Why is Supply Chain Efficiency Important and 5 Ways to Improve It

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Enhancing supply chain efficiency can lead to a variety of operational benefits, from helping companies save money to enabling better inventory management, faster processing times, and shorter delivery times.

Obviously, supply chain efficiency is crucial, but what can you do to improve it? In this post, we are answering the question “What is supply chain efficiency?”, explaining how you can measure it, and sharing tips on how to enhance supply chain efficiency. 

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What is Supply Chain Efficiency

The effectiveness of a company’s supply chain refers to how well it uses its resources (including human, financial, physical, or technological) to produce and deliver products, as well as how effectively it gets its goods to the right location at the right time and at the lowest cost possible. Supply chain efficiency is important because it gives you a competitive advantage, increases profit margins, promotes customer satisfaction, and fosters growth.

Difference between supply chain efficiency and supply chain effectiveness

A well-functioning supply chain should be both efficient and effective. While efficiency is about how well a company uses its resources to ensure the fast and seamless operation of systems, effectiveness is the extent to which a certain process produces the desired results expected from it.

According to experts, supply chain effectiveness is an external benchmark that measures how well the company is satisfying customer expectations, whereas supply chain efficiency is an internal benchmark. Although the terms “supply chain efficiency” and “supply chain effectiveness” are often used interchangeably, a company can have an effective supply chain that is still not efficient and vice versa. 

For instance, an efficient supply chain can result in faster processes and delivery of the finished product to customers in a timely manner, but the product’s quality may or may not meet their expectations. Similarly to this, an effective supply chain is one that produces high-quality goods or services that satisfy customer demands. However, if that good or service wasn’t provided on schedule, the supply chain might not be efficient.

How to Measure Supply Chain Efficiency

Although each company will have distinct priorities, there are several supply chain performance metrics that can be used to measure efficiency.

  • Inventory turnover. How often a company sells its inventory in a specific time period. Inventory turnover is calculated as the cost of goods sold divided by the total or average inventory. 
  • Supply chain cycle time. The time it would take to complete a customer order if inventory levels were zero at the moment the order was placed. The entire supply chain will be more efficient and the company will be better positioned to react to changes in the market if the cycle is shorter.
  • Customer order cycle time. The period of time (number of days) needed to fulfill a delivery once a customer has made an order.
  • Days Inventory Outstanding is a measure of how long a company typically keeps its inventory before selling it. It is determined by multiplying the average inventory by the cost of the products sold for the time period. The quicker a company converts its stock into sales, the lower its DIO.
  • Days Sales Outstanding measures the length of time it takes to receive payment from clients. To calculate it, divide the average accounts receivable by the total value of sales made on credit. The result is then multiplied by the number of days in the time period that’s being measured. 
  • Fill rate is the percentage of orders that can be fulfilled at a given moment with the available inventory without lost sales or backorders.
  • Perfect order measurement is the percentage of orders with no errors. The supply chain operates more effectively if there are fewer errors. 
  • Cash conversion cycle is the length of time it takes to convert cash into inventory and then into sales.

5 Ways to Improve Supply Chain Efficiency

Although creating an effective supply chain is labor-intensive, the rewards are substantial. Here are a few supply chain management best practices.

1. Improve your supply chain visibility

Visibility allows for better tracking of your products as they move through the supply chain, from manufacturing to inventory and warehousing to packing and delivering to customers. The greater your supply chain visibility, the better you’ll be able to understand your stock levels and delivery efficiency. In addition, supply chain visibility makes it simpler to identify any potential bottlenecks and inefficiencies.

One way to improve your supply chain visibility is by using technology. Technology solutions like inventory management software provide businesses with information on each step in the supply chain enabling them to solve issues immediately. 

2. Foster strong relationships with suppliers

And any inefficiencies that might develop on the supplier side can have an impact on your supply chain efficiency as a whole. One strategy to improve your supply chain is eliminating any underperforming suppliers while establishing strong relationships with dependable suppliers that are better suited to meeting your business objectives. 

Inventory management software can play a crucial role in fostering strong supplier relationships by enhancing the information flow between you and your suppliers. In addition to guaranteeing that your supplier database is accurate, the ideal solution should enable you to update suppliers on their purchase orders, invoices, and payments. By providing suppliers with the information they require, you can reduce the number of inquiries you get from them, saving everyone involved time and improving supply chain efficiency.

3. Automate your supply chain processes

By automating important procedures, businesses can free up employees from manual duties and enable them to concentrate on things that create value. Automation can also be quite helpful in reducing the likelihood of error.

Although automating time-consuming tasks such as order processing and automated shipping, won’t replace the need for human effort, it will help you increase productivity and streamline operations. Warehouse automation reduces the effort, time and mistakes that are very common in logistics. Some companies even use logistics automation in their own warehouse, as well as tracking devices on each item in order to better track their inventory, improve inventory forecasting, and avoid issues such as out-of-stocks and excess inventory

We already mentioned how the use of inventory management software can help improve supply chain visibility and help you build strong supplier relationships. By automating your inventory management, you can also make sure that the right products are delivered at the right time, which makes it simpler to determine when additional products need to be ordered. Automation can also help your company identify chances to minimize obsolete stock, reduce human error, lower warehousing and storage costs, and shorten lead times for products in transit, which can make it simpler to coordinate the delivery of commodities with production requirements.

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4. Invest in employee training and development 

Regardless of how many of your internal processes you decide to automate, your supply chain will still rely more on people than on technology. For this reason, you need to make sure that all of your personnel are properly trained in the operation of your supply chain.

Make sure to provide training on your supply chain processes and systems for all your employees. Employees with inadequate training could feel overburdened and prone to mistakes, whereas well-trained staff will contribute to more streamlined supply chain operations. 

5. Audit your supply chain efficiency frequently

It is not enough to achieve supply chain efficiency once. Inefficiencies can appear as the internal procedures or business environment evolve over time.

Once you have made the necessary improvements, maintaining an efficient supply chain is the only way to ensure that everything works smoothly. Be sure to regularly assess the effectiveness of your supply chain and look for any opportunities to further increase its efficiency. 

The Bottom Line

In today’s global economy, having an efficient supply chain is essential. Your supply chain is a crucial component of your company’s operations and when it’s properly set up, it can greatly benefit both your company and your clients.

Following the tips and best practices listed in this article is a great place to start for increasing the efficiency of your supply chain. As a result, you’ll be able to improve cost savings, increase inventory visibility, build better relationships with your suppliers, and boost customer satisfaction. 

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