For the past few years, the news has been filled with stories about supply chain disruptions, supply chain fragility, and the need for supply chain resilience. A term once prominent in supply discussions — optimization — isn’t heard quite as often as it used to be. That doesn’t mean optimization isn’t as important now as it has been in the past. Quite the opposite. A few years, Aaron Berg, Vice President of River Logic, wrote:
“Optimizing the supply chain and then integrating the decisions back into plans of action is crucial. Also, validated financial statements are key in the underlying optimization models. Assumptions aren’t enough to know how a supply chain incurs costs and earns revenues. … Additionally, data visualization allows companies to drill down into the variances and see where to make adjustments. Understanding the drivers of optimized recommendations is crucial, helping companies better understand their business. Supply chain optimization is no longer about individual tools that solve individual problems. It’s about seeing the bigger picture and making bigger changes, then making a bigger impact on the business through the supply chain. The technology is ready to go; now is the time to use it.”[1]
He added, “More than half of companies surveyed by Ventana Research say they have limited or no ability to understand complex trade-offs across their supply chain.”
What is Supply Chain Optimization?
The SAP staff observes, “The top supply chain optimization priorities haven’t really changed for decades, even centuries: Make sure customers are happy, increase efficiency and profitability, and balance supply and demand.”[2] They add, “And while those core priorities remain at the fore, businesses today find themselves facing levels of change and uncertainty that they’ve never seen before. The bad news is that things like climate events, economic upheaval, and geopolitical unrest seem to grow more complex with each passing year.” According to staff at Thomas, this growing complexity means too many companies put off optimizing their supply chains because it appears “too hard.” They write, “This includes tackling bigger issues such as compliance, supplier relationship management, risk and disruption, responsible sourcing, and transparency. If you think this sounds like an enormous task, you’d be right. But it’s a bit like unpacking a box of Christmas lights to find they’re hopelessly tangled — it will take time to sort out the mess, but the results will be illuminating.”[3]
Patrick Long, Director at Opportune LLP, insists, “All the reasons why you don’t think you can start a supply chain optimization implementation is even more reason that you should. … The biggest hurdle to overcome in any journey is the first step. As Thomas Jefferson once famously said, ‘If you want something you have never had, you must be willing to do something you have never done.’ The fear of the unknown and perceived complexity prevents us from embarking on new initiatives. Companies are no different.”[4]
Tackling optimization sounds a bit like the old question: How do you eat an elephant? The answer: One bite at a time, of course! That’s exactly what Kyle Krug, Vice President of Corporate Strategy & Marketing at Legacy Supply Chain Services, suggests. He explains, “The first step … toward supply chain optimization is to diagnose the pain points — large or small — and determine how they are hurting your supply chain’s overall optimization. One of the best ways to do this is to have a supply chain engineer break your supply chain down, layer by layer.”[5] He continues, “Most supply chains consist of the following layers or departments: manufacturing; suppliers; transporters; warehouses; distributors; service Providers; retailers; [and] customers. It’s important to be thorough and break down each layer, process by process and person by person.”
Optimization and Advanced Technologies
Fortunately, supply chain professionals have a lot more help these days than they have in past when it comes to optimizing supply chains. The SAP staff explains, “The good news is that you can now leverage smart technologies and tools to better power increasingly sophisticated supply chain optimization strategies.” They go on to suggest seven different areas in which advanced technologies, like artificial intelligence, can help companies optimize their supply chains. Those areas are:
● Warehouse optimization. “Advanced AI algorithms analyze historical data to predict future stock requirements and optimize warehouse space. IoT devices track inventory in real time, providing valuable insights into stock movement, reducing waste, and ensuring products are available when needed.”
● Inventory optimization. “Sophisticated predictive analytics tools process sales data, seasonal trends, and market fluctuations to forecast demand accurately. This prevents surplus, reduces carrying costs, and minimizes the risk of stockouts, ensuring a balanced inventory.”
● Logistics optimization. “AI allows you to integrate real-time data from various sources, helping you devise more efficient delivery routes and schedules. This reduces fuel consumption, lowers delivery times, and enhances overall transportation efficiency.”
● Manufacturing optimization. “Customer feedback combined with rapid prototyping and agile manufacturing processes means quicker adaptation to market trends and faster product development cycles, reducing time-to-market.”
● Customer service optimization. “Analysis of sales and review data provides deeper insights into customer behavior and preferences. This lets you offer tailored support and services and improve customer satisfaction and loyalty.”
● Optimized sustainability. “Analysis of resource consumption and supply chain practices helps you make informed decisions that reduce environmental impact, such as optimizing routes for lower emissions and selecting sustainable materials.”
● Sourcing optimization. “Evaluation of supplier performance, reliability, and risk factors leads to more effective sourcing strategies. This ensures efficient, cost-effective procurement while maintaining supply chain integrity and quality standards.”
The Thomas staff asserts, “Advances in AI and machine learning can help make logistics seamless, greatly improve demand forecasting, warehouse management, provide the data and visibility necessary for Just-in-Time (JIT) inventory management, or revolutionize your supply chain, Amazon-style, with a combination of cloud-based operations, robotics, and the Internet of Things (IoT).”
Concluding Thoughts
Earlier this year, Gartner reported, “Top performing supply chain organizations are investing in artificial intelligence and machine learning (AI/ML) to optimize their processes at more than twice the rate of low performing peers.”[6] Ken Chadwick, Vice President Analyst in Gartner’s Supply Chain Practice, stated, “Top performing supply chain organizations make investment decisions with a different lens than their lower performing peers. Enhancing productivity is the key factor that will drive future success and the key to unlocking that productivity lies in leveraging intangible assets. We see this divide especially in the digital domain where the best organizations are far ahead in optimizing their supply chain data with AI/ML applications to unlock value.”
As I noted in a recent article concerning the consumer packaged goods (CPG) industry, “CPG companies should focus on supply chain optimization to drive cost reduction and efficiency, as well as help offset promotional spending, price rollbacks and other incentives designed to regain market share. That requires a comprehensive analysis of supply chain data and operations to facilitate the efficient production and distribution of products without impacting product quality or essential functions. The savings generated from these profit-driving optimization initiatives should be utilized to strategically reinvest into R&D and technology adoption, creating a self-fulfilling innovation and revenue cycle.”[7] Optimization isn’t easy; however, taken a bite at a time, is can be (and should be) done.
Footnotes
[1] Staff, “Supply Chain Optimization: What does it mean in 2019 and beyond?” River Logic Blog, 14 August 2019.
[2] Staff, “What is supply chain optimization today?” SAP Explainer, 19 August 2024.
[3] Staff, “How to Optimize Your Supply Chain in 2020,” Thomas, 6 January 2020.
[4] Patrick Long, “Myth Vs. Reality: First Steps In Supply Chain Optimization,” JD Supra, 25 April 2022.
[5] Kyle Krug, “Supply Chain Optimization: How to Alleviate Common Pain Points,” Multichannel Merchant, 16 December 2019.
[6] Staff, “Gartner Says Top Supply Chain Organizations are Using AI to Optimize Processes at More Than Twice the Rate of Low Performing Peers,” Gartner Newsroom, 20 February 2024.
[7] Stephen DeAngelis, “How CPG Brands Can Move Beyond Price Hikes to Fuel Revenue Growth,” SupplyChainBrain, 17 October 2024.
