The Cost Reduction Tip of Supply Chain

Over past 12 years I’ve looked at sourcing, procurement and payments processes in 150+ companies spanning every continent except Antarctica.

At a detail level, the best of these companies took very different approaches to managing their suppliers – approaches tailored to subtleties of their industry, geography and economic climate.

But best shared one common trait: Their supply chains were as simple as possible given constraints of their operating environment.

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That’s not to say they weren’t sophisticated – often they were (in a surprising number of cases they were not) – but they were all simple.

Commonly, but not universally, best companies regularly tendered categories that didn’t matter much.

Commonly, but not universally, they would set up longer term relationships (with both parties incentivised to meet a common goal) in categories that were critical to their ability to deliver value.

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In all categories, their sourcing, ordering and payment processes were as invisible as possible. Many of the best companies did not even view their supply chains as strategic. For information on Cost Analysis Monte Carlo Simulation in Excel click on this.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

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The Cost Reduction Tip of Supply Chain

a) Companies are still primarily focused on environmentally conscious production. Any company can become totally carbon neutral by outsourcing all its production. Shifting carbon-producing activity up or down supply chains does nothing more than hide dirt under carpet. A holistic approach to carbon management is required and is provided by adoption of a Green Supply Chain methodology.

b) Environmental pro-activism is generally assumed to come at an additional cost to corporations. It is widely thought that going green is expensive. On contrary, our modeling indicates that adoption of a Green Supply Chain methodology should result in overall cost reduction if it is done in a thorough and logical manner.

So it is clear that a move to Green Supply Chains is not only necessary for sound environmental management but also profitable for sound financial management. How can companies start making move? From our research and practical work in this area, we believe following five fundamental questions would help focus discussion and crystallize action plans in right direction:

The Cost Reduction Tip of Supply Chain

The Cost Reduction Tip of Supply Chain

Over past 12 years I’ve looked at sourcing, procurement and payments processes in 150+ companies spanning every continent except Antarctica.

1.What are tangible and intangible benefits of moving towards Green Supply Chains?

In our experience, these benefits are frequently neither fully explored, nor adequately quantified. Even where a robust analysis can be carried out, analysts tend to either ignore some of potential benefits or find it hard to analyze their full impact on business. As a result, overall benefits do not get adequate attention at board level to generate enough interest to release budgets that are necessary to create transformation.

In one company we know (a large global industrial and building products company with revenues in excess of $5 Billion) task of exploring opportunities in Green Supply Chains was handed over to a senior executive as an additional job over and above his regular job, without any funding, clear direction or expectations. In a situation like this (which is very common), all potential benefits cannot be fully understood and agreed upon by key stakeholders, resulting in understaffed projects, and poor implementation.

2. What are costs – both direct and indirect?

This is flip side of question above. For same reasons, while companies have vague ideas of costs, these are rarely fully explored and analyzed. In our experience, many times these are also frequently exaggerated because of uncertainty surrounding many of costs. While all costs have a certain amount of uncertainty, and there is a general tendency to allow a buffer; our research finds that costs of going green are generally more uncertain, and buffers allowed are disproportionately higher.

The indirect costs are generally the source of most complications. It is really hard to estimate the costs of process changes, disassembly lines planning and set up, waste collection and recycling modeling, additional research and development, inventory reduction and green supply chain modeling, etc. Once each one of these systems is fully functional, the costs will follow a predictable experience or learning curve pattern, but it is difficult to predict the transitional costs, and these make the analysis complicated and perhaps insurmountable for many project teams.

3. What influence do we have over our suppliers, their suppliers, and our customers that would allow us to jointly work together and move towards a greener supply chain?

This question is easy to answer because most pragmatic managers have a good idea of relative power balance in their customer-supplier relationships. While occasionally influence is under-estimated or over-estimated, in general, we found that just asking this question helps focus action in right direction. Many corporations have now started to break intra-organizational silos to start thinking in terms of end-to-end supply chains within their companies. However, thinking holistically outside boundaries of corporations, when applied to Green Supply Chain methodology can yield some outstanding results. Under this primary question, a few additional secondary questions will help sharpen focus even further to create clarity, impetus, and momentum toward a positive plan and action.

4. In our end-to-end supply chain, which party has the most influence? How can we encourage them to think ‘green’?

This question is perhaps crux of matter. Clearly, the entity which has the most influence over an end-to-end supply chain is best positioned to create clarity and impetus toward Green Supply Chains. For example in retail supply chains, most retailers such as Tesco or Walmart are best positioned to exercise this type of influence. On other hand, in automobile supply chains, retailers have far less influence than manufacturers. In each supply chain, entity which has most influence needs to be encouraged to think holistically, in interest of all parties that form part of that supply chain. It is perhaps also clear why this crucial question can only be answered after answering three questions that come before it. Once benefits, costs, and influences are clearly enunciated, defined, and analyzed it is much easier to have an informed discussion with the party that ‘controls’ the supply chain. A corollary to this discussion is how to distribute the costs and benefits of movements toward Green Supply Chains. Unless all the incentives are properly aligned, some parts of the supply chain will end up sabotaging the overall Green Supply Chain project.

5. How will communicate our progress toward the green supply chain to the key stakeholders? How will we engage them?

A new road needs new milestones. Traditional supply chain or financial measurements would not suffice in this case. We found several companies have started to make some progress towards vague environmental goals defined in terms of carbon impact reduction without a clear definition of 4 or 5 key measurements that relate to supply chains at all levels. Not only were the measurements not clearly defined, but even the traditional KPIs that were adapted for the purpose also could not be uniformly and easily accessed by the key personnel who needed the information. A typical Green Supply Chain project has far more stakeholders than any other transformational project inside a corporation. Besides internal staff, key suppliers, customers, and even the public, media, regulators, and government are all stakeholders in a transformation of this nature. Clear, crisp, and credible communication keeps all stakeholders appropriately engaged in the process ensuring its success.


In summary, the leaders have started Green Supply Chain projects by asking some fundamental questions. The answers are illuminating their way toward innovation, profitability,and sustainability. As is the case in all path-breaking endeavors, the first-mover advantage is enormous, as are the challenges.

The Cost Reduction Tip
The Cost Reduction Tip

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