What can SMEs do to improve their supply chain management?

By Dr Sue Grinsted

3 of 5 Articles on Supply Chain Management for SMEs

Many SMEs find themselves in a “supply chain sandwich”. Buying their raw materials from large companies, they find that they have no purchasing power. They often sell to large companies who dictate the conditions of sale. Although these may seem like immutable constraints, the following three elements of supply chain management can be really useful for SMEs – Information exchange, lead time reduction and appropriate relationships.

Information Exchange

Many studies have shown that having more information about demand and supply means that you do not need to hold so much inventory. If you have reliable suppliers, you need less buffer stock of raw materials and components. If you know more about the demand from your customers, you are subject to fewer surprises and can therefore hold less buffer stock of finished product. As the phrase goes, “information is replacing inventory!”. So the question really is “how do we get this information?”.

Large suppliers and customers increasingly operate supply platforms or extranet areas where a partner company can see all relevant orders, forecasts and performance measures. While some companies have seen this as a constraint, others have used the platforms as a source of information for their own planning and motivation for raising their game in terms of performance.

Smaller Suppliers – If you are dealing with smaller customers and suppliers, use the 80-20 rule. For the customers that make up 80% of your demand, spend time understanding the nature of their markets and particularly the nature of the variation in demand that they face. Figure out together how you can obtain more reliable demand information. Secondly, for the 20% of suppliers that give you the worst headaches, spend time explaining to them the importance of reliable delivery.  Figure out together what you can do to help them improve their performance. In short, talk to these customers and suppliers!

Lead Time Reduction

If there is one change that you can make internally that will have a major impact on your whole supply chain it is to reduce the elapsed time between starting to make a product and completing that product, i.e. the production lead time. The main benefits are reduced work in progress and hence less working capital, faster reaction to changes in demand and thus reduced risk, and better service to your customers. There are 2 main approaches. The simplest approach is to address the bottleneck operation.

Unblocking Bottlenecks – When this is no longer the bottleneck, address the next bottleneck and so on. Opening up bottlenecks often involves changes such as reduced setup times e.g. through quick release tooling, increasing capacity by adding a twilight shift in one area, developing a relationship with a subcontractor, better scheduling and so on.

Measure & Manage – The more analytical but more complicated approach is to record carefully where time is spent during the lead time of a high volume or typical product, in order to find the non-value-adding time. It is not unusual for the total lead time to be more than 100 times the total operation time so there is plenty to find! Get a shopfloor team together to look at the results and suggest changes.

Appropriate Relationships

Over the last 20 years or so, “purchasing” has become “strategic supply management”. Of the many changes that have occurred, one of the most important was to recognize that we need different kinds of relationships with our suppliers according to their importance (1). Importance can be conferred either by their importance in the supply market or the importance of their product to our product.

In the past, orders were placed with suppliers as simple one-off transactions. That is OK if there are many suppliers or the items are non-strategic but more developed relationships are required if there are very few suppliers or if the items involved are critical to your product. As this importance increases, you need to increase the depth of the relationship accordingly. This might involve more frequent contact with the supplier (emails, phone calls, visits, joint planning meetings), involvement of the supplier in your new product development, finding out about the supplier’s new products as early as possible to understand what advantage they can bring to your products, or offering to be a “laboratory” for the suppliers new product development and trials.

Successful SMEs have used many other different and original approaches. Using your imagination with a large supplier is one way of breaking out of the sandwich!

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REFERENCES: (1) PETER KRALJIC, “PURCHASING MUST BECOME SUPPLY MANAGEMENT”, HARVARD BUSINESS REVIEW, SEP-OCT 1983 PP 109-117, OR JUST GOOGLE “KRALJIC MATRIX”