Supply Chain Optimization: What it is and 6 Best Practices

Supply Chain Optimization: What it is and 6 Best Practices
American Express
Supply chain optimization can increase business revenue and build resilience. Here’s how to review your supply chain and implement best practices in order to boost efficiency and reduce obstacles.
Supply chains can be a key source of business advantage and optimizing the performance of your supply chain can mean improving your business revenue. Almost 80% of organizations with superior supply chain capabilities have reported above-average revenue growth1 against just 8% of organizations with poorer-performing supply chains. Expand your business, mitigate your risks and keep control of your costs by making the most efficient use of your supply chain.
What is supply chain optimization?

You understand what a supply chain is, now it’s time to optimize it – in other words – making changes to the technology, processes and relationships that power it to ensure your supply chain runs as efficiently as possible, all the time.

Achieving optimal supply chain performance involves building strong relationships with suppliers, good communication, a global reach, effective use of technology and contingency planning, and is usually supported by an effective supply chain management strategy.

Supply chain optimization isn’t something you do just once. The environment in which your business operates changes all the time: the cost of raw materials, the availability of parts, packaging and distribution fluctuate, suppliers go out of business and new ones appear, and customer preferences change. So, keeping your supply chain humming along at peak efficiency requires constant monitoring, tweaking and re-evaluation.

Supply chain optimization depends on the nature of your business. A retailer’s supply chain issues, for example, might be different from those of a manufacturer. For retailers, sales margin is everything. Controlling the cost of supplies can make the difference between a profitable business and one that is barely breaking even. And since retailers are on the front line when economic shocks hit, they need suppliers to be flexible. So, supply chain optimization for a retailer might involve renegotiation with suppliers to improve payment terms and reduce unit costs.

Manufacturing supply chains can be complex, with parts sourced from all over the world. And since maintaining parts inventories is costly, many manufacturers prefer to keep inventories low and rely on just-in-time deliveries. However, if a crucial part fails to arrive, an entire production line may have to be shut down. For that reason, a manufacturing supply chain should be optimized to include contingency planning to mitigate against risks such as distribution problems.

Why is supply chain optimization important?

Optimizing your supply chain means reviewing your supply chain end-to-end and identifying ways to minimize costs and maximize efficiency. Costs can be reduced at every stage of the business process, from buying raw materials to distributing finished products to customers. There are also non-financial benefits, such as faster delivery to customers and speedier resolution of problems.

Optimization also helps managers to understand the supply chain and identify where the “pinch points” are that create fragility. For example, are you critically dependent on a key supplier for a vital piece of packaging? Are there planned road developments that will affect your delivery schedule to a key retailer? Optimizing your supply chain involves building resilience.

Optimizing supply chains can involve cost outlay and disruption in the short term. And the cost-benefit of significant changes needs to be evaluated. For example, breaking a relationship with a long-standing, reliable supplier to switch to a cheaper provider may not prove as beneficial to the business as the cost-saving might suggest.

As you look for ways to minimize disruption and avoid risk, you can take control of how you pay your global suppliers and make international payments simple and secure with American Express' vPayment which enables you to pay suppliers world-wide instantly, using single or multi-use virtual account numbers.

Example of supply chain optimization

Chris Eccles of Employment4Students, a recruitment technology company with suppliers all over the world, used volatile market conditions as a catalyst to rationalize his supply chain. “We removed some suppliers for non-essential services, we scaled some back, and we diversified, taking on new ones who could offer us something different,” he says.

For Eccles, an important learning point from optimizing his supply chain was the importance of flexibility. “The fact that quite a lot of our suppliers were on fairly flexible contract terms was really helpful for us. It's something I’m now very mindful of going forwards when renegotiating contracts or starting relationships with new suppliers to make sure we have flexibility in there to help us with any unforeseen events in the future,” he says. As a result, Eccles plans to continue working with suppliers who were flexible during volatile market conditions and phase out those who weren’t.

How to optimize supply chains

Rajdeep Gahir of Wing It Cosmetics, a bespoke cosmetics manufacturer that sources products and packaging from specialist suppliers in Asia and Europe, identifies five key areas for managers to focus on when it comes to optimizing supply chains.

  • Research: Do we have the right suppliers? Are there alternatives that can deliver better products at a lower price? What are our competitors doing?
  • Communication: Do we have good supplier relationships and a loyal customer base? Are we resolving problems quickly and managing expectations?
  • Price negotiation: Can we renegotiate supplier contracts to reduce prices and improve payment terms? Are our supplier contracts sufficiently flexible to accommodate temporary cash flow problems?
  • Quality control: Do we have clear standards, have we communicated them effectively and do our suppliers meet them?
  • Stock control: Do we have processes in place to identify optimal inventory levels and ensure reordering is done in good time?

Six supply chain optimization best practices
  1. Look globally

    “The world is getting smaller. Having a global supply chain has advantages for small businesses,” says Eccles. Using suppliers outside your own country can significantly reduce costs relative to larger competitors.

    Employers4Students uses a cybersecurity expert based in Singapore to advice on best security practices for its software. “He’s significantly cheaper than someone in the UK would be because of the massive skills shortage in the UK but his expertise is really high calibre,” says Eccles. And going global can increase business opportunities, too. “Global supply chains let you stretch, reaching goods you’d otherwise not be able to offer your customers,” says Mike Michalowski, author of Profit First.

  2. Choose the right partners

    Wing It Cosmetics' Gahir says that choosing suppliers who share your values and are willing to work constructively with you is key to building a successful business. Weed out suppliers whose view of quality is different from yours, who can’t reliably meet delivery requirements or who aren’t sufficiently flexible.

  3. Build long-term relationships

    Building loyal and flexible relationships with suppliers is key to a successful, resilient business. However, it’s important to remember that the relationship is two-way. Suppliers need you to be loyal and flexible, too.

  4. Stick to what you’re good at

    Businesses need to resist the temptation to try to do everything themselves. “Although you might get something that’s bespoke and exactly how you want it, the chances are it’ll take a lot longer, cost a lot more and probably won’t give as much advantage as something you can get externally,” says Eccles.

  5. Use technology effectively

    There is a range of software tools that can collect information on your supply chain and provide metrics on its performance. Software to manage inventories and cash flow is widely available, and new blockchain-based technology is now making it easier to track shipping. However, sometimes something as simple as an Excel spreadsheet shared with business partners can eliminate inefficiencies.

  6. Have contingency plans

    All supply chains can experience disruption but good contingency planning can mitigate this risk.

    Optimizing your supply chain can increase revenue and build business resilience. You can also gain greater control over your finances by paying suppliers with American Express' vPayment; Set the payment amount, time-frame for use, and the suppliers it can be used for to make instant international payments.

1Deloitte: Supply chain leadership: Distinctive approaches to innovation, collaboration and talent alignment

This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.