How do I standardize my supply chain process? In this week’s supply chain talk, Arkieva CEO Harpal Singh, discusses the key components to standardizing supply chains. Hint: It’s not all about cost reduction.
In a follow-up discussion with a webinar attendee, he mentioned an interest in learning more on how to standardize supply chain processes. Based on this discussion we decided to center this week’s Supply Chain Talk on the topic of standardization.
Imagine Wearing a Standard Shoe Design
With some exceptions, most shoes before 1900 were made on a generic axis without distinguishing between left and right feet. This was the norm until Gustav Hoffman founded a company in 1908 to make left and right shoes for children. While going back to a standardized shoe would certainly be cost effective, most folks would agree that it is not the kind of standardization that would help with the business objective of selling more shoes.
The Problem with Supply Chain Standardization: It’s Not All About Technology and Cost Reduction
Many businesses would like to create a standardized supply chain process across multiple business units. The underlying assumption is that standardization will reduce costs and improve responsiveness. If a business regards its supply chain as a “cost,” then it makes perfect sense to reduce this to the minimum possible. But most aggressive businesses regard the supply chain not as a problem to be dealt with, but as a competitive tool to further profitability.
The supply chain costs at a typical Hospital can be as much as 30% of the total operating cost. It is easily the second highest component of costs after “people cost.” This is not surprising because the typical hospital carries inventory for more than 10,000 items, and may have as many as 25,000 items on its books.
Standard supply chain practices like better tracking, automated ordering, and improved technology can help. But much more money can be saved through clinical standardization, enforcing clinical protocols, and thus reducing the number of products that need to be stocked, and using these products effectively.[Related: Supply Chain Talk: Are Best Practices Always Best?]
Understanding the Two Components for Supply Chain Standardization
In every situation, there are two components to standardization. The first is the standardization of generic supply chain processes that cut across industries. The second deals with the specific characteristics of the industry and involves restructuring the business processes to utilize supply chains effectively.
Take the airline industry as an example. The cost per seat mile for the value-based airlines like Alaska and Spirit is as much as 25% less than most full-service airlines. Ryanair leads the way largely through aggressive standardization of their supply chain processes and assets. They operate only one kind of aircraft which reduces training, maintenance parts, and increases flexibility in assignment of planes to routes because every aircraft has the same capability. But the same approach (although effective in reducing costs), may not be appropriate for a national airline or one that operates in a different market segment.[Download: Improving Your Supply Chain: Where Do You Start? ]
Standardizing can increase effectiveness, but what to standardize and how to standardize is intimately tied to the business objectives. Standardization is a valuable tool for reducing supply chain costs, but the real issue is to figure out how the supply chain can be configured to most effectively support the business objectives. In the case of a hospital, if simplifying a clinical protocol saves money but reduces survival rates, it is probably not a viable option.
Have a supply chain topic that you would like us to discuss? Join the Arkieva Supply Chain Talk with Arkieva CEO Harpal Singh. Add a comment below or send a tweet to @Arkieva with #ArkievaSCT, or email email@example.com.