In our last post we pointed out that the number one supply management priority in the average organization is the lost cause of cost reduction. This is exemplified in many recent studies and reports, including eyefortransport’s recent Global Chief Supply Chain Officer Strategy – European Focus report which has it as the number one priority. But this is a lost cause because inflation is back with a vengeance, food reserves are at fifty — or one hundred — year lows, critical raw materials are in very short supply, and, as pointed out in Supply Chain Insight’s recent report on Supply Chain Metrics that Matter: Driving Reliability in Margins report, between 2000 and 2011, 75% of companies in process industries lost ground on margins! In other words, even the mighty are falling — year over year.
For the foreseeable future (and most likely the rest of your supply management career), costs are going up. There’s nothing you can do about it. The best you can do is control the cost increases, and make sure you do it better than your peers. SI truly believes that this will be the difference between your company staying in business and your company filing for bankruptcy.
And you will do this not by focussing on cost, but on cost drivers. What are the main components of the cost? How much does each component contribute to the cost? How much does an increase on a core component increase the overall cost? Where is the greatest opportunity to reign in cost increases through process improvements, requirement reductions (for unnecessary services or needlessly expensive materials)? Where is the greatest risk of a cost increase? What can be done to prevent it? What should be done to prevent it?
This requires your organization to acquire the following competencies:
- Cost Modelling
The first thing you need to do is accurately model the cost components — including raw materials, labour, energy, and services.
- What-if Analysis
Understand how costs will change if each component increases, decreases, or maintains stability in line with (global) inflation. Be able to model the estimated impact of product, process, or service initiatives on overall costs.
The only true way to minimize cost increases and keep costs in check is strategic sourcing decision optimization, because the only true way to minimize costs is to minimize them holistically. Reducing unit costs is pointless if logistics costs double. Reducing labour costs is pointless if quality declines and return and warranty costs triple. Only strategic sourcing decision optimization allows you to see the whole picture and minimize costs across the board.
- Real-Time Visibility
You can no longer get away with NOT having real-time visibility into your supply chain, which should go beyond knowing when your order was shipped by your first tier supplier. At the very least, you should have visibility into your suppliers’ suppliers across the board and you should have visibility into any third-tier suppliers who supply critical or scarce raw materials.
- NPD with the Goal in Mind
In their Supply Chain Metrics that Matter: Driving Reliability in Margins report, Supply Chain Insights shared a great insight — most supply chains are based on functional excellence based on inside-out thinking. Companies are not clear on supply chain strategy and the delineation of the financial metrics that matter. When designing a new product, the goal is not to make the coolest (or most desirable) product, the lowest cost product, or the product you think you can charge the most for. The goal is to make the product that the organization will generate the most profit from — which is a function of margin and profit (and, specifically, the multiple thereof).
So acquire these competencies, and maybe you can stop chasing the lost cause of cost reduction and start focussing on the achievable goal of cost control.