FAQs (frequently asked questions) on supply chain Cost Reduction
Following are some of the frequently asked questions (FAQs) on supply chain cost reduction that we have encountered in our workshops, seminars, and other forums.
Feel free to ask more questions if your particular question is not answered below. And remember, if you do not act on what you know, then you have no advantage over the person who does not know what you know.
Why we are qualified to write this list of FAQs?
For nearly three decades now, our co-founder Vivek Sood has been considered one of the most authoritative professionals in the field when it comes to the subject of understanding supply chains and configuring them for cost optimisation in his clients' corporations on all five continents.
He has written four seminal books about using supply chains to gain massive advantage in business. He also regularly delivers keynote speeches at business schools and conferences such as University of Technology Sydney, Supply Chain Asia, Asian Bankers Forum, APEC Business Advisory Council.
He has been quoted in the authoritative business press and over 100 academic papers written by supply chain researchers around the world. Vivek and his team have examined thousands of supply chains during their projects over the last three decades and helped hundreds of executives build safe, cost effective and sustainable supply chains and careers.
In any company, cost reduction possibilities exist everywhere - in sales, general, administrative, payroll and supply chain.
Excess costs in sales, general and administrative areas are quite visible to the accountants sitting in the corporate HQ. Even excess payroll is easy of identify on a spreadsheet.
With higher awareness comes frequent action. These costs are frequently reviewed and kept in check. Many of them are also easy to turn off temporarily in search for profit boost at the end of the quarter or year.
Supply chain costs, on the other hand, are a mystery to almost everyone in the company. The accountants have to accept the word of the few supply chain specialists in the company that the costs are as low as they could be under the circumstances.
Most corporate staffers are skeptic about these assertion, but are not able to find ways of easily reducing supply chain costs - though they keep weighing on their minds. That is why everyone in the company immediately thinks of supply chain whenever cost reduction is mentioned.
In most of our projects, we have found cost savings opportunities where supply chain staff were convinced none existed. More importantly, someone else in the company thought it was worth taking a fresh look with a more experienced mindset.
We agree that supply chain is one of the most popular avenues of cost reduction. Whenever people have to cut costs deeply, they are always looking to restructure their supply chain network. Almost every time you take a serious look at the supply chain, you will find some savings.
However, that is not the only thing you will find of value in a supply chain. Also, sometimes, the cost savings avenues in supply chain have been genuinely exhausted (see the other answers below).
Supply chain can also be used for innovation - both product innovation and process innovation. A properly segmented supply chain structure will respond better to your market segmentation efforts and customers will literally 'feel the love' and reward you in return. It is an art form to carry it out in practice. We address this in our book Unchain Your Corporation.
Supply chains are also critical for product life-cycle management where succeeding generations of same product is launched in a phased manner to maximise its profitability as well as longevity. Again, it is an art form to do so, and we talk about our projects case studies in the book The 5-STAR Business Network.
Over the last 25 years we have conducted hundreds of supply chain restructuring projects. Some were as small as two weeks, while others lasted several years and spanned a number of continents.
A few of those cost savings opportunities struck in mind for their sheer magnitude, not just in dollar terms but also in percentage savings terms.
That is one of the reasons when we see directives from a large strategy consulting company very fond of issuing top down percent savings diktats - the first question we ask is 'how did they know that the savings potential was not much more than 15% or 20% that they decreed?'
This article outlines each of the three case studies that stuck in mind for us due to their savings achieved. Have a look and see which parts of the information might also be useful for you.
The article mentioned in the question above has already given some common ways of reducing supply chain costs. If you have not read it, please click on the link here to read it.
We can give you a laundry list of hundreds of places we found cost savings during our supply chain projects in the last 25 years. But it would take you ages to go and look in each area. And, then you will still not know whether, in this particular case, the costs are high, low or just right.
So instead, we will give you a way of thinking about supply chain costs that will allow you to yourself find numerous cost savings opportunities in your supply chains.
You will have to think about this a little bit more what we say below, but once you absorb this new concept, your cost-saving perspective will change forever.
Are you ready for the big secret?
Look For The Business Constraints People Regularly Accept, That You Find Worthwhile Breaking.
Yes, that is it. That is the secret.
Let me first give you a simple example everyone can relate to, and then, in the next answer, I will provide you with the relevant overall framework we teach our client teams.
Take a simple road trip in a car to go pick up your child from the school. Let us say it is a 10-minute road trip, but due to congestion around the school hours, it takes 22 minutes. Most people will accept an extra 12 minutes as inevitable. But, you being a cost reduction aficionado, add up all that wasted time per person per year. You find that it is a vast number, and think something must be done - after all time is money.
