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GB Fulfillment Jan 20, 2023 4:39:07 PM 9 min read

What Is Supply Chain Efficiency and Why Is It Important?

supply-chain-efficiency-graphicSupply chain efficiency is a broad term that generally refers to the cost-efficiency of an organization's supply chain. Improving it generally means that you can get your product to your end customer faster and/or at a lower cost.

On the surface, this is a straightforward concept. While supply chain efficiency is an extremely important part of a logistics operation, it’s not the be-all and end-all. Prior to looking for ways to improve your efficiency, it’s equally important to consider how you measure it and the other important aspects of a healthy supply chain.

Improving Supply Chain Efficiency Is a Balancing Act

When considering your organization’s supply chain efficiency, it’s important to understand that it’s really a balancing act between three factors:

  • Cost - How much it costs to get your product to the end consumer.
  • Efficiency - How fast, or efficiently, you can get your product to the end consumer.
  • Effectiveness - How effective your supply chain is at serving your customers.

For example, you can spend more to get your product to the end customer faster, but you need to determine whether that cost will hurt profitability and whether that will actually make your supply chain more effective. 

This is a big issue for ecommerce companies. Amazon set the standard for one to two-day shipping, and many ecommerce companies feel that they need to have those shipping times to compete. However, many customers don’t mind waiting an extra day or two to get their products (depending on the industry). In other words, it may be more beneficial to have a less efficient supply chain if it can help you save on costs and doesn’t impact how effective your supply chain is at serving your customers.

Measuring Supply Chain Efficiency

There is no agreed-upon formula for supply chain efficiency. Instead, most organizations will select a few key metrics to help them determine their organization’s general supply chain efficiency. Here are a few of them:

  • Cost per Unit - How much it costs to produce and ship your product to the end consumer.
  • Cash-to-Cash Cycle Time - The number of days between purchasing materials to receiving cash from your customers for your end product.
  • Supply Chain Cost vs. Sales - A percentage of how much your current supply chain costs compared to overall sales.
  • Days of Sales Outstanding - The average number of days it takes for a company to receive payment for a sale.
  • Perfect Order Index - The percentage of orders that are not affected by any errors as it goes through your supply chain.

 Improving Supply Chain Efficiency

Now that you understand the different factors and metrics at play, you can begin to take a look into the various ways you can improve your supply chain efficiency. In general, there are three methods organizations can use to increase supply chain efficiency.

1. Technology

The most important aspect of supply chain efficiency is technology. This is the software and systems you use to track where your products are in each stage of your logistics operation. Many organizations use transportation and warehouse management systems to get real-time information about the status of each product. These systems can also provide information on many of the metrics mentioned above.

Understanding where your products are in the supply chain, where they are spending the most time and where errors are occurring are all things that you can use supply chain technology to monitor. Using this information, you can discover problems in your supply chain and come up with solutions that can help you increase supply chain efficiency.

2. Automation

Using the technology above, the next important step to improving supply chain efficiency is automation. Many WMS systems come with various solutions to automate rote tasks. 

For example, if you’re still manually processing orders or inventory tracking, automation can help you reduce errors and increase efficiency. Depending on the size, some companies may even want to look into warehouse automation with machines or robotics to improve efficiency.

 3. Outsourcing Logistics

The problem with the two solutions above is that they can be difficult and expensive to implement yourself. This is why outsourcing your logistics to a 3PL can be so cost-effective. This way, you can gain access to state-of-the-art logistics technology and automation right away.

Outsourcing your logistics has other benefits as well, particularly because you won’t have to deal with the fixed costs of operating your own logistics operation.

To give you an example, if you have your own warehouse, you need to staff it. Most of the day, you may only need 15 warehouse employees. However, during periods of high demand during the day, you need to have 20 employees. However, no matter what your current hourly demand is, you need to staff all day, every day, with all 20 of those employees.

If you were to outsource your logistics to a 3PL instead, the 3PL could fluctuate the number of workers on your product based on demand. When demand is high, the 3PL could put more employees on your product. When demand is low, those same employees could go to support another one of the 3PL’s clients. This increases the cost-efficiency for the 3PL, allowing them to pass those cost savings on to your organization.

This is just one example of the various ways 3PLs can help organizations increase their supply chain efficiency. If you’re interested in working with a 3PL that can help you balance the various factors you need to consider to improve your supply chain efficiency, reach out to an expert at G&B Fulfillment. We help e-commerce businesses and companies eliminate logistics hassles, improve customer experience, lower costs and increase ROI. 

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