Optimizing supply chain costs

Optimizing supply chain costs
Optimizing supply chain costs

Optimizing supply chain costs

Apr 14, 2022

As disruptions to the supply chain continue and the shortfalls within the system which were highlighted by the pandemic re-shape supply chain management as we know it, many companies have started 2022 unsure how to proceed. It seems that uncertainty and unpredictability have become the norm. While according to KPMG 67% of CEOs say they will increase investment in disruption detection and innovation processes, the route to optimization continues to experience ever more disruptions due to geopolitical, financial, and environmental shifts. 

These macro factors make supply chain planning, demand forecasting, procurement, and inventory management extremely difficult, and the industry has had to adapt and remain flexible to maintain service levels while meeting customer demand. This also makes predicting total costs from one quarter to the next a challenge.

The importance of efficient supply chains

According to Matthew Burton, supply chain and operations leader with EY EMEIA, over the past couple of years, leading organizations “have developed the ability to rapidly adapt business models and supply chain ecosystems to live with a high degree of volatility and disruption. In many cases, driven by necessity, companies used this period to increase overall investment in digital supply chain technologies, and replace legacy platforms in order to gain end-to-end visibility and bring risks under control.”

Optimized, efficient supply chains are now drivers of business growth that demand a business’ full attention from director level down. Optimizing is no longer simply a strategic task that focuses on cost management or more specifically, lowest cost.

Kris Timmermans, global supply chain and operations lead at Accenture says that “Today’s supply chains are more complex than linear models – they’re sophisticated supply networks that are more flexible and efficient. As we look to the future, building resilience, staying relevant to customers, and embedding sustainability throughout will be critical, as future supply chains must be equipped to anticipate and lead through disruption.”

Supply chain and sustainability

Although supply chain costs and profitability are still a key focus, especially with fuel costs fluctuating and affecting transportation costs, customer journey is a crucial factor in influencing the public’s perception of a company. Sustainability is also an integral part of supply chain strategy, and the triple bottom line that takes into account people, planet, and profit, increasingly carries weight for customers in their decision-making processes.

Not all businesses can afford to bring their manufacturing closer to home, but those companies that have a diversified network of manufacturers and suppliers, while sourcing raw materials from a number of countries, have managed to navigate the supply chain crisis with fewer hitches. As well as considering the location of factories, the increase in ecommerce is driving demand for industrial real estate as warehousing becomes vital for inventory management. According to the North American Ports Report from Cushman & Wakefield this has resulted in record low vacancy rates and rising rents that are expected to continue throughout 2023. Many companies still rely on one central warehouse, with 41% of companies self-fulfilling multiple channels from just a single distribution center last year.

Expanding distribution 

As the past few years have demonstrated, all it takes is one bad storm, labor strike or other localized disruption to bring distribution of finished goods to a standstill. In addition to manufacturing and supply network optimization, companies should explore ways to expand their distribution and fulfillment networks. This can include ship-from-store fulfillment, dark stores, micro-fulfillment centers, or outsourcing to a third-party logistics (3PL) provider. Before embarking on an optimization project, companies need to think about conducting a network analysis. This will help to determine the correct size, location and number of facilities required to accommodate current and projected growth while achieving desired service levels. A network analysis can also help to identify opportunities to increase capacity and maximize warehouse space in current facilities.

Sales and operations planning (S&OP) is a planning process that coordinates demand, supply, and financial planning as part of a company’s master planning. The process was designed to support executive decision-making related to feasible and profitable business plans but has become increasingly complex. Various S&OP software and management systems are available to provide an overview of business processes and to integrate planning across departments. They offer advanced analytics that help with demand planning and lead times as well as providing insights into balancing production costs, operating costs, and inventory costs. Overall cost reduction is always a preferable end goal but it can be difficult without other trade-offs or jeopardizing customer satisfaction.

Many companies struggle with supply chain operations because successful management requires so much monitoring and visibility across teams. Even for the simplest of businesses, the supply chain can be lengthy and complex, and without a system in place, teams can end up working in silos and not sharing information in real-time with stakeholders. End-to-end supply chain visibility helps businesses to overcome some of the potential pitfalls of the chain not being joined up. Supply chain management software, digital platforms, and blockchains that dynamically update are hugely important in helping businesses to reach operational efficiency, especially in times of volatility and ambiguity, because each step of the chain is reliant upon every other step.

Managing risks in supply chain

Risk management plays a big part in supply chain costs. Kevin Shuler, CEO of Quandary Consulting Group, stresses the importance of understanding how to manage risks properly by explaining that “over optimizing your supply chain can be just as costly as allowing disruptions to happen.” For example, stockpiling inventory in case of potential disruption can unnecessarily drive cost and put pressure on operations, especially if that disruption never comes. However, not being prepared for a spike in demand, can be damaging. 

Frequently auditing the supply chain can help to identify potential weaknesses while carrying out stress tests on suppliers can give evidence of how pricing, logistics and production would be impacted.

Become an indispensable link in the supply chain with an MBA

Operating in today’s VUCA (volatility, uncertainty, complexity, ambiguity) world can be challenging. The supply chain network is increasingly subject to political, economic, and environmental forces outside of our control. Maintaining cost-effective processes while hitting KPIs will continue to present issues for service providers and retailers alike. 

Knowing what metrics to work with in the optimization process is a desirable skill and professionals who have sound knowledge of and experience in supply chain optimization will remain in demand. Find out how you can study while you continue to work with a part-time 100% online MBA with Supply Chain Management from the Alba Graduate Business School, The American College Greece, and gain a qualification that helps you stand out.