How to reduce operational costs through effective supply chain management

Any supply chain leader knows the financial strains of running a supply chain. With global supply chains constantly evolving into more intricate networks, it has become easier than ever to find yourself losing money at every stage. While industry giants like Amazon continue to dominate the market, supply chain leaders scramble and often are forced to throw money at a problem without understanding what the right solution for their organization is. So, how can you avoid getting caught in the cycle? And more importantly, how can you learn to identify where your money is going and the measures you can take today to save it?

What is driving operational costs in a supply chain?

In most supply chains of medium to large companies, the bulk of operation costs lie in six main areas:

• Warehousing
• Transportation
• Inventory
• People
• Technology
• Demand planning

It's essential to understand what goes into each area, the impact it can have on your supply chain when one of these areas isn’t running to the best of its abilities, the financial effect it can have on your bottom line, the cost drivers associated with each, and ultimately how to sustainably reduce your overall cost.  

Optimize your warehouse network and operations

Having an optimized network design and efficiently running your warehouse operations is an essential aspect of ensuring cost optimization. If your warehouse management is flawed, or your network design is unbalanced, you can run into extreme bottlenecks in your supply chain which can lead to negative effects on your bottom line. Finding the right balance between having the right location for your warehouses or distribution centers close to the center of gravity at a reasonable rental price is essential. It is therefore a worthwhile effort to find and implement the most efficient warehouse network with the right management for your supply chain to optimize service levels, improve lead times, free up capital, and reduce operational costs.

Select the right transportation partners and mode

Transportation can be a major money pit if you aren’t careful. Choosing the right partners and mode of transportation is critical. If your forwarders and carriers are not performing well or your choice of transportation is contingent on time pressure, then expensive air freight or express trucking is your solution. This can cost you up to eight times the cost of a planned consolidation enabling ocean freight or regular road transport.

Analyze and optimize your inventory

In such volatile times, supply chain leaders are finding it increasingly difficult to discern how much and when to purchase goods or raw materials. It is important not to have too much inventory in the warehouses and distribution centers, as this ties up cash and causes high operational costs, but also not to have too little stock, otherwise you won’t be able to meet customer demand. In order to optimize inventory levels in your supply chain, it is important to understand that inventory level does not only refer to the products that are in your warehouses and distribution centers, but you also need to consider the products that are before or after production temporarily stored, as well as all products that are in motion on trucks and containers. Although this sounds obvious, in most cases the implementation is far more complicated. This is mainly driven by the fact that the warehouses and distribution centers are in many cases not only operated internally, but also partly by external logistics partners. The result is that different WMS are in use and there is no comprehensive view of the inventory levels in the supply chain. All this makes inventory management very complex but essential when it comes to reducing operational costs in supply chain management.

Put the right people in the right seats

People are the heart of your supply chain; they’re what keeps it pumping. If you find that your team is constantly making missteps, are unmotivated or incapable, you’ll surely see rapid financial losses. Prioritizing your team is key, as the decisions they’ll make and the speed they make them can cost your organization millions. When your goal is to optimize your operational costs, you want your entire team to adopt the same mindset. Not only should your costs decrease at your current stage, but your team should be well equipped with the resources to create a sustainable and cost-effective plan for the future. Prioritizing end-to-end communication and social cohesion is vital here, with studies showing that organizations who make this a priority see a much more optimized team dynamic, and in turn a more successful supply chain.

Embrace modern technologies and leverage real-time data

Numerous cutting-edge technologies are on the market today to help companies optimize their supply chain and alleviate long-term financial strain. If you’re using outdated technology with manual processes and poor data quality, it can cost your organization huge financial losses. According to a recent McKinsey survey, only 23% of global supply chains have implemented digital solutions and are moving away from manual process. What’s more, 90% of the supply chain leaders surveyed say they plan on making this shift soon, understanding the constraints manual systems have on their organizations. We’ve seen up to 20% in savings of global logistics spend by implementing modern technologies data such as a digital supply chain platform. In combination with real-time data it ensures your supply chain is ready for any possible future outside stressors. Readily available data on suppliers, products, shipments, and more is a key player in mitigating challenges that consume cost. Instead of reacting when it’s too late, you can get ahead of the problem and solve it before it gets too big or too costly to manage. To stay competitive, deliver world-class customer service, and operate efficiently, companies today must adopt modern technologies and systems that create more efficient, streamlined operations. This shift ultimately requires less people and reduces overall operational costs.

Poor/ outdated data costs supply chains a whopping 12.8 million dollars per year, with this number on a steady increase in coming years.

Gartner

Emphasize the need for demand forecasting

Demand forecasting is the key to understanding and delivering the right products to the right place in an efficient and timely manner. It refers to the estimation of what your future customer demand will look like, and the effects those demands will have on your business as it stands. This ultimately builds customer trust, cuts the cost of fixing underbuying or overbuying stock, and overall allows for a smooth-running supply chain. To ensure thorough demand forecasting, invest the necessary time and effort in the analysis of historical data so you avoid making the same mistakes this time around.

Conclusion

In the more and more complex world of global supply chains, getting a grip on cost is not an easy task. Many supply chain leaders find themselves falling into money pits and struggle to break free from a constant cycle of crisis aversion. By understanding the challenges above and making small steps to optimize cost management in your supply chain, your organization will surely see cost benefits and ultimately succeed.