The previous decade was characterised by cheap money leading to a growth-first mindset, the next decade will likely be seen through a different lens, explains Argon & Co‘s Paul Eastwood.
Five essential steps to enhance supply chain efficiency
As we enter a macro environment of more normalised monetary policy, most developed economies also find themselves with historic levels of employment and participation. Therefore, access to both capital and talent has become more difficult and more expensive. Added to this are supply chain pressures, with an increasing focus on resiliency as the terms onshoring, near-shoring and China+1 become ever more popular.
Consequently, companies need to be more creative to find ways to increase capacity to meet demand, while maintaining profit margins. Failure to do so will find businesses falling behind their competition, with external investment likely favouring simple business models with clear opportunity for returns.
We believe there are five practical steps leadership teams can take to help them identify that strategic changes required to maximise return on investment over the medium to long term.
Simplify – focus on the core
When businesses are in growth mode, cost levers have less focus and systems and products can often be bolted onto existing systems to enable growth at speed, resulting in a clunky, expensive and inefficient operating model. Here are two examples worth considering:
- SKU rationalisation – this needs to genuinely simplify the end-to-end supply chain and not just be a small part of it to significantly add value.
- Your business model – just-in-case not efficient and just-in-time carries too much risk. There is a need to move to a new operating model, which adopts smarter practices is required to achieve the simplicity required.
Ensure compatibility first and foremost – an amazing solution that is incompatible with your suppliers and/or the wider market will not work. Placing connectivity upfront as part of the architecture of your systems or processes will then provide adaptability. Overall, ensuring your processes and technology allow you to connect with and adapt to the rest of the world with the least friction.
Vertically integrate to increase efficiency
Cost pressures are not unique to your situation, but a challenge facing your competitors, suppliers and clients. Consequently, M&A activity could enhance your supply chain at an attractive cost as long as you have the scale and operating model to unlock the efficiencies. Reducing the number of transactions and steps from the raw materials to the end product inevitably lowers the total direct and indirect costs. By simplifying your business model, you will also make your business more attractive to external investment, helping you to access funds as required.
Lean up (but be smart)
Focus on the areas where you can increase value as well as decrease costs. For example, by digitising your supply chain planning using automation tools like Advanced Planning systems, business logic and AI, you can improve the effectiveness of your supply chain while reducing costs from human capital. Process mining tools can also help you identify bottlenecks, non-conformances and root-cause issues more efficiently. Overall, make sure you are not simply cutting costs but identifying areas where you can reduce costs and add value at the same time.
Prioritise automation, codify processes
To succeed over the next decade, you will need to operate on an automation-first basis, i.e., the first question at each stage of a process or task should be, ‘Can this be automated?’. Not only will this increase efficiency by transferring repeatable processes to machines, but it will also reduce labour shortage issues. This can help reduce or remove the human capital risk and cost – particularly beneficial when facing a tight labour market. The final step is to codify this automation as your own work. A great example here is what Ocado has managed to achieve in this space over the past decade. By codifying your way of working, you are creating IP, which can provide additional income streams or opportunities down the line.
Paul Eastwood, Managing Partner ANZ Argon & Co
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