It used to be cost reduction, which was focussed on cost cutting, started with the one-trick pony of cost cutting by any means necessary, which typically took the form of e-Auctions, RFPs to new suppliers, and GPOs that could aggregate and leverage huge volumes — all tricks that are rearing their ugly heads again with the rapidly rising costs thanks to inflation, tariffs, and global instability.

They all work just fine in the short term, but they all come back to bite you in the backside in the long term. Here’s why:

• e-Auctions: find savings by squeezing margins, and you can only take those out once, and once inflation comes back, costs go up
• RFPs: designed just to find the absolute lowest price attracts suppliers who cut corners, underpay their staff, and offer no service while alienating your current, more trustworthy, suppliers
• GPOs: can aggregate volumes and lower prices, but then you are dependent on them, and paying their markup … forever

None of these is the long term answer.

When we first started discussing cost reduction two decades ago, the key methods we focussed on were:

• strategic supplier relationships and customer of choice: so that they put the effort into being your supplier of choice and finding their own ways to keep costs down (streamlined operations, better raw material sourcing, etc.)
• supplier investment and development: if the supplier is smaller, or not as advanced, they’ll only do so much on their own, so your efforts to invest, improve, and guide them (through early payments, low-cost new line financing, etc.) could greatly lower your costs over a multi-year engagement
• strategic sourcing decision optimization: where you did a multi-objective optimization that took all of the cost factors (unit, transportation, warranty, service, waste etc.) into account as well as risk (that could cause “savings” to evaporate over night) and quantitative assessments of other key factors

And those are all good techniques in (semi) normal times. But these are not (semi) normal times. These are almost unprecedented times. Between natural disasters, geo-political conflicts and wars, and terrorism, we are dealing with unprecedented simultaneous reductions and closures of major maritime shipping lanes (the Panama Canal, the Red Sea, the Strait of Hormuz), unstable (and rapidly escalating) fuel costs, regular supplier and carrier failures, unpredictable crop and raw material availability, etc. all at the same time. Old friends becoming foes, or at least frenemies; friend-shoring, near-shoring, and home-shoring finally gaining ground (despite being promoted and the right answer for decades); and supply chains being swapped whenever possible.

We’re in times where these techniques, while still good, can’t always address all of the situations. Plus, if you’re constantly adapting to what’s available now, versus focussing on what you should be building, you’ll be in a constant, unstable, state of affairs, caught off guard with every flux, and constantly on the brink of ruin.

You need to stop working sourcing event to sourcing event, procurement to procurement, and disruption to disruption and start working on transforming your supply chain to a more resilient long term supply chain. This will require identifying which safe countries and regions (likely to have long term geo-political and trade stability with your home and/or destination countries) you should be doing business with, where solid supply bases could be, and how you could construct a real supply chain from the source countries to the destination countries that don’t depend on unstable source points.

Then you have to engage the carriers, find partners to help you manage the export and import requirements and take advantage of FTZs (free trade zones), build or acquire intermediate warehouses and cross-docks, and be ready for trade with the local suppliers. Those will typically include multiple suppliers you are not currently working with, and they may need to upgrade their production lines, operations, services, etc. to serve you to your level of expectation. This will incur costs that your suppliers and partners will need to incur, which will need to be passed onto you. Which means, in the short-to-mid-term, your costs will increase. But if you design the right, stable, supply chain networks that you can use for years (or decades), develop the right suppliers, and maintain volumes, as operations improve, up-front costs get amortized, and economies of scale get optimized, costs will go down, and with long-term agreements, over multiple years, your company will see previously unrealized savings while your peers see their costs go through the roof.

So if you want to save money, you better be prepared to spend.