6 Best Practices to Scale Your Supply Chain

1. Choose meaningful KPIs, then track them religiously.

You can measure countless aspects of your supply chain. Popular supply chain metrics and KPIs include inventory turnover rate, profit margin, on-time delivery rate and perfect order rate. There’s no way to know where your supply chain is faltering — gut feel and anecdotal knowledge aside — without some method of measuring current performance.

The hard work comes in choosing a handful of metrics to track that are especially crucial to your supply chain. Many businesses surpassing $10 million either lack clearly-defined operational KPIs or have no way to quickly and easily find their latest numbers. Outdated information can be misleading: If a distributor of construction materials bases its margins for various types of lumber on its costs six weeks ago, but prices have since tripled due to a worldwide shortage, then the company could be losing money on those sales and not realize it.

Once you and other decision-makers can reliably measure KPIs with a capable reporting tool, you need to actually use those metrics to determine where to direct your time and attention.

“We’ll see a lot of companies that will have KPIs, but sometimes they’re reporting on KPIs to be reporting on KPIs,” said Spencer Shute, a consultant at Proxima who helps companies optimize all aspects of their supply chains. “They’re not actually driving business decisions based on these KPIs.”

2. Determine your true costs.

You may realize that the true costs of the products you sell is more than what you pay a manufacturer or distributor for them, but tracking and compiling those expenses is another story. Manually crunching all of the numbers for every item in a catalog isn’t realistic, especially as an organization grows, so many companies simply don’t know their landed costs.

Without knowing your true landed cost for various items, you don’t know the true margins for various items. Certain products could be cheap to manufacture but expensive to transport or subject to sizable tariffs due to their country of origin. This information is critical in deciding which items to push, scale back or stop selling.

3. Pay attention to sales and inventory metrics.

One of the biggest challenges for any products-based organization is finding the right inventory balance. On-hand inventory is one of a company’s largest expenses, and too much or too little stock results in money lost. Add in disruptions — not just a pandemic but also more typical issues like dockworker strikes or shipping container shortages — that delay replenishment times, and it’s not hard to see why demand planning is important. Under ideal circumstances, the standard lead time for getting goods from Asia is three or four months, so there’s no quick fix if you start selling through inventory quicker than expected.

Many fast-growing businesses work around this challenge by simply carrying a lot of safety stock, but that can prevent you from making valuable investments elsewhere, maybe even in your supply chain. It’s an especially wasteful approach if you’re handling items with an expiration date, like food or pharmaceuticals, or ones that quickly become obsolete, like apparel or consumer electronics.

To build more trustworthy forecasts, closely examine how available inventory compares to sales and how these trends change over time. Operational leaders need access to both real-time and historical information on each SKU they sell and must factor in the lead times for new orders. If you’re in a fast-moving industry like apparel or consumer electronics where the product lineup changes frequently, pay extra attention to consumer trends and look for comparable items previously offered as a point of reference.

4. Approach new channels with caution.

“Omnichannel” has become a retail cliché. Selling through multiple channels is indeed critical long-term, but that doesn’t mean you should start selling to everyone who wants to carry your items as soon as they ask. Specifically, wholesaling to retailers who only buy in large quantities so they can get a lower price per item could eat into your margins.

Nada Sanders, a professor of supply chain management at Northeastern, has seen the allure of big-name retailers nearly put companies out of business.

“As a small business, the volume that you commit to your large customer could just swallow you, and you might find that you can barely satisfy that and you have no more inventory for other channels,” Sanders said.

So, understand your customer profile and via which channels they want to buy. Then, make strategic decisions about how to allocate your inventory and gradually welcome new opportunities as your capacity increases.

5. Make decisions with the future in mind.

As the name indicates, each piece of the supply chain is connected. Remember that as you make cost-cutting moves or other adjustments.

“I think the biggest pitfall is not understanding the downstream effects [of changes to your supply chain],” Shute said. “So yes, you can go to the cheapest carrier, but what’s that going to do downstream in terms of what your customer service looks like? What’s it going to look like in terms of damages or on-time shipments, delivery, things like that?”

In other words, chasing quick wins that temporarily boost the bottom line but lead to other problems is a mistake. Any such issues will only be magnified as a business gets closer to the $50 million mark. Realizing the full impact of these decisions requires more insight into the entire network: Revisiting Shute’s example, do you know whether switching carriers would cause any changes or issues for suppliers? Is the carrier’s on-time delivery percentage as good as or better than that of its predecessor, and what remedies does it offer for orders delivered late?

6. Commit to continuous improvement.

Since there are always areas of your supply chain to strengthen and vulnerabilities to address, adopt a continuous improvement approach. Philosophies like Kaizen promote making small, frequent tweaks that add up to larger gains, with suggestions often coming from lower-level employees (i.e., bottom-up leadership).

Such a philosophy can help companies quickly adapt to shifts in customer preferences and broader changes in market conditions, Sanders said. They’re especially helpful during periods of rapid growth, which she described as the “most perilous time” for a business. It’s often easier for smaller organizations to commit to continuous improvement because they tend to have less bureaucracy and red tape.

Take Krinsky’s company TOV Furniture: The team resolves its biggest supply-chain challenges by breaking them up into small, achievable action items with clear timelines that keep everyone on track, Krinsky said. TOV attacks those small goals in part by tweaking the supply chain system it implemented four years ago to implement faster or better ways to complete certain processes.