Businesses often struggle to keep supply chain costs low. For example, home delivery is often complex and costly for two main reasons. First, the size and value of orders are usually small, leading to a high shipping cost-to-revenue ratio. Additionally, when customers are not at home, businesses have to re-deliver, making these costs even higher.
To cut supply chain costs, businesses need to clearly identify customer needs to design services that are cost-effective, or change management and operations to optimize activities within the supply chain.
The following article will discuss 7 ways to help businesses of all sizes and industries save on supply chain costs.
Why is it necessary to cut supply chain costs?
According to the World Bank, logistics and supply chain management costs in Vietnam are at 20.9% of GDP, much higher than developed countries such as Singapore, the US, or China. With such high costs, businesses find it difficult to optimize profits and operational efficiency. Additionally, logistics and supply chains are still considered traditional sectors and have not been optimized with technology. Therefore, the potential for optimization and development in this field is vast. Especially after prolonged lockdown periods causing supply chain disruptions, businesses are gradually realizing the importance of optimizing processes and technology to reduce supply chain costs.
So, where should businesses start and how can they reduce costs?
7 solutions to reduce supply chain costs for businesses
1.
Customer service
In marketing, the basic principle is: provide customers with what they really want, not just what the business thinks they want. Customer demands should shape the strategy and structure of the business’s supply chain.
For example, to appease customers calling in with complaints, a distributor offered free delivery, resulting in a $500,000 loss in revenue over a year. If the distributor could thoroughly resolve issues related to customer service, both they and the customers would benefit more.
Moreover, when customers see value in a specific service, they are willing to pay for it, especially if it helps them run their business better. Ensure that your entire business understands this, so you can adjust customer service to meet needs, improving sales, profits, and gaining more loyal customers.
2.
Supply chain strategy
Once you understand customer needs, build a strategy that aligns with business goals while ensuring customer service.
Here are some issues you might encounter if the correct approach to supply chain strategy is not used:
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The entire company does not fully understand the supply chain strategy.
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Your company thinks that the supply chain is limited to one or two functional departments (e.g., purchasing and production) instead of involving the entire company (including logistics, marketing, sales, research and development,...).
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Customer dissatisfaction related to costs and service.
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Many supply chain projects are managed by individual functional departments.
Indeed, the supply chain strategy must be adaptable and change with the growing demands of the business and customers, while being flexible enough to help the business make optimal operational and tactical decisions. The supply chain strategy also needs to be clear and precise, helping you avoid wasting money on activities that do not bring much profit.
3.
Cutting costs by optimizing processes
An optimized and efficient process helps businesses improve inventory conditions, cut supply chain costs, and increase revenue and profits. Instead of focusing on applying advanced and expensive technologies, if the process is not built correctly, even the most expensive software in the world cannot save your business.
S&OP is a process of sharing information between functional departments within the company. It is a simple concept but not easy to implement. Your S&OP process might be in trouble if you notice signs such as: too much overdue inventory, constantly changing production schedules, skyrocketing storage units (SKU), inaccurate or non-existent demand forecasts,...
To succeed with the S&OP process, businesses should start by planning long-term, categorizing products by sales volume, and setting fixed timelines for purchasing and production.
4.
Designing the supply chain network to cut costs
The farther suppliers are from each other, the more warehouses need to be added to the supply chain network to ensure service continuity. However, each touchpoint between the supply point and customers incurs costs and increases the risk of errors and damage. An improperly designed network leads to overloaded product handling processes, too many warehouse locations, and underutilized distribution centers. The result is high distribution costs and poor customer service.
Therefore, an optimized supply chain network design helps simplify product handling processes, cut supply chain costs while meeting customer service commitments.
You can refer to the following implementation plan:
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Determine customer service requirements: customer locations, delivery times, and their service expectations.
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Establish supply points and customer delivery times.
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Analyze the performance of the current network: facility costs, inventory costs, transportation costs, service effectiveness.
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Use appropriate analytical tools to test and quantify options to design the lowest-cost network.
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Consider switching to a new network if the benefits are substantial.
5.
Outsourcing services
Over 85% of businesses outsource to manage one or several activities in the supply chain. The two most commonly outsourced activities are warehousing and transportation. The most common reason businesses outsource is to save on supply chain costs.
our company should choose service providers that work productively and can meet various requirements. A healthy and proactive partnership will benefit both your business and the service provider. You will receive good service at a reasonable cost, and achieve the expected profits.
When outsourcing, your company should clearly state service requirements to the provider, such as delivery frequency and volume, or special conditions like packaging, handling, and temperature control,... The clearer and more specific the requirements, the more issues such as higher-than-expected costs or poor service can be avoided.
Assets that are utilized more within 24 hours are more valuable and have greater potential for profit. Unused assets, such as vehicles, facilities, or inventory, mean they are operating inefficiently and yielding low returns on investment. Businesses should change how they use assets to maximize their benefits and cut supply chain costs.
For example, a large beverage manufacturer experiences a peak season during Christmas. Providing enough warehouse capacity to meet the volume of goods during this peak period means there is little warehouse space to use for other times of the year. Therefore, this company rented additional warehouses to prepare for Christmas. As such, they only paid for the additional warehouse needed for one or two months, instead of the whole year.
7. Measuring performance
To measure performance in achieving the goal of cutting supply chain costs, businesses can follow these steps:
Step 1: Set specific goals to improve the supply chain
First, review the current state of the supply chain: the strengths and weaknesses in operations, cost usage, customer relationships,... Then, establish specific, practical goals suitable for the business to improve.
Step 2: Establish key performance indicators (KPIs)
Establishing appropriate KPIs helps you accurately measure the business’s performance in achieving the goal of cutting supply chain costs. KPIs will differ among organizations, depending on the culture and goals of each business. A good KPI needs to be understood and implemented by the entire company, as well as aim to promote and improve performance in achieving the overall goal.
Step 3: Implement and evaluate
It is time for your business to start taking action and do not forget to measure according to the KPIs set. During the implementation process, continuously evaluate operational effectiveness to make suitable changes for the goal of cutting supply chain costs.
Conclusion
No matter which of the seven methods you choose, always remember the basic principles of effective supply chain management: understand customer needs, identify goals and strategies suitable for the company, implement the strategy, and measure results to continuously improve the entire process.
References:
“7 WAYS EVERYONE CAN CUT SUPPLY CHAIN COSTS” - Rob O'Byrne: https://www.supplychainquarterly.com/articles/513-7-ways-everyone-can-cut-supply-chain-costs
Seven Ways to Reduce Supply Chain Costs