Supply Chain Efficiency vs. Effectiveness
Supply chain managers at wholesale distribution and manufacturing companies might think that if a process is efficient, it is also effective. In fact, that may not always be the case. But how can a supply chain be efficient, yet not effective? It can happen when a company is more concerned with internal process improvements than the needs of its customers, stakeholders, or the supply chain as a whole. It can also happen because of the relationship between the two concepts. Efficiency and effectiveness are interrelated, yet independent. A supply chain therefore could be efficient and effective, neither efficient nor effective, efficient but not effective, or effective but not efficient. Confused? Let’s take a closer look at these concepts.
What is supply chain efficiency?
According to a white paper released by Industrial Marketing and Purchasing (IMP) Group, organizational efficiency is defined as an internal standard of performance. Supply chain efficiency is related to whether a company’s processes are harnessing resources in the best way possible, whether those resources are financial, human, technological or physical. Notice that the definition of efficiency says nothing about improving customer service. You might have a very efficient supply chain that minimizes costs for materials and packaging but leaves your customers fuming when the product they receive is not up to their specifications. The term efficiency is also a very abstract one. People have different definitions, and again…what may be deemed “efficient” in one part of your supply chain may adversely affect another area of your business.
What is supply chain effectiveness?
The definition of effectiveness, on the other hand, is more externally focused on results. Organizational effectiveness is defined by IMP group as an external standard of how well an organization is meeting the demands of the various groups and organizations that are concerned with its activities. These groups might include customers, partners, suppliers and vendors. So, to measure your supply chain effectiveness, take a look at not just what is going on within the walls of your own company, but how this is ultimately impacting customers and the supply chain as a whole.
Supply Chain Efficiency vs. Effectiveness
When considering the efficiency or effectiveness of a supply chain, we’re evaluating each from different perspectives. When thinking about supply chain efficiency, we’re considering what happens within the supply chain system. The supply chain is efficient when we are able to get products at the lowest cost. We also might be looking at how well we are able to coordinate with others in our supply chain for extended manufacturing processes. When a supply chain is effective, we’re looking from outside the company. Customers are looking at whether they got the right product in the right timeframe to meet their needs. Stakeholders might be looking at how much revenue was generated relative to the cost. Vendors and other business partners might also be looking at how well we were able to solve problems.
Why are supply chains sometimes efficient but not effective?
Lora Cecere of Supply Chain Insights wrote in a recent Forbes article that while many companies believe supply chain efficiency and supply chain effectiveness to be one and the same, it is her firm belief after three years of research that, “the most efficient supply chain is not effective.” While she believes that improvements in supply chain technology have resulted in many process efficiencies for companies, they have not resulted in an overall reduction in costs to customers or improvements in margins for companies themselves. Her belief is based on studying results for publicly traded companies greater than $5 billion in annual revenue from 2000-2012. According to Cecere, “Yes, labor productivity improved; but, four out of eleven of the industries did not make progress on operating margins and inventory turns. And for many industries, the progress on labor productivity is much greater than the changes in operating margin and inventory turns.” Why is this happening? One reason is increased commodity costs and increased reliance on outsourcing. Companies have pushed costs to their supply chain partners, but this has not resulted in better results for customers on the measures they care about, such as on-time delivery and lower prices. A well-publicized case in point is The Boeing Company, whose recent foray into large-scale outsourcing of its manufacturing processes to its supply chain partners on its 787 Dreamliner program resulted in nearly three years of delays in delivering product to customers, and billions of dollars in cost overruns. Outsourcing is a common practice within highly complex industries such as aerospace and automotive, but this is typically out of necessity––companies that make cars may not make radios, tires or other components, and aircraft manufacturers may not make engines or electronics. Boeing’s 787 supply chain strategy was envisioned not just as a necessity but as a way to be more competitive against its major rival, Airbus, by keeping manufacturing and assembly costs low while sharing risk with Boeing’s suppliers. Based on our definitions of supply chain efficiency vs supply chain effectiveness, this strategy was efficient in that it met internal company needs for a lean supply chain, yet not effective due to its negative impacts on customers and other stakeholders.
What can we learn?
So what can we learn from all this? That supply chain systems are extremely complex goes without saying. In general, it is very difficult to improve efficiency in meaningful ways, unless we look at both efficiency and effectiveness. We must look beyond our internal company requirements to how improvements in our processes will impact external partners and customers. In other words, not only must we do things right, we must also do the right things. Got an example of a supply chain that is both efficient and effective? Or a horror story about one that is neither? Let us know in the comments.