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Supply Chain Costs

Reducing Supply Chain Costs

Collaboration with suppliers and customers to cut supply chain costs is a key strategy employed by most companies.

Why reduce supply chain costs?
The economy has made the traditional supply chain ineffective. Across industries there is no relief from ever-increasing raw material prices and declining sales. So the only option now for survival is to decrease costs. Corporations are looking at cutting costs across their supply chains. An effective way to bring down supply chain costs is to collaborate with the suppliers and customers. Most organizations realise that competition is not between companies but between supply chains.

According to supply chain strategists, the modern day supply chain strategy is based on three principles:
  1. The end customer contributes to the cash flows of the supply chain.
  2. Supply chains management must include every component of the chain that contributes to the profits.
  3. Supply chain management should not be price centric, and must include management of technology, quality and product performance.
Therefore, the latest model of supply chain management emphasizes the management of information, relationships and inventory. Surveys that though organizations are excited about e-supply chain management, it is the physical delivery and sourcing that forms the bottom line of strategies. Managers should examine the processes that underlie supply chains and would evolve solutions that would facilitate costs savings and generate higher returns.

In most cases the supply chain costs escalate due to poor communication. Supply chain strategies that enhance the effectiveness of information systems must trim down inventory, logistic costs and boost customer satisfaction. However, new systems or processes should be introduced only based on efficient metrics and consistent data. A good example is Bechtel Group, where a plan to improve supply chain efficiency was held up because it lacked right metrics.

Reducing stock/inventory levels is profitable the supply chain. Some research surveys reveal on an average a typical manufacturing company spends 56 cents on inventory for every one dollar of revenue, while retail and wholesale organizations spend even more. By saving each dollar in inventory, the pre-tax profit can increase by one dollar. Wal-Mart is a good example for a corporation that has gained from an efficient inventory management system. Its success is credited to the well automated two-step distribution process. GlaxoSmithKline has developed internal supply chain consulting groups. The internal supply chain consulting groups comprise of the CIO, procurement officer and senior officers from legal and R&D departments.

Another approach to supply chain is to view supply chain management as a cost centre. Shell Oil operates the cost centre in consultancy mode. The costs savings achieved are shared among the cost centre and the other departments that work in tandem with the centre. Home Depot involves all the members of the supply chain including transporters and vendors. Such new approaches focus on reducing internal costs across functional departments.

Some other supply chain cost management initiatives include CRM, engineering control, global supplier development etc. Chrysler received a spate of suggestions from suppliers when it declared that cost savings would be shared. American Honda Motor Co maintains an enormous database that has cost drivers for each and every part that is sourced. This data is shared with the suppliers and savings that result are equally distributed.

Related reading: “Reducing Costs Across The Supply Chain”: R Handfield

Case Study Quotes

"Pretty much, Apple and Dell are the only ones in this industry making money. They make it by being Wal-Mart. We make it by innovation". - Steve Jobs, Apple