So you convene a meeting of a few concerned parents and come up with a solution where parents take a turn to pick up 3-4 neighbourhood kids in their car. The number of vehicles for pick up reduce by about three times, and the commute reduces from 22 minutes to about 19 minutes. You have found an executional constraints solution to solve the problem - saving 3 minutes in the bargain. It takes easy to get started, but difficult to coordinate it on a daily basis, but the savings are small and instant.
After a while, one of the parents happens to use their influence to get a school bus started, and that takes more than 50 cars off the daily pick up commute. Sure the kids have to walk home from the bus stop, but overall parents save time, kids get some more exercise and arrive at home at about the same time anyway. The commute for those who still use the car for the pick up reduces to 15 minutes. This is a systemic constraints solution that takes a more significant chunk of savings out of the problem but takes a bit more effort to organise.
Now, this is an influential school, and some of the parents have enough pull to get the road lane structure around the area to be reconfigured to make special lanes for entering and exiting a special pick up zone in the parking of the school. This structural constraints solution that brings the pickup times back to nearly par - 11 minutes.
And, then an unexpected thing happens. Due to COVID-19, the schools are closed, and kids go to remote learning. It takes some getting used to, but eventually, the kids are learning at the same pace in the new model with no commute. This type of natural constraints solution is almost always novel, though it should not always take a crisis to trigger innovative thinking.
Continue reading the next question and its answer to the framework that we promised at the beginning of this answer.
We will answer this question in two different ways.
Firstly, we will answer exactly what you asked - where to look for cost reduction first. Simple - where you can get almost sure savings, quickest.
Well, warehousing, and transportation are the two areas where somehow we have almost always found some savings in every case. So it is natural to look there first. Another area which is frequently ripe for optimisation is manufacturing footprint review. If you have not read this article I linked before, make you you read it to understand why I say so.
Now we will give you the constraints based supply chain cost reduction framework to prioritise the savings projects. I have already given an example and explained the concept briefly in the the answer to the previous question.
The table below explains the framework adequately for the purpose of this answer. In real life, it is a fairly involved exercise to understand and apply the framework and we spend almost an entire day practicing it in our Advanced Cost Leadership Workshops with our clients.
However, if you combine the information in this answer with the information in the previous answer diligently, and apply it to your company's situation, you will arrive at the same end results yourself.
By far the biggest mistake is very simple - people underestimate how difficult any cost reduction exercise is.
Once a company gets used to a higher cost structure, they simply cannot live without it. Your suppliers see it as a threat to their revenue, their profit or even their survival. Your own staff see it as a threat to their lifestyle or working conditions. Even your executives sometimes see it as a threat to their budget and their ego.
All these sensitivities need to handled carefully and with a judicious mix of authority, tact and logic.
There are many other mistakes that we discuss in the cost leadership workshops and generally this is the most lively part of the discussion. Emotions run high and people are frequently challenged to keep moving forward.
This is a very good question and we can guess the reason for the question. In all fairness, our answer depends on your company's situation and cost reduction targets.
If the cost reduction targets are modest (say less than 10%) then most of the cost reduction projects will belong to executional constraints breaking related ideas. Your existing business-as-usual supply chain team should be able to handle these type of projects in addition to their day-to-day jobs. This much is more or less expected in today's business environment.
On the other end of the scale, if you think that the cost reduction opportunities are massive, or do not know how big, then you must use a separate internal or external team for the cost reduction exercise. Your business-as-usual supply chain team simply does not have the expertise, capabilities, objectivity and bandwidth to handle the structural and natural constraints breaking ideas.
Unfortunately, most of the times where people have doubts about this question they are in between these two extremes and find it difficult to make a decision. Our view is then when you have a doubt, you should assume that this is the case and act accordingly.
The following graphic makes the differences between the two types of team clear. If you need more information, do not hesitate to contact us.
Your suppliers are not happy to lose their profits, their revenues and their bonuses. They will do everything in their power to claw it back. Even some of your employees will play games to restore their perks and budgets.
Keeping these very important issues of motivation aside, there are many reasons why supply chain cost reduction teams fail to achieve sustainable savings. Let us give you an example from this article we wrote a while back:
A company we know initiated a major supply chain transformation initiative. All warehouses were given strict KPIs in terms of RONA (Return on Net Assets) and inventory levels. The expectation was that if all warehouses achieve their RONA targets, the overall supply chain would be in a much better shape. However, at the end of 6 months, when the overall supply chain costs were tallied, it appeared that the overall supply chain costs had actually increased. On further investigations, it appeared that due to strict inventory restrictions on the warehouses, they were ordering minimum possible stock, resulting in much more frequent replenishments – sometimes even on LTL (less than full truck load) or expedited shipment basis. So all the savings in inventory reduction was more than eroded by the increase in transportation costs. Like a half-filled balloon being pressed in one place, the costs would just show up somewhere else – in an area which was not being focused on temporarily. This type of partial optimisation approach results from a lack of balance in the supply chain transformation efforts.
