Why unoptimized supply chains drain your profits

Today’s business environment is characterized by intense competition, globalization, and rapidly-changing consumer needs. In this context, an inefficient supply chain could be stealing your profits or, at the very least, holding you back from peak performance.

The world gained a clear view of the impact of supply chain disruptions during the pandemic, but there are more, and rising traditional disruptions. A Business Continuity Institute study notes that cyberattacks/data breaches, adverse weather, and natural disasters are primary causes globally.¹

Supply chain disruptions are costing organizations around the world an average of 184 million U.S. dollars per year, according to a 2021 survey by market research firm Statista². On a regional distribution, the financial burden is highest in the United States, where the estimated average annual cost amounted to 228 million U.S. dollars.

To cope with these challenges, many organizations are looking to modernize their supply chain by incorporating new technologies, adopting agile methodologies, and streamlining their processes.  

Let’s first look at the story behind supply chain inefficiencies.

Expectations of today’s supply chain

The modern supply chain landscape is constantly evolving, and organizations are expected to keep up with these changes. Today’s supply chains need to be flexible, responsive, and resilient to changing market conditions.

In addition, customers now expect faster delivery times, real-time updates on their orders, and personalized service. These factors become competitive advantages that impact buying decisions. To meet these expectations, organizations need to consider innovative technologies like artificial intelligence (AI), 5G, the Internet of Things (IoT) in manufacturing, and blockchain to optimize their operations and gain real-time visibility into their supply chains. For internal operations, a modernized, reliable fiber network that can meet the data and processing demands of these technologies must be considered first. Legacy networks and copper lines simply aren’t as reliable or secure, and they can’t handle these demands.

Assessing your supply chain

Assessing your supply chain is an important step in identifying areas that need improvement.  A comprehensive assessment can help organizations understand their supply chain strengths and weaknesses and identify opportunities for optimization.

A framework for assessing your supply chain may include factors such as process efficiency, inventory management, supplier performance, and risk management.

Factors that create supply chain inefficiencies

Supply chain inefficiencies can be caused by a range of challenges, including poor communication, lack of visibility, supplier issues, network disruption, security breaches, and inventory management. Inefficient processes, outdated technology, and inadequate training can also be causes for inefficiency.

The impact of these can be substantial. As McKinsey found in its 2021 report, “barely 2% of businesses have any visibility over their Tier 3 suppliers.”³  Inefficient inventory management can lead to increased costs and stockouts. According to a study by Aberdeen Group, organizations with poor inventory management practices have an average inventory accuracy rate of just 63%.

Avoid the “5 Os” of supply chain inefficiencies

Supply chain disruptions can inflict significant costs on organizations. In addition to direct costs such as lost revenue, stockouts, and increased logistics expenses, disruptions can also lead to indirect costs such as damage to brand reputation, lost customer loyalty, and decreased market share.

According to the World Economic Forum, supply chain disruptions can reduce shareholder value by up to 7%. We can categorize these disruptions into the “5 Os” or supply chain inefficiency:

1. Operational errors: Mislabeled packages, barcode errors, missing delivery details, and incorrect product selection.
2. Overuse of packaging materials and methods: The weight and dimensions of every package and the shipping method have a direct impact on shipping and handling costs.
3. Overdelivering: Overdelivering and exceeding consumer expectations for delivery speed can lead to unnecessary costs. For example, let’s say you use same-day delivery to ship a product when a customer doesn’t need the product that fast. That increases shipping costs unnecessarily.
4. Overpriced business transportation costs: Retailers can reduce supply chain costs when the entire retail network is used to fulfill product orders. 
5. Overutilization of resources: Not having enough employees or poor logistics management results in shipping and packing errors, supply chain delays, and a stressful work environment. 

Why unoptimized supply chains drain your profits