Companies can minimize the business impact of congestion—and gain a strategic advantage over less-prepared competitors—by enhancing their supply chain performance in four critical ways.
Improve process efficiency. Speeding up value delivery can result in remarkable performance improvements. For instance, a 25 percent reduction in the time needed to deliver a product or service can double the productivity of labor and of working capital. And our experience over the years at The Boston Consulting Group is that a business that can deliver value twice as quickly as its competitors will grow twice as fast and be three times more profitable.
Improve information flows. Supply chain speed and agility sharply increase when information is shared across the network. Walmart’s Retail Link offers an electronic bridge to the retailer’s suppliers, providing data on sales and inventory levels and allowing them to download purchase orders. This close integration gives suppliers a better sense of true demand, which can reduce the effects of congestion throughout the supply chain.
Reduce variability. The longer your supply chain is, the greater the risk of variability. But much supply-chain variability is self-inflicted, the result of inadequately informed planning and needless complexity in processes, products, and portfolios. As noted above, improving process efficiency will reduce cycle times, a good first step toward reducing variability. But companies should also look for ways to shorten and simplify their supply chains by shifting away from high-volume, world-scale plants that make just a few products to smaller plants that make a wider range of products closer to local markets. Increases in unit production costs are often offset by lower logistics costs, faster replenishment cycles, and fewer stockouts and overstocks. The same logic can apply to distribution logistics when global distribution centers are replaced by regional warehouses.
Compress transit times. Besides improving process efficiency and shortening their supply chains, companies can improve cycle times by rethinking how they transport their goods. One tactical approach is to make more use of air freight. Air cargo costs per ton are four to six times greater than on-ocean shipping costs, which account for 0.5 to 2 percent of the shelf price of most products. For the right products—those with high margins, a limited shelf life, or short product life cycles such as fashion and technology items—the added costs of air freight are more than offset by the positive impact on profits of fewer stockouts and overstocks. Air freight can cut weeks from the time it takes to ship from China to North America and Western Europe.
In the end, the above four measures are just tactics. Real benefits—growth and profits—come when these tactics are employed in a differentiating strategy that exploits congestion. For example, one possible strategy is building dominant share positions with those customers that value faster, more reliable responses from their suppliers.
Such tactics and strategies for improving supply chain performance can increase market share, reduce costs, and dramatically improve profitability. Companies that take action now can turn the looming congestion crisis into a major strategic opportunity. Use it against your competitors before they use it against you.
This blog was originally published at www.hbr.org. It is reposted with permission of Harvard Business Publishing.