You are right when you can it a crucial judgement call.
Our simple answer is that given the propensity of the companies to always hide the bad news until it cannot be hidden anymore, the situation is generally worse than it looks. In other words, if you suspect something, it is most likely the case.
However, that is just a small bit of colloquial wisdom from decades of experience. You want more than that - objective, logical reasoning. We use an entire chapter in our book Unchain Your Corporation to describe the observable symptoms and their root causes.
The following graphic summarises that chapter and might provide you with a set of useful guidelines. For more explanation, or to be able to read the fine print, either click on the image below or feel free to read the full chapter by getting hold of the book, or its free first three chapters.
This is a challenging question, and the answer is likely to fill an entire book. However, in the spirit of brevity and giving you the best value in the shortest time here are the most important pointers:
- Do not underestimate the amount of work involved and covert resistance you will encounter.
- Try to have a dedicated team for cost reduction.
- Staff this team with internal people with a high amount of expertise and motivation, and external people with deep experience.
- Use a structured approach to supply chain cost reduction - such as constraints based cost reduction framework outlined in the answers above.
- Keep your reserves handy - if your target is $75 million cost reduction, have a hopper of $100 million. In other words, allow for savings shortfall at the last minute.
- Independently verify every $ of savings as it hits the bottom-line. Have a formal verification process with sign-off from the CFO and the Treasurer for every $ claimed to be saved.
- Watch out for double counting. Have a system in place to handle double counting if the bonus is dependent on the amount saved by the team.
- Watch out for the cost creep in the areas affected, especially after the savings have already been verified and signed off. There are far too many ways for suppliers to claw back their profits.
- Structural savings ideas yield the most significant benefits but also take the most time. Keep after them if you want the big bucks. They are also the riskiest. Engage experienced personnel to assess the risk-reward trade-off.
- Do not write off the rats and mice - the small savings opportunities. They can add up to a ton. Take every $ of savings from wherever you can get it. This practice instils the right culture in the team.
- Spend a penny to save a dollar. You will have to pay for top judgement and experience, or you will miss the most significant savings opportunities.
- Top management engagement - support and constant scrutiny - is critical for results.
Everybody who hangs a shingle is able to help you in one way or the other. It is for you to discern the capabilities of each set of people, and work out how to make the best use of that capability. We will below outline the key groups of people and their respective sweet spots.
You can get help from:
- Contractors - generally ex executives who might be between jobs or have set up a one man band. They are generally a specialist in their own industry or field. So long as the situation is similar to what they encountered within their management careers, they are extremely useful. Do not attempt to use them outside their industry or field, or if the situation has changed significantly since they last managed a company.
- Accounting firms and their offshoots - they have the best relationships with the client CFOs and other executives due to their audit role. Their branding is respected by your bankers and board, and their templates can be impressive at times. Do not expect breakthrough strategic thinking here and expect them to bring large teams for an extended period of time irrespective of the work involved.
- Strategy firms and their offshoots - They have the highest prestige, and you can boast about having employed them to your peers. They can be extremely good if the right senior partner spends a lot of time at your site. Expect to train their brilliant novices, and pay a lot of money irrespective of the value you get in return.
- Tactical consultants in one of these areas - SAP/Oracle/other packages, six sigma, production planning, purchasing, logistics, warehousing, transportation, railways, trucking or shipping: They are generally the best in solving the tactical problems in their area of expertise. To some extent, they are very similar to #1 above, though many of them like to claim to have a broader set of skills than they have, or supply chain is all about just what they specialise in.
- Supply chain specialist strategy boutiques such as our company - They are focused on the results and combine the best of the strategy firms and the tactical supply chain firms (#3 and #4 above). Due to size constraints, they have limited bandwidth to work on your project unless you are a long term client or have the potential to become one or offer them a small learning opportunity about a unique situation. They can tend to bite off more than they can chew, so ask about time commitments for your full project before you award projects to them.
Notes on FAQs
Clearly, any such list of frequently asked questions (FAQs) about supply chain can never be fully exhaustive. Neither is anyone, including us, the final authority and arbitrator on this or any other topic.
You will have your own opinions on many of these topics, and will have many other questions.
We throw open the comments section to you for your opinions and questions. We will try to address all of these, and the best ones will attract a reward in the form of one of our books, or publications.