Breaking the Chain: Strategies to Eradicate Supply Chain Debt

Supply chain debt refers to the accumulation of inefficiencies, bottlenecks, and costly practices that drain resources and impede the smooth functioning of the supply chain. In this article, we will explore the concept of supply chain debt, its various sources, and practical strategies to eliminate it, enabling companies to achieve profitability and operational excellence.

When I was working in the factory we had a specific piece of equipment that was used to make bulk specialty packs for Costco & Sam’s Club. This machine needed to run most days and there was one operator, Billy, who seemed to be the only one who could get the machine to run easily and efficiently. He would sit comfortably by the machine all day while pallet after pallet was produced while others on other shifts spent hours underneath it clearing jams or trying to dial it in. Things got so bad that I remember asking if we should just shut the line down when he took time off. Whether it was genius or sabotage, that multimillion dollar machine wouldn’t run without his blessing. 

This was no way to run a factory or a multimillion dollar piece of equipment and yet many businesses have a similar story and are laden with inherent supply chain debt that makes their operations so brittle that they run the risk of breaking with a little added pressure.

What is Supply Chain Debt?

Operations people are resourceful and we are natural problem solvers. Oftentimes we will take a shortcut or put a bandaid solution in place in order to keep the business moving and before long that band aid solution just becomes how things are done. Supply chain debt is the sum total of all of the compromises we build when getting something off the ground and whose inertia prevents brands from taking a step back and rebuilding from the ground up. 

Supply chain debt manifests in different forms, such as frequent operational fires, excessive air freight or expedite costs, high product returns, inventory imbalances, poor customer service, and delayed product launches. These issues not only incur additional expenses but also erode customer satisfaction and damage brand reputation and recognizing these symptoms for what they are is crucial to address the root causes of supply chain debt effectively.

Where does Supply Chain Debt come from?

Every organization has some level of operational debt. It’s the reason why every new planner opts to create their own spreadsheet even though functionally they probably do the same thing. The severity of the debt in your organization can be influenced by things such as a lack of sales and operations planning (S&OP) adoption across the organization, absence of clear Key Performance Indicators (KPIs) leading to organizational bloat, insufficient transparency from leadership regarding financials and performance, and over-reliance on manual processes dependent on a single individual.

How can I eliminate Supply Chain Debt?

Here are three key strategies to consider:

Reassess the Labor Curve:

Companies should reassess their labor curve by evaluating headcount and the location of the headcount. Most startups go through a common cycle when they first start where they focus on local, generalized talent before transitioning to specialized remote domestic talent, specialized overseas talent, and eventually automation. In order to progress up this curve the organization has to learn how to build redundancy and quality into their processes which causes a constant rethink of why things are the way they are. By optimizing the workforce, companies can streamline operations, reduce costs, and leverage the lowest cost available while maintaining productivity.

Rethink Supply Chain Design:

I usually tell people that 85% of the problems you’ll have in your supply chain come from the design decisions you make. As such, Supply Chain design plays a vital role in preventing supply chain debt. Companies should closely examine the design of their supply chain to identify inefficiencies. For example, launching production in North America before offshore manufacturing can minimize issues like high air freight costs while you are still figuring out demand and product market fit. The Xbox launch story serves as a good reference; for the first few years they wanted to be as close to the customer as possible and opted to produce in North Mexico before shifting production to Asia after they had a better understanding of what the baseline demand was going to look like. 

Build Release Valves for Waste:

What would you do differently if you knew that every outbound shipment you sent out was going to come back as a return? Hopefully you don’t have this nightmare scenario (unless you’re in circulate commerce), but answering this question effectively prompts brands to eliminate all sorts of supply chain debt. Creating release valves for waste is crucial for managing returns, slow-moving inventory, and off-quality goods. Startups should establish efficient processes to assess, dispose of, and prevent these issues from spiraling out of control. By adopting a proactive approach, companies can reduce unnecessary costs associated with storing excess inventory and implement measures like refurbishing or establishing recommerce channels to minimize waste.

Identifying and eliminating supply chain debt is essential for achieving profitability and optimizing operational performance. By reassessing the labor curve, rethinking supply chain design, and building release valves for waste, companies can streamline their operations, reduce costs, and enhance customer satisfaction. Embracing a proactive approach and continuously evaluating and refining the supply chain will enable organizations to achieve sustainable profitability in today’s dynamic business environment.