Is chronic supply chain underinvestment hurting your business?

To the casual observer, there are a few clear signs that a supply chain is under stress, yet it remains one of the more difficult challenges to resolve for business leaders.

In the years prior to 2020, it seemed supply chains only received attention when something went wrong. However, over the past three years those “somethings” have been happening with greater impact and regularity.

Much has been written about the disruptive factors behind this. From the pandemic to extreme weather and geopolitical events, to one of the world’s biggest ships getting stuck in the Suez Canal for six days. And yet, supply chain woes seem to be one of the hardest challenges for most organisations to solve. The question is – why?

While the digital tools exist to turn the supply chain into a strategic enabler for the overall corporate strategy, even amidst the current disruption, many leaders are failing to grasp the opportunity. Every day we see organisations that are still floundering with systems and methodologies that were fit-for purpose in the 20th century but can’t keep up with the realities of the current environment.

In short, these organisations are suffering from chronic underinvestment in the supply chain function – and the lack of attention is beginning to cause widespread pain for leaders.

How can we tell if our supply chain is suffering from chronic underinvestment?

To the casual observer, there are a few clear signs the supply chain is suffering from a long-term lack of investment. The most obvious of these is feeling that you are constantly “firefighting” short-term issues related to supply and demand, largely due to poor inventory management or replenishment shortfalls. Known as a reactive supply chain, the root cause is almost always a lack of investment in the people, processes and technologies required in the current environment.

While operational disruption is the headline issue, there are other impacts that spread right across the organisation, particularly into the CFO’s area. If you deal in physical goods, the supply chain is the critical component of your company’s operations. When it’s ignored there will be impacts on organisation-wide financial planning. For example:

Underinvested supply chains are inefficient, with increased lead times and higher operating costs. This has a direct impact on profitability and overall financial position.

Aside from inventory shortfalls leading to lost sales, excessive inventory may be tying up capital and incurring storage costs and impacting cash flow and financial planning.

Outdated processes and inefficient workflows within the supply chain can lead to waste in terms of time, resources and materials, which impacts overall operational costs and sustainability.

The organisation has greater exposure to financial risks and increased vulnerability to disruptions caused by natural disasters, geopolitical events, or other unforeseen circumstances.

You’ll experience challenges with forecasting future sales and production, which underpins the demand forecasting element of organisation-wide financial planning.

Beyond financial planning, disrupted supply can also negatively affect long-term customer relationships and damage the company’s reputation; as well as impact the organisation’s overall agenda of agility and adaptivity to changing conditions.

How do we solve chronic supply chain underinvestment?

It may seem fairly straightforward to offer investment in your supply chain as the solution to the challenges caused by ongoing underinvestment. However, while investment is the solution, there are some complexities to how it’s implemented.

The obvious starting point is to invest in a long-range planning solution with the technical capability to identify operational constraints and investment opportunities. When deployed successfully, these solutions can integrate your supply chain and finance departments, delivering the strategic foresight needed to align your supply chain and corporate strategies,

However, if you expect your supply chain woes to be solved by simply pouring funds into software, you are heading for disappointment – no matter how great the software might be.

As with any enterprise-wide initiative, the success of your supply chain transformation depends on a number of factors that wrap around the technology, including:

An executive sponsor for the project who has a deep understanding of the organisation’s strategic direction – and a stake in seeing it succeed. The most successful supply chain transformation projects we’ve been involved with have been driven by the CEO and CFO, or another influential member of the executive team.
Read more about how the right sponsor can set IT projects up for long-term success here.
Alignment in the executive team in terms of understanding the organisation’s strategic value stream, and how decisions relating to supply chain are made to stay consistent with strategy. For example, are decisions on stock allocation made on the basis of margin, or some other factor – such as long-term importance of a particular customer relationship?
There is no software solution that can make those initial, strategic decisions for you. Instead, your system can be trained to make ongoing “microdecisions” that reflect your strategic direction, based on rules of thumb and other data sets from internal and external sources.
A plan to bring teams out of silos and properly align people, systems and processes. It’s no secret that interconnected teams who collaborate across silos are at the heart of great change management, however getting to that end-state is a long-term process.

While it all starts with great leadership and sponsorship of the project, there are a number of practical strategies to manage the day-to-day realities of asking your people to change the way they do things. We’ll be taking a look at some of these strategies in a future article.
KPIs related to non-financial outcomes. For most organisations, financial planning tied to CAPEX and OPEX investment remains tied to long-embedded outcomes such as inventory reduction and transport costs. It’s notoriously difficult to quantify the benefits of agility, flexibility, making better decisions and improved productivity. It’s time for forward-looking organisations to make some bold and decisive steps towards instilling value around these non-financial benefits. Again, we’ll take a look at this in greater depth in a future article.

Are you ready to address underinvestment in your supply chain?

In summary, underinvestment in the supply chain can have a cascading effect on a company’s financial planning, leading to increased costs, reduced revenue, and heightened financial risks. On the other hand, strategic investments in supply chain capabilities can enhance operational efficiency, improve customer satisfaction and positively impact the financial performance of the business.

We are enablers of change and transformation in Supply Chain, Information Management, Financial Planning & Analytics, Management Consulting, Project Management, and Managed Application Services. Contact us to find out more about how we work with your teams or call 1300 841 048.