Lean companies are healthy borrowers – Characteristics of efficient supply chain management

In a downturned economy, operating inefficiencies can push shaky companies over the edge. On the other hand, healthy supply chain management can help avoid inefficiencies. A strong system displays these chief characteristics:

Purchasing is centralized

Purchasing should be the responsibility of one individual — or a single department for large companies. This person, or department, is tasked with negotiating with suppliers for the lowest price, greatest flexibility and highest quality.

The procurement manager also tracks the reorder points for inventory, supplies and equipment. Consolidated orders are larger and made less frequently, which results in volume discounts and reduced shipping charges.

Information is shared

Demand-driven businesses match inventory levels with customer demand. Enterprise resource planning (ERP) software facilitates supply chain efficiency by enabling customers, vendors and middlemen to share information. ERP systems also improve customer service, as well as minimize production delays and overtime costs.

Budgets and forecasts should be updated monthly or even weekly, if possible. That way, everyone along the supply chain knows what will be needed — and when.

“Preferred vendors” are used

Companies should have a short list of preferred vendors with whom they’ve negotiated the best prices and terms. It’s especially important for lean manufacturers to have suppliers that are flexible and provide reliable quality.

Most vendors stop by annually to renegotiate price and discuss service issues. The procurement manager should prepare for supplier negotiations by reviewing forecasts and historic spending patterns to determine volume, average order size and expected demand. To maximize bargaining power, he or she also should know what the competition offers.

Shipping policies are tight

Fuel prices affect shipping charges. Depending on the balance of power in a borrower’s supply chain, some companies can pass along increased costs with fuel and shipping surcharges. But many cannot.

Efficient borrowers discourage small batch orders of supplies and inventory, as well as overnight and 2-day shipping options, which cost about 40% more than standard ground delivery. To optimize shipping efficiency for finished goods, some companies purchase transportation and logistics software — or they might outsource shipping functions to a third party logistics provider.

High shipping costs are causing many companies to re-evaluate their offshoring contracts. The incremental shipping costs from, say, China or India may negate any cost savings from cheaper materials and labor. Moreover, domestic suppliers often are more flexible and provide fewer communication barriers.

Inventory practices are lean

Lean (or just-in-time) operations strive to eliminate non-value-added activities (such as downtime, setup, inspection and scrap) and minimize the amount of working capital tied up in inventory. Lean borrowers expect suppliers to ship inventory at the last possible minute and then ship finished goods to customers just as quickly.

Lower inventory balances also mean lower storage, security, obsolescence, pilferage and insurance costs. Business owners who worry that decreased inventory levels will compromise customer service can rate customers based on volume and profitability. They then can base safety stock levels on these ratings.

Outside assistance is sought

Supply chain efficiency is an important consideration when evaluating the creditworthiness of existing and prospective borrowers. An outside expert can help borrowers reinforce their management skills by forecasting demand, benchmarking performance against industry best practices and setting realistic improvement targets.

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