Identifying opportunities for cost reduction is a key objective for companies across all types of industries. Supply chain management spending thresholds, of course, are unique to every enterprise; a multi-billion dollar logistics company has more cost maneuverability than a 5 million dollar e-commerce startup. However, supply chain costs tend to average 9.8% of sales, with conscientious enterprises able to drive that number down to just 5.7%.
Supply chain costs can creep upward over time, slowly consuming an ever-increasing portion of profits. The first step is to set a specific cost reduction target — for example, decreasing supply chain costs to 7% of sales. This number can then be revisited over the next three, six, nine, and 12 months. Next, focus on completing an analysis of three primary aspects of the supply chain: acquisition, storage, and distribution.
Acquisition
There are two main drivers of acquisition costs: consumer demand and vendor pricing. Assessing consumer demand is crucial for remaining nimble in an evolving marketplace in which consumer expectations play an increasingly important role. If, for example, customers have shifted toward purchasing products from businesses that are socially conscious and ethically source raw materials, this may drive up acquisition costs. Alternatively, this may be a temporary fad.
Implementing new technologies such as machine learning or AI algorithms, which can more precisely predict consumer trends and the likely increases or decreases in acquisition costs, will help to reduce decisional risk. The same technologies can also be used to help produce a cost/benefit analysis of new supplier engagement. In the long run, having faster and more accurate information during the acquisition process will aid in driving down costs.
Storage
Storage and inventory management are intertwined, and depend on the acquisition stage. Depending on the specific industry, there may be wide fluctuations in inventory that require quick upscaling or downscaling of storage capacity. If new technologies and upgrades — for example, smart warehouses that are largely automated — are not within the current budget, then having a reorganization plan for a best- and worst-case scenario may be a more realistic goal.
When inventory is at its highest, creating easily adjustable column spacing or incorporating additional vertical units can provide a cost-saving solution. Also, creating a contingency plan for consolidating multiple warehouses in order to compensate for the possibility of low inventory periods can help reduce overhead and labor costs.
Distribution
Most experienced supply chain managers conduct an analysis of the distribution cost per order and per item. A good supply chain management software system should already provide this information. You may find that it's time to reduce the number of carrier contracts and focus on those that provide optimal pricing while maintaining consistently reliable delivery schedules. Alternatively, you may be able to use a single carrier for a limited period of time, allowing for reduced rates for an increased volume of goods.
Planning for Success
The tips discussed above are merely a starting point for supply chain cost reduction analysis. There are much more granular aspects within the cost vs. sales matrix that will be revealed through a deeper dive into each of these general categories.
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