This part of the planning process looks at a company’s goals and predicted demand for items. These things are used to examine needed steps in inventory management, transportation and logistics and distribution. This is the level where organizations adapt to changing market expectations from the top down. Adopting new practices to keep up can be the difference between growth and failure in today’s competitive marketplace.

Tactical Planning

Tactical planning narrows things down by focusing on the next one to two years of a company’s supply chain strategy. Tactical plans include estimated timing for each step of the plan, capital requirements (such as increased warehouse space) and any specific skills or software required. This part of the plan also covers outside consulting and services.

Operational Planning

This step of the planning process narrows down further to day-to-day actions needed, such as plans and programs. Operational planning also starts to allocate resources to different areas. It is also where performance measures are used to ensure the supply chain is operating at peak efficiency. Operational planning can cover monthly, weekly and daily activities needed to enable a supply chain operating at optimal efficiency.

Contingency Planning

The last part of an air-tight supply chain optimization planning process is a contingency plan, which allow you to plan for worst case scenarios. For example, you can have a contingency plan to deal with the loss of a major supplier or a labor shortage. Coming up with solutions to all your worst-case scenarios can offer you more security in the event of an emergency or unexpected issue. 

These steps allow companies to form a comprehensive supply chain optimization plan that covers long term goals, short-term actions needed to reach those goals and any issues that could arise to derail progress.

What Are the Most Important Steps of Supply Chain Optimization?

While supply chain optimization varies depending on a company’s goals and the specifics of the supply chain, there are a few areas of focus that generally offer the most results. Here are a few supply chain optimization techniques to focus on as you begin optimizing your supply chain:

Integration

Quite simply, integration refers to understanding all parts of your supply chain and making sure they are optimized to work together. Having a relatively secure supply chain in today’s quickly changing production landscape requires understanding and communicating with each step of your supply chain. The better connection and understanding you have with the players along each part of your supply chain, the more secure your processes will be. This can be accomplished with manual communication, but it also often requires the implementation of supply chain software and applications that can give you real-time data on suppliers, current obligations and contracts, business transactions and current issues occurring along your supply chain.

Communication

This one seems simple, but breakdowns in communication are responsible for a large percentage of supply chain issues. Keeping up with your employees and suppliers and facilitating an open line of communication between all the players in your supply chain network is essential for success when optimizing your supply chain. Whether by phone, email or texts, the value of open and consistent communication among supply chain players cannot be underestimated. An important part of maintaining good communication is training your employees in soft skills such as collaboration and relationship management.

This allows your employees to maintain the crucial lines of communication between your company and your suppliers, giving you early insight into any issues that arise. This gives you more time to strategically address problems before they become unmanageable.

With companies sourcing from more and more vendors across global supply chains, keeping up with communication has become more challenging than ever. The good news is that many applications and software solutions are now available to help bridge communication gaps and keep all players in the supply chain up to date with any changes or developments in real-time. This brings us to another crucial part of the supply chain optimization process – utilizing technology to your advantage.

Technology and Software

Supply chain optimization technologies have revolutionized the way supply chain issues are found and addressed. Large businesses benefit immensely from artificial intelligence (AI) powered solutions that are designed to do things such as keep track of your inventory and automate order and fulfillment processes.

Some of the most common supply chain optimization software and applications include warehouse management systems, inventory management tools, logistics tracking tools, warehouse control systems, order management systems and more. With the sheer variety of applications on the market today, it can be helpful to speak with supply chain optimization experts to get an idea of what solutions could best help with your company’s particular pain points.

Inventory Management

Of all the moving parts of a supply chain, inventory management is one of the most crucial. A mistake made here can quickly become catastrophic. The breadth of inventory shortages during the COVID-19 pandemic brought to light just how crucial inventory management is and how unprepared many companies are to deal with unexpected inventory supply issues. Good inventory management ensures you have enough stock on hand to meet consumer demand without wasting resources maintaining dead stock. This is a delicate balance to maintain, but it is one of the most crucial components of a successful supply chain.

Logistics

Logistics simply refers to the way that goods are moved from one location to another. Logistics impacts many parts of the supply chain. The goal of a good logistics strategy is to get the correct item in the customer’s hands in a timely manner. Logistics can become more complicated when transporting perishable or sensitive items, such as produce or medicines. To bullet proof your logistics processes, it is important to look at each facet of your logistics strategy and have contingency plans in place.

For example, if you were shipping a batch of perishable grocery items to a grocery store, what would you do if the truck being used in the transport suddenly broke down? This is an example of a common issue that should be planned for when you’re considering your logistics strategy. Being able to solve problems that arise quickly is the difference between a happy returning customer and a dissatisfied one.

Supply Chain Optimization Case Study – Briggs & Stratton

The Opportunity

Briggs & Stratton is the world’s largest small engine producer and a leading manufacturer of power generation, lawn and garden and job site products. The company came to enVista for help due to storage capacity issues, high transfer costs across networks, tariff charges, high warehouse costs, service level changes in several regions and acquisitions and demand changes negatively impacting their supply chain.

The Solution

enVista’s supply chain optimization solutions team assessed Briggs & Stratton’s global supply chain. We looked at their current global distribution network, including capacity, costs, inventory, transportation and product flows. We identified several improvement opportunities for alternative network designs. enVista modeled these alternative designs, which were predicted to reduce costs across the supply chain up to 15 percent. It was clear that the company would need an optimized global network design to position inventory closer to customers and improve overall service levels.

Results

enVista worked with Briggs & Stratton to implement a global network redesign that realigned both warehouses and capacity. This allowed the company to support present and future business growth, and the company soon saw supply chain costs drop by more than 15 percent.

How enVista Can Help Your Company

If you’re ready to work on creating a more effective supply chain but aren’t sure where to start, enVista can help. Our supply chain consulting experts have helped major players optimize every part of their supply chains, from sourcing, to demand planning, to inventory management and logistics. We can look at your current processes and come up with both long- and short-term plans and supply chain optimization techniques to solve current and future issues and drive growth and profits. Let’s have a conversation.TM

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