Logistics and supply chains are an important source of cost savings for businesses undertaking internal divisional mergers or rationalising and optimising their transport and warehousing networks.
They also help to fund investment decisions in M&A by delivering cost savings through the integration of multiple logistics networks. Unfortunately, however, many savings plans are too often based on dubious industry benchmarks and have not been subject to sufficient due diligence. In these circumstances, they fail to deliver on planned and committed savings. And they can in the worst cases put the whole business performance at risk and create reputational damage.
Transforming Supply Chains is inherently challenging
From commercial and operational experience, insufficient due diligence of the basics and under-resourcing of change management programmes are high on the list of major risk factors. We have seen many examples over the years of ambitious cost-saving projects which are built on over-optimistic assumptions that have not been properly validated through operational experience. In addition, not enough attention is paid to the implications of cost savings objectives on customer service or of the actual capacity and performance of logistics operations to absorb change in meaningful timescales.
This results in a business case for change founded on unrealistic savings numbers with a real risk that the business performance itself could be damaged in the change.
Savings potential – the devil is in the detail.
So, to assess the risk of missed savings targets and operational disruption, access is needed to detailed data and live logistics operations. The devil really is in the detail in logistics and supply chain operations. The best due diligence reviews strike the right balance between effective risk management and realising savings opportunities.
Investors and management are looking to build confidence in the likelihood of a successful outcome. This comes in part from lowering the investment risks through a better understanding of the operational capacity and capability of the logistics and supply chain operations.
Some typical questions are as follows:
- What opportunities are there for cost savings and reductions in working capital?
- Does the organisation have the ability to deliver them in practice and what do we need to do to achieve our objectives and in what timescales?
- If we reduce the time expected for implementation, what are the risks and how do we mitigate them? What value is there in outsourcing or insourcing transport and warehousing?
- How much inventory do we need to achieve target service levels?
- If we reduce stocks, how we do we do it and what risks are there to customer service?
- What spare capacity is there in the current operations and how can we improve our productivity and service?
- What role if any does automation play in improving efficiency and at what cost?
- How effective are the IT Systems and Technology in support of efficient operations?
- How scalable are the current operations?
- If we have to add capacity, when and how should we do it cost-effectively?
The essential components of risk-saving strategies.
Logistics operations are at the sharp end of long and often complex supply chains.
Significant variations in supply and demand combined with ever-increasing customer service levels can make them highly pressurised environments in which to work. In our experience, the main problems usually come from a lack of capacity in the logistics operation to absorb additional stock and throughput volumes and from unrealistic expectations about the pace of change achievable in complex distribution networks.
It’s like a continuously moving elevator – not so easy to step off mid-journey without risk of injury to ourselves and other passengers. Supply Chains also require collaboration amongst a number of different groups which cut right across internal and external management boundaries: internal company functions, suppliers, sub-contractors, outsourcing partners, and customers most important of all. Understanding how all the parts fit together and where the pinch points lie is a critical part of reducing the risks on implementation.
In practice, no implementation is without challenges, some foreseen and others unforeseen, especially in volatile marketplaces. This is one area where lining up back-up resources and contingencies and acting decisively and quickly when problems arise becomes essential to mitigate the risk of even bigger cost overruns.
So, careful implementation planning and effective resourcing of implementation are an essential component of effective cost-saving strategies. Without it, there is a high risk that savings targets will not be achieved and, worse still, customer service is compromised with consequent risks to market share.
Due diligence reviews help define the opportunities, identify the pitfalls and the critical success factors.
Due diligence of cost savings objectives and plans can go a long way towards generating sustainable cost savings and managing the risks on implementation. It also usually throws up alternative options or variations to existing plans which can reduce the risk while maximizing the return. The same process applies in principle if you are considering what logistics and supply chain cost savings opportunities there are within your business.
Experience shows that more effort upfront more than pays for itself by validating savings delivery targets and ensuring the changes that you plan to make are practical and actually work.