How to reduce your supply chain costs for increased profitability

Awareness of supply chain management is growing; obvious signs of good or bad supply chain performance confront us all in our daily lives, the relief of a next day delivery at the touch of a mobile phone app or the disbelief at an empty shelf. There are many definitions of supply chain management available, several include the classic ‘right product, right time, right place’ phrase; a statement much easier said than done and critically often missing ‘right price’.

The term ‘supply chain’ is an oversimplification, ‘supply chains’ are really networks in which many activities and decisions need to be orchestrated with precision. For your business, it is also imperative to gain clear insight into what aspects are adding value and what are generating unnecessary cost. Why? Because apparently small changes in operational costs can have a big impact on profit margins due to the multiplier or ‘ratchet’ effect; for example, modest improvements of 5% or 10% can drive a 70% gain in profit margin or even 120% should improved service drive sales:

Supply chain service to grow revenue

Meeting customer expectations is a given for sustaining and growing sales revenues; operational performance that inspires confidence, in both customers and sales teams, can have a transformational effect. Plans can be made based on demonstrated reliability, opportunities can be taken based on known flexibilities.

Any assessment of service must start with the customer; whilst order fill rates can provide an indication of customer experience, knowing how customers measure your business is critical. An approach that marries quantitative measures with a qualitative assessment that captures what customers value most is extremely powerful. The insights gained will highlight opportunities and competitive risks as well as providing a key input to any subsequent realignment of the supply chain operation.

Building collaborative relationships

The ability to capture and apply information from across the supply chain network has been greatly enhanced by technology and will continue to make significant advances as artificial intelligence, the ‘internet of things’ and blockchain applications come to life. That said, information, not just data, really flows when based on trust, not simply optical fibre cables.

Fundamentally, building collaborative relationships is more about mindset than technology and involves identifying and sharing opportunities to create mutual benefits and recognising that costs inevitably flow and circulate in the network. A straightforward Pareto analysis based on sales revenues can provide a starting point, but this should be enhanced with an understanding of customer profitability and expected market developments. It is likely there will be relatively few standout customers of the scale and capability to form true collaborative supply chains; once identified, these customers can make a pivotal contribution to transforming ways of working and enabling both cost and capital efficiencies.

Material Costs

A focus on material costs and cost reduction programmes applied to the supply chain are nothing new. Mandates to reduce costs by 10% have often set simple targets in some businesses; the ultimate outcomes, usually beyond the current reporting year, can, in many instances, yield unintended consequences with nominal supply cost ‘savings’ being lost as other inefficiencies start to accrue. It is important to consider the coherence of cost reduction opportunities and to assess if the adjustment or change will remove cost from the whole supply chain or simply seek to transfer the burden. An end-to-end supply chain assessment of potential cost reductions will help to identify those options that are sustainable.

Design has a critical role in shaping product costs (and supply chain management costs) as well as ensuring material and component costs are truly value-aligned; value being determined by the customer and their willingness to recognise this in the price paid. ‘Value Engineering’ pioneered by General Electric (GE) offers a rigorous approach to testing cost versus value.

Productivity

Labour efficiencies tend to drift without a systematic approach. Good practices may be lost with staff turnover as knowledge leaves the business; outmoded practices may linger when not subjected to regular review and assessment. Again, productivity measures and incentives need to be balanced with a total supply chain cost perspective constructed using activity-based costing to allocate fixed costs.

Overheads

The process-related costs of planning, sourcing and distribution operations are often overlooked. In many instances, simply identifying and analysing these ‘indirect’ costs will reveal significant opportunities for improvement. Overhead costs related to managing the supply network can be extensive, from the resources needed to source materials to the leasing costs of the equipment used to fulfil customer orders; capturing the discrete cost elements allows an evaluation of value-added and an assessment of the approaches being taken. Such insight will often challenge perceptions and yield opportunities. Understanding total cost-to-serve allows your business to make the most informed decisions and seek cost reductions that are sustainable. Simply passing cost around the supply network will not, ultimately, deliver savings and may hamper collaboration and limit the ability of a network to compete with others. Confirming how operational performance is determining profitability for your business will enable:

· the relationship of service to cost to be qualified and any trade-offs to be determined with greater precision
· cost reductions to be targeted at non-value adding activities
· operational capabilities that can act as growth drivers to be confirmed and business-wide understanding and confidence enhanced.

To truly deliver sustainable profitability improvement, however, current performance data needs to be:

· Captured accurately, reflecting true customer experience
· Applied intelligently to assign costs to activities, products, and customers
· Evaluated within the context of the business and the wider supply network
· Used to answer key questions about the characteristics and requirements of the operation
· Applied to set key priorities for the business and drive the alignment of teams.

For advice on how to get started on reducing your supply chain costs, download our free Cost Optimisation Guide.

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For a free, no obligation discussion on how to reduce your supply chain costs, you can book a discovery call with one of our supply chain experts.
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Calum Lewis is the founder of OP2MA, an innovative consultancy that focuses on transforming supply chains for sustainable growth.

Biography

Calum has extensive experience in leading businesses and delivering exceptional operational and financial performance. With the LEGO Group, he embedded best practice supply chain management to drive five-fold sales growth to £300m in the UK/Ireland market whilst supporting LEGO’s climb to No 1 UK Toy Supplier. More recently, with responsibility for planning and inventory management across EMEA, he enhanced the capability and effectiveness of managing supply to around 80 countries in the region.

Recognised for his clear insight on core issues and not being afraid to challenge prevailing thinking or ways of working, he is highly skilled at implementing innovative approaches to supply chain management. Calum believes it is now more critical than ever to combine creative and analytic thinking to make innovation really happen.

Creating OP2MA, he sees no reason small and medium-sized enterprises (SMEs) should not have access to the ‘large corporate’ expertise and know-how that can transform supply chains to drive sustainable growth. The OP2MA team love working out what makes businesses tick, how they can improve, and applying pragmatic solutions. They believe that SMEs are critical for the economic prosperity and well-being of the communities in which they operate and are passionate about helping businesses grow and thrive.