Supply chain managers can often think that if a process is efficient, it is also effective. In fact, this is not always the case. Confusion can arise because the relationship between efficiency and effectiveness is interrelated yet independent. This article will explain the difference between supply chain efficiency and effectiveness, and although mistakenly used interchangeably, why every successful business needs to know the distinction.
What is supply chain efficiency?
According to a recent white paper by Industrial Marketing and Purchasing (IMP) Group, organisational efficiency is defined as an internal standard of performance. Supply chain efficiency is a measure of how a company’s processes harness resources in the best way possible, whether or not those resources are financial, human, technological or physical.
Here, this definition of efficiency is silent about improving customer service. A company might have a very efficient supply chain that minimises costs for materials and packaging but leaves customers hugely disgruntled when the product they receive is not up to their expectations.
What is supply chain effectiveness?
Supply chain effectiveness is an external standard of how well an organisation is meeting the demands of the various groups and organisations that are concerned with its activities. These groups might include customers, partners, suppliers and vendors.
To measure supply chain effectiveness, it is important to look at not just what is going on within the walls of your own company, but how this is ultimately impacting stakeholders.
Efficiency vs. effectiveness
Many companies know how to make their global supply chains run efficiently. But the true test is not just about running efficiently but also effectively. Effectively encompasses all things outside looking in towards the company and its responsiveness. Unexpected events, such as changes in consumer demand or natural disasters, threaten to undermine even the most efficient operations. Operational effectiveness and responsiveness provide companies with the flexibility to quickly react to these types of events and remain a strong player.
When business variables are not constant (and they often are not), lead times are critical. A company that has full visibility into its supply chain, including work-in-process inventory, can increase its lead time to respond to unexpected shifts and detect problems earlier.
In general, it is very difficult to improve supply chain efficiency in meaningful ways, unless both efficiency and effectiveness are considered. It is time to look beyond internal company requirements to how improvements in processes will impact external partners and customers. In other words, not only must companies do things right, but they must also do the right things.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.