Your supply chain infrastructure is at the heart of your business. Its productivity and efficiency help dictate capacity and revenue potential. Here are several key ways that infrastructure directly affects overall operations.
INFRASTRUCTURE COSTS MONEY
After labor, infrastructure represents the second biggest expense in your supply chain and is by far the largest fixed cost in your business. When it comes to fixed costs, your single biggest risk is having too much infrastructure. There is also a risk associated with not investing enough in your supply chain infrastructure, which we will examine a bit further on, so keep reading.
INFRASTRUCTURE AFFECTS PRODUCTIVITY
Labor is the largest expense in your supply chain, but your infrastructure has an enormous impact on your labor productivity. Undersized facilities and poorly configured material handling systems reduce productivity resulting in expensive operating penalties. Having inadequate IT systems also hurts productivity by incurring higher clerical and administrative costs.
Some of the telltale signs of an undersized infrastructure include cramped docks, products staged in the aisles, multiple SKUs sharing reserve locations and pick slots that are difficult to access. Each of these issues will result in excessive product handling and less than ideal product transactions. For example, your warehouse workers may look busy because they have to make two or three product moves in order to accomplish one real transaction.
We recently observed a foodservice distributor who had run out of pick slots, so they began creating pick slots on beams that sat six-and-a-half feet in the air. Pickers were forced to climb up on top of their pallet jacks to access these pick slots. This not only made picking unproductive, it also presented a huge safety risk for the workers.
INFRASTRUCTURE CREATES ERRORS
Errors in the supply chain can have expensive consequences, such as adjustments for inventory that disappears from distribution centers, or that simply expires while buried in the darkest corners of a warehouse. Errors create costs that, while measurable, can sometimes become lost in a thicket of P&L statements.
INFRASTRUCTURE ENABLES GROWTH
Supply chain infrastructure has a throughput capacity limit. That is to say, a given infrastructure set up can support only so much product volume. Once a company reaches that limit, it cannot grow no matter how compelling its product offering or effective its sales team.
One of the best examples of the relationship between infrastructure and revenue growth comes from the foodservice industry. If you are a foodservice distributor, your distribution center is your store – meaning there is a direct relationship between the size of your DC and the revenues you can expect to generate.
One foodservice executive engaged us to perform an ROI on a DC expansion project because he knew that his facility was severely under capacity relative to its volumes and that his company was paying a large penalty in productivity losses as a result. Upon closer examination, however, it turned out that projected savings from improved labor productivity was not the primary criteria used to justify the expansion. The real benefit – almost 66% – came from the additional profit margin that would be made possible by an increase in capacity and top-line revenue growth.
Seeking more ways on how to keep your supply chain infrastructure operating efficiently? Download LIDD’s eBook Supply Chain’s Missing Link.