Supply Chain Stock Reduction using a Smart Product Architecture

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Supply Chain Stock Reduction using a Smart Product Architecture
Jeroen Vos, Member, Business Consultant, Netherlands

Improve your business performance by reducing your stock with a smart product architecture. Join our Linkedin group 'Asintik Innovationstore' for more interesting articles about innovation.

High stocks reduce business performance

High stock values in the supplychain are a common headache especially during economic difficult times. The stock ties up capital which could be used for more beneficial means. Furthermore there is always a risk the stock will grow obsolete. And how about your marketing forecast, if the forecast of especially the mix is uncertain, you easily might have the wrong products in stock. You either have to accept lost sales, back orders or…. hold even higher stocks.

In general stocks highly impact your overall business performance rather negatively especially in high product diversity businesses. They tie up capital, induce costs and induce risks.

Some solutions result in even poorer business performance

So what is the strategy to improve the business performance? How can we reduce stocks or reduce the costs and risks they induce?

Of course, it is common practice to optimize the supply chain process. More efficient logistics, reduce throughput times, pick suppliers closer to you or build a warehouse close to your market. Sometimes even pick different transportation means. A plane instead of a boat. Even heavy machines are sometimes flown all over the world to meet delivery times and keep the stock values reasonable. This of course comes at a cost.

Often also solutions are considered where the cure makes the business performance even worse. Portfolio optimization in operations often translated into standardization. Standardization reduces costs in operations. The movement therefore often starts at operations. It is cost effective to standardize operations. It is best if we get rid of low selling product types since they induce a lot of costs but contribute to the profit only marginally.

Often this results in quite a conflict with the marketing & sales department. For efficiency reasons it is good to standardize in operations. However, for value creation it is often necessary to mass-customize your product.

It is this conflict where product architecture plays a major role. Satisfying both the cost effectiveness of operations as well as the value creation (or rather selling) of the marketing & sales department.

A smart product architecture reduces stocks and improves customer value

The problem of high stock values occurs in the supply chain. So often the problem is looked at by supplychain specialists. Just like the previously mentioned solutions. However: Ask a wood cutter a solution for your house decoration and you will get a wooden solution. So are you sure you will get the right solution?

The problem can be solved in a different domain as well: in the product architecture domain. Developing a smart product architecture often highly contributes to solving different conflicts. In this case the conflict between operations standardization and the mass customization wish of the marketing & sales department.

A smart product architecture should enable standardized modules. These can be produced using standard operations. These modules can be put on stock. For the customer specific demand one can configure a specific product using the standard modules, maybe add even more customer specific modules and make a unique proposition. This requires adjustments in the design or builduip of the product (the product architecture) as well as of the supplychain (the supplychain architecure). From product point of view: different arrangements of customer and operational functions over product building blocks. From supply chain point of view: divide your operations into standard and customization operations and smartly chosing your stock points in the chain. The standard and customization both serve different aspects of the business performance. Costs, capital, value proposition and responsiveness.

The process to identify and implement this is not straightforward. Different departments sometimes have different objectives. Furthermore different professionals each have their own language. What ties them together is the integral business performance or integral chain performance.

Even though the process might not be straightforward, practical results show high benefits. Benefits where there are no conflicts anymore between departments. Stocks are slaughtered (up to 50% is rather normal) with lower integral costs and mostly even higher customer diversity. This all with heavily improved responsiveness.A smart product architecture delivers much more than the title of this article suggests. Lower stocks, lower costs, better responsiveness and more value. More information is available on this topic in the linkedin group innovationstore and on the Asintik website.

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