A supply chain cost reduction does not mean a reduction in quality or service. In fact, quite the opposite.
Experienced operators look for customer service improvement opportunities as well as cost savings. As long as you check the “cost to serve” trade-offs through modelling, you can decide what to save and what to reinvest, for example, in better order fill and shorter lead-times. The trick is to ensure that customers receive a market competitive service while stripping out any inefficiencies in the way the operations are run.
Removing all inefficiency in those areas where it adds no value means greater efficiencies in those areas where it matters. The potential savings in the supply chain are huge and the impact on profits even more so.
Unfortunately, many savings plans are all too often based on dubious industry benchmarks.
Now we risk the danger of cost reduction in those areas which not been subject to sufficient due diligence. In these circumstances, they fail to deliver on planned and committed savings. In the worst cases, they can put the whole business performance at risk and create reputational damage.
Customer service is actually at the top of the agenda when addressing any supply chain cost reduction. As we all know, customers buy for reasons that do not always fit our so-called “models”. If you add value where no value is perceived that is clearly an unnecessary cost.
The same is not true where cost reduction is attempted to those parts of the service which are greatly appreciated. Understanding what motivates and de-motivates your customers is fundamental to the whole process.
Transforming Supply Chains for lower cost and higher profit.
Some things should never be compromised. Yes, we want to save money but not at the expense of our core values.
Reliability is the perfect example. Any cost-cutting exercise that adversely affects reliability will not achieve a company’s core objectives.
Insufficient due diligence and under-resourcing of change management programmes are always high on the list of major risk factors.
We have seen many examples over the years of ambitious cost-saving projects. Many are built on over-optimistic assumptions that have not been properly validated.
In addition, not enough attention is paid to the implications of cost savings on customer service. Nor on the actual capacity of the logistics operations to absorb any change.
How to calculate supply chain costs and savings.
So, in order 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.
The best due diligence reviews strike the right balance between effective risk management and realising savings opportunities.
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 key questions will ensure the project is correctly aligned at the start:
- What opportunities are there for cost savings and reductions in working capital?
- Does the organisation have the ability to deliver them in practice?
- 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.
It is very rare for one company to service just one type of customer. As a result, there are significant variations in supply and demand combined with ever-increasing customer service levels. This all leads to a highly pressurised environment in which to work.
In our experience, the main problems usually come from a lack of capacity in the logistics operation to absorb any additional stock and throughput volumes. We also see unrealistic expectations about the pace of change achievable in complex distribution networks.
It’s like a continuously moving elevator.
It’s not so easy to step off mid-journey without risk of injury to ourselves and other passengers.
Supply Chains also require collaboration between a number of different groups which cut right across internal and external management boundaries.
In order to reduce supply chain costs, we need to understand how all the parts fit together. Identifying where the pinch points lie is a critical part of reducing the risks of implementation.
In practice, no implementation is without challenge. We don’t always know what we don’t know – especially in volatile marketplaces. This is one area where lining up back-up resources and contingencies becomes essential to mitigate the risk of even bigger cost overruns.
Due diligence reviews 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. It also usually throws up alternative options or variations to existing plans which can reduce the risk while maximizing the return.
Experience shows that more effort upfront more than pays for itself. It does this by validating savings delivery targets and ensuring the changes that you plan to make are practical and actually work.
If you would like to know more about supply chain cost reduction give us a call on +44 (0) 1628 487000. Alternatively, you can email us at firstname.lastname@example.org. Click here to look at the complete range of services we offer.