A Primer on Cutting Down Expenses Through Supply Chain Cost Optimization
The global inflation crisis placed additional strain on supply chain networks. Rising input costs have exerted significant pressure on margins; supply chains are breaking down, increasing inefficiencies, thereby increasing costs. As a result, business leaders need to plan their strategies better, account for disruptions, balance cost with service and look for alternate resource uses as a part of their supply chain management process.
Traditionally, cost management involved short-term cost-cutting measures that inevitably affected service levels, leaving stakeholders averse to the idea. However, recent trends show that cost optimization in the supply chain must move toward optimizing the total cost of ownership rather than choosing the lowest supply chain costs.
Supply Chain Cost Optimization, Explained
The aim of supply chain cost optimization is to control supply chain expenses to improve the return on investment while maintaining reliable supply. This involves evaluating all the supply chain functions and optimizing the processes. This holistic approach helps reduce costs without placing the chain at risk.
The scope of supply chain cost optimization includes:
- Cost, quality and supply of raw materials
- Transportation methods and costs
- Procurement process
- Inventory planning and management
- Cost of distribution and logistics
- Demand forecasting and supply chain planning
- Customer service levels
Cost optimization of the supply chain encompasses all aspects, from raw material sourcing, procurement and inventory management, to last-mile logistics and customer satisfaction.
According to a recent survey, 79% of companies believe that supply chain optimization directly improves revenue. Besides directly impacting the bottom line, cost optimization creates a lean and agile supply chain, builds resilience and improves production efficiency.
Here are some of the benefits to be derived from optimizing the supply chain.
- Better quality control: By evaluating the procurement and supply processes, optimization helps improve end-to-end quality control. It helps reduce waste and manage key metrics linked to performance.
- Lower overhead costs: The purpose of cost optimization is to find ways to reduce expenses by evaluating all supply chain functions. It involves making changes that reduce operational activities without a trade-off with service levels. Hence, lowering overhead costs comes as a direct result of this activity and impacts business profitability.
- Steady flow of materials and information: Supply chain reliability and resilience are critical for your business. Investing in real-time tracking, integrated inventory and logistics management, as well as enhancing the end-to-end visibility of the supply chain, helps reduce wastage costs caused by costly sourcing, improper packaging, opting for unsuitable transportation modes and poor last-mile logistics.
- Higher efficiency: Using predictive and prescriptive analytics improves demand forecasting, planning and managing costs of production, procurement, inventory and distribution. This results in higher efficiency and time and cost savings.
- Better collaboration: Supply chain networks share real-time information with suppliers, 3PL partners and customers. This ensures that valuable time and money are not spent on addressing disruptions caused by miscommunication. It also allows all stakeholders to participate and the supply chain to run smoothly for mutual benefit.
How Cost Reduction Works Through Supply Chain Network Optimization
When it comes to cost reduction in a supply chain, the answer does not lie in the compartmentalization of functions or in cutting costs by substitution. Business value –such as profitable growth, customer experience, compliance and sustainability– must be aligned with an efficient supply chain that results from demand fulfillment, product supply and new products/business.
Let’s look at how this can be achieved:
- Manage supplier inventory: Your suppliers need to be on the same page as you. Share the demand planning of your business and collaborate with the suppliers’ demand planning to ensure smooth supply and optimum inventory management. By sharing forecasts and timeframes, you and your suppliers can achieve greater transparency, which reduces the time and cost of managing avoidable disruptions.
- Maximize space: Reduce overheads by optimizing warehouse management. Ensure full use of space or revisit demand planning for modifying inventory needs. Paying for warehouse space but not utilizing it to its limit is a waste of resources and finances.
- Track performance: Performance tracking of all supply chain functions using KPIs is essential to measure efforts and track progress. With the help of analytics, it is necessary to set realistic targets and provide forecasts for stock renewal, logistics, etc.
- Deploy inventory management: Inventory management is essential to avoid the cost of wastage, ensure timely delivery to customers and achieve near-perfect inventory accuracy. This guarantees timely delivery to customers without spending on additional purchases.
- Create reliable demand planning: Customer demand planning is at the core of cost optimization. Knowing what the customers may expect can help your business understand what they want and when they want it. This reduces the cost of last-minute expedited charges and other unplanned supply chain overheads.
- Focus on the customer: Cost optimization should not be a trade-off against customer service levels and quality expectations. Focusing on the customer helps offer choices that your supply chain can handle, such as paid expedited delivery options, subscriptions for free shipping and other similar ideas.
These metrics can empower an organization’s supply chain capabilities without compromising their service levels.
Cost optimization is not a short-term solution, but a long-term approach that factors key components such as quality control, inventory management and demand planning; all while maintaining a spotlight on customer service. It is a trump card for organizations and has the potential to overhaul their supply chain strategy.
This article was first published on Nearshore Americas