Managing complexity in the supply chain – The Drinks Business - July 2015

It is very easy to over-complicate things. When it comes to the complexities of the supply chain, the wrong approach can lead to frustration, inefficiency and wasted effort.

We have all seen how poor supply chain management can result in too broad a supplier base, low stock availability, excess of obsolete or non-selling stock, frequent emergency orders and delayed or rushed product launches; all of which impact both service and profitability.

Complexity generally emerges from a belief that in order to remain competitive and protect sales, it is necessary to extend the range, eliminate minimum order quantities or constantly run promotions. All of these adversely impact cost and service. However, when properly managed, complexity can have its benefits, adding value in an ever more competitive marketplace. How do you tell if things are too complicated?

A large supplier base is not necessarily bad, but when too many are providing similar products then differentiation is required. In a similar respect, companies should balance the benefits of offering an extensive range by making sure this isn’t clogging up the system with endless low-volume SKUs.

A key tell-tale sign that the cost of choice is outweighing its benefits is when customers and suppliers start complaining that ‘you are a difficult company to deal with’. In order to avoid the uncertainty that can derive from complexity, successful companies have supply chains capable of adapting to fundamental shifts in the business environment.

Complementing this flexibility is a clear awareness of the cost to serve by product and customer, which is then used to understand how profitable each is. Maintaining this profitability may involve pulling supply chain levers such as adjusting pricing mechanisms, consolidating deliveries, pulling out of certain contracts, offering alternative SKUs or encouraging a change in customer behaviour by implementing fixed charges for emergency deliveries or small orders.

Once all of these factors are under control, the challenge is to prevent over complication from creeping back into the system. This requires strong leadership to identify, set and maintain operating rules, clear information for stakeholders on the cost of services and, ultimately, working out for which customers adding complexity adds value, not just cost. It may seem odd to turn to a theoretical physicist for business advice, but Einstein had a valid commercial point with his mantra: ‘Everything should be made as simple as possible, but no simpler.’

 

– Crispin Mair, Director, Crimson & Co.

 

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