Is your supply chain optimized for efficiency or effectiveness? Well, ‘what’s the difference?’ you would ask.
Efficiency is related to the traditional approach to supply chain management and optimization. The cost was always the important indicator of performance. Therefore, supply chain strategies always revolved around improving internal processes to save as much money as possible during procurement. Cost minimization is not a bad thing, especially when it is a result of process automation. However, supply chain effectiveness is a much broader and better way to analyze supply chains.
Supply chain effectiveness not only looks at costs but rather opportunities to create value and a long-term competitive advantage for the company. Costs are an internal performance metric. Optimizing efficiency alone could mean hurting other stakeholders. Effectiveness, therefore, is a more outward-looking metric and tries to protect all stakeholders while increasing business agility.
Conflict Between Efficiency and Effectiveness
An organization aiming for efficiency seeks to minimize costs in all its processes. It will aim to procure raw materials and have them delivered at the lowest price possible. However, this might sacrifice the quality and the timeliness of delivery. The result might be lower customer satisfaction levels or an inability to charge higher prices due to quality problems.
In addition, optimizing efficiency alone might mean compromising agility. For example, getting all crucial raw materials from one supplier might help reduce the cost per unit. However, it leaves the organization badly exposed in case of disruptions such as port closures, natural disasters, or unfavorable political climate in the suppliers’ country.
The Boeing Case Study
In the late 1990s, Boeing was losing market share to Airbus. The company decided to embark on a mission to minimize its airplane construction costs. Outsourcing is a norm in the airplane construction industry because no one company has all the required technology and capacity. Initially, Boeing’s outsourcing was around 35-50% for its flagship planes. They planned to increase the outsourcing of the Boeing 787 to 70%.
This move was meant to achieve lower assembly costs while spreading the financial risk of the development process to suppliers.
Arguments against large-scale outsourcing are that the mother company is giving out knowledge to suppliers and that profits too will be outsourced. There is also the element of giving up control and not being able to anticipate delays. Boeing suffered many setbacks due to the fragmentation of the development process. The project went many billions of dollars over the budget and the company failed to honor orders from customers.
The company was chasing efficiency but it ended up losing more.
Here are several ways to increase supply chain effectiveness.
Using Technology to Improve Efficiency
One of the most important ways to improve decision-making in supply chains is to invest properly in technology to improve efficiency and serve customers better. Automating repetitive processes in warehouses not only increases the speed but also improves accuracy in order processing.
Investment in improving logistics is equally important. Amazon combines its internal logistics with third-party outsourcing to great effect. The company knows that third-party deliveries are great for minimizing costs. However, there are customers who value same-day delivery and will pay a premium for it. For this reason, same-day deliveries are fulfilled by Amazon’s internal logistics teams while other orders are fulfilled through partners. In both cases, the company is creating value.
Strategic Relationships with Suppliers
Instead of simply pushing suppliers to give you the lowest prices possible, companies seeking effectiveness should look for opportunities to create value for either party. One way to do this would be through sharing data analysis. For instance, a manufacturing company might provide suppliers with a performance analysis of the parts they supply.
There are cases when a large company has enough resources to invest in improving the internal processes of suppliers. Oftentimes, this is done through mentorship programs of organizational leaders or sharing of technology. When a supplier improves their capacity, they are in a better place to produce. They can standardize quality and withstand disruptions. A good example of such a supplier management model would be agricultural processing companies investing in educating small-scale farmers through one-on-one training, manuals, and even giving them improved seeds.
Vendor Selection and Outsourcing Partners
When selecting vendors, it’s important to evaluate their commitment to continuous quality improvement. How will they respond to feedback regarding the quality of their work and timeliness? How effective is their communication style? Any problems noted from the beginning should never be ignored. When optimizing effectiveness, the goal is to develop a long-term mutually beneficial relationship with vendors.
When outsourcing manufacturing, a proper capacity evaluation is required. Toyota has successfully managed to work with a select group of manufacturers and as a result, minimize the average production time of their cars. However, Toyota still determines the designs and specifications of every car. They also closely monitor the work of these partners for quality assurance purposes. Cost is not the only driver of strategy but rather the desire to grow the value and competitiveness of the whole company.
Pursuing Effectiveness in Your Company
Your company should not be just optimizing efficiency. It needs to look at metrics indicating its ability to respond to an ever-changing business environment. Agile businesses today use real-time information to make decisions. The use of e-procurement software enables the collection of crucial data and the application of analytics to draw insights.
ProcurePort is the world’s leading provider of e-procurement software. Contact us for a free consultation to find ways to add value to your operations through automation and analytics in your supply chain processes.