The events of 2020 intensified the challenges of managing supply chain performance, driving organizations to focus on financial liquidity through cash preservation. But in 2021, as businesses commit to profitable growth, they must take a more comprehensive approach to optimizing supply chain performance.
“Some companies are now finding that an excessive focus on cash has started to create challenges with current performance and limit their future growth potential, while some have emerged from 2020 with a renewed sense of commitment to investing in capabilities that will upgrade their resilience for future disruptions,” says Paul Lord, Senior Director Analyst, Gartner.
Download guide: 5 Levers for Optimizing Supply Chain Costs
Achieving and sustaining performance requires connecting short- and long-term aspirations (operation for cash and enablement of profitable growth) through an intermediate lens — optimized total performance. This lens aligns key stakeholders around both design choices (physical, commercial, organizational) and operating decisions required to efficiently fulfill demand with reliable product supply and effective service delivery.
Optimizing cash flow and costs needs a comprehensive approach
Supply chain organizations design and operate supply networks to fulfill demand. Complex demand signals, product portfolios and supply constraints require more than simplistic trade-off discussions that promote conflict and negotiation rather than enabling optimization. Consider these aspects of the three performance lenses for supply chain cash flow and cost optimization.
Operate for cash: Zero in on near-term reductions for improved cash flow
Supply chain leaders must start with the recognition that fixed costs are sunk in the near term. They should instead focus on the operating cash levers for capturing variable margin, controlling working capital and managing discretionary spend. “Leaders need to recognize that in most cases network design choices and structural costs are out of scope for near-term improvements to cash flow,” says Lord.
Optimize performance: Drive deliberate, aligned network improvements
Alignment across both the key stakeholders within an organization and the extended supply network is essential to achieve optimized performance. Misalignment will create constraints (physical, economic, virtual) that impede performance over time as market and organizational dynamics evolve. Supply chain leaders must focus on obtaining clarity around business imperatives and alignment on realistic performance goals that ensure strategic alignment.
Supply chain leaders must focus on obtaining clarity around business imperatives and alignment on realistic performance goals.
Invest to grow and transform: Orchestrate a value-driven operating model
Long-term supply chain growth thrives on increased agility and collaboration to enable superior total performance, including joint value with customers and suppliers. Innovation of products and operating models may include offering integrated solutions customized for specific customers or market segments. Investments in digital technology replace physical elements of the supply chain with information.
Digitalization accelerates the speed and precision of decisions and execution, reducing the need for inventory and eliminating the cost and errors of nonproductive manual activity. “While improved efficiency typically is not a driver for these investments, it is a dividend of successful transformation,” says Lord.
Supply chain strategy execution leaders must help their organizations acknowledge and find the right balance across all three lenses, with appropriate changes in emphasis through economic cycles and in response to events.
These should not be interpreted as stages of maturity, but as a recognition that different lenses are required to manage strategic and operating decisions simultaneously, across multiple time horizons, to achieve proper balance.