Streamlining Supply Chain Complexity
Scope For This Project
Cost base is a crucial concept in supply chain management that refers to the total cost incurred in the production and delivery of goods and services. It encompasses all expenses related to the procurement of raw materials, manufacturing, transportation, warehousing, marketing, and distribution. Understanding the cost base is critical for supply chain managers as it provides valuable insights into the true cost of production and helps identify areas where cost savings can be made.
Table of Contents
Achieving Clarity and Cost Savings of $18 Million
By analyzing the cost base, companies can make informed decisions about pricing, production, and supply chain optimization, ensuring they remain competitive in the market and maximize their profits. In this context, the cost base plays a significant role in determining the total cost of ownership in the supply chain and is an essential tool for effective supply chain management.
The cost base in the supply chain can be influenced by several key factors, including storage at the company’s premises, freight to the customer, and inventory carrying costs. These contributing elements will be thoroughly explored in this discussion
Storage at company premises
Storage at company premises is an important aspect of supply chain management, as it can greatly impact the cost base and overall efficiency of the supply chain. Companies may choose to store inventory on-site for a number of reasons, including improved control over inventory levels, faster access to products, and reduced shipping costs.However, storage at company premises also comes with its own set of costs and challenges. The cost of storage includes rent or lease payments for the storage space, utilities, insurance, security, and handling costs. In addition, managing inventory at the company’s premises can be complex, as it requires careful planning and coordination to ensure that products are stored efficiently and safely, and that inventory levels are optimized.To minimize the cost of storage at company premises, companies can implement various strategies, such as adopting a just-in-time inventory management system, using space-saving storage solutions, and optimizing storage layouts to increase efficiency.
Freight to Customer
Freight to customer, also known as transportation costs, is a crucial component of the cost base in the supply chain. It refers to the cost of shipping goods from the company’s warehouse or production facility to the customer’s location. This cost can have a significant impact on the overall cost of goods, and it is an important factor that companies must consider when setting prices and managing their supply chain.
There are several factors that can impact the cost of freight to customer, including the distance between the company and the customer, the mode of transportation used, and the weight and volume of the goods being shipped. In addition, changes in regulations, fuel prices, and market conditions can also influence the cost of freight to customer.To minimize the cost of freight to customer, companies can implement various strategies, such as optimizing the route and mode of transportation, consolidating shipments, and negotiating favorable rates with carriers. In addition, companies can also consider alternative shipping options, such as using intermodal transportation or utilizing distribution centers closer to the customer.
Inventory carrying cost
Inventory carrying cost is a critical element of the cost structure in the supply chain. It refers to the expenses incurred by a company for holding and maintaining inventory for a specific period. The inventory carrying cost includes different costs such as warehouse expenses, insurance, taxes, obsolescence, and the opportunity cost of holding inventory that could have been invested in other assets to earn a higher return.
- Warehouse Expenses: The cost of operating a warehouse includes rent, utilities, maintenance, and labor expenses. These expenses are necessary to store, organize and maintain the inventory safely and efficiently.
- Insurance: Insurance cost is essential to protect the inventory from damages or loss due to unforeseen circumstances. It includes the cost of insurance premiums, deductibles, and other related expenses.
- Taxes: Taxes include property tax, inventory tax, and other taxes associated with owning and holding inventory. These taxes vary depending on the location, the type of inventory, and the value of the inventory.
- Obsolescence: This cost is associated with the risk of inventory becoming obsolete or losing value due to changes in technology, market trends, or regulatory changes. This cost can be significant, particularly for high-tech products or products with short product lifecycles.
- Opportunity Cost: The opportunity cost of holding inventory is the cost of not investing the inventory in other assets that could generate a higher return on investment. This cost is particularly relevant for companies with a high inventory turnover rate, where the inventory is constantly replenished.
Reducing the inventory carrying cost is crucial for companies to improve their profitability and competitiveness. By optimizing inventory levels, companies can reduce the cost of holding inventory, improve cash flow, and increase working capital efficiency. Effective inventory management strategies such as implementing lean inventory practices, forecasting demand accurately, and managing supplier relationships can help companies minimize the inventory carrying cost and optimize their supply chain operations.
In This Project
Our client, operating in Australia with a serving population of 33 million, was facing challenges in their supply chain due to increased competition and the complexities of serving a wide and dispersed demographic. In order to optimize their supply chain, our team conducted a detailed analysis of the problems faced by the client and utilized data analysis to identify key areas for improvement.One of the key areas identified was storage at the company site. Our team recommended optimizing storage processes and systems to reduce costs and improve efficiency. This optimization resulted in a significant reduction in storage costs for our client, contributing to their overall cost savings,Another area for improvement was freight to customer. With careful management of transportation costs, our team was able to help our client minimize the cost of shipping goods from the warehouse to the customer, improving their competitiveness and profitability.
Finally, our team also recommended optimization of inventory carrying cost. By reducing inventory levels, implementing just-in-time inventory management techniques, and utilizing more cost-effective storage solutions, our client was able to significantly reduce the cost of holding and maintaining inventory.
Thanks to our team’s efforts and the implementation of these optimizations, our client was able to save a total of $18 million. This demonstrates the importance of carefully analyzing and optimizing the cost base in the supply chain, as it can have a significant impact on a company’s bottom line..
Conclusion
The cost base in supply chain management is made up of several important components, including storage at company premises, freight to customer, and inventory carrying cost. Each of these components can greatly impact the overall cost and efficiency of the supply chain, and it is important for companies to carefully manage and optimize each of these areas.
- Storage at company premises: Storage costs are associated with the expenses that a company incurs in keeping and managing inventory at its premises. These expenses include the cost of warehouse rental, utilities, labor, and other related costs.
- Freight to the customer: Freight costs refer to the expenses incurred in transporting products or inventory from the warehouse to the customer’s destination. These costs can include shipping, handling, and customs fees.
- Inventory carrying cost: Inventory carrying cost refers to the cost of holding and maintaining inventory over a specific period. These costs include warehousing, insurance, taxes, obsolescence, and the opportunity cost of holding inventory that could have been invested elsewhere.
- Storage at company premises requires careful planning and management to minimize costs, improve inventory levels, and ensure a smooth and efficient supply chain. Implementing space-saving storage solutions, optimizing storage layouts, and adopting a just-in-time inventory management system are some strategies that companies can use to reduce the cost of storage at their premises.
- Freight to customer costs must be carefully managed to remain competitive and maximize profits. Companies can achieve this by using cost-saving strategies such as consolidating shipments, optimizing transportation routes, and negotiating better freight rates with transportation providers. Staying abreast of market changes, such as changes in fuel prices or shipping rates, is also crucial for managing freight costs.
- Inventory carrying cost can have a significant impact on a company’s bottom line, and companies must carefully monitor and minimize this cost to optimize their supply chain and maximize profits. Implementing effective inventory management strategies, such as demand forecasting, safety stock optimization, and reducing lead times, can help minimize inventory carrying costs. Companies can also optimize their inventory by eliminating obsolete inventory and reducing overstocking.
Overall, careful management of these cost components can help companies optimize their supply chain, improve efficiency, and reduce costs, leading to increased profitability and competitiveness.
About the Author
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com
Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.
Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.
Vivek has served world-wide corporations in nearly 500 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.
Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.
More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com
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