Key Takeaways:
- Inflation and stiff industry competition mean that organizations must continually strive to control costs to remain profitable.
- Costs are incurred at numerous points across the supply chain, particularly in the areas of procurement, transportation, inventory, production, and distribution.
- Accurate demand forecasting and effective supplier management are among the key strategies for supply chain cost management.
- Adopting a culture of continuous improvement is also vital to success.
Effective Supply Chain Cost Management: A Blueprint for Success
Businesses that control their supply chain costs naturally outperform their competitors. It’s all about carefully managing expenses from when raw materials are bought to when the final product reaches the customer. Often, tightening belts and eliminating waste in the supply chain is the only way for companies to lower their Total Cost of Business and eke out an acceptable profit in this challenging economy while remaining competitive. Businesses that systematically eliminate inefficiencies within their supply chain can ultimately reap the rewards of reduced expenses while maintaining customer loyalty and satisfaction. It’s no wonder that CFOs and other business leaders have made cost management a major area of focus for 2024 and beyond.
The Anatomy of Supply Chain Costs
Understanding the breakdown of supply chain costs is essential for effective management. There are different methods for itemizing costs, but for our purposes, we will break it down into five primary categories:
- Procurement costs
- Transportation costs
- Inventory holding costs
- Production costs
- Distribution costs
Procurement costs refer to the costs associated with acquiring materials, components, for services — and of course, as the cost of raw materials goes up and down, this can impact the price of the finished product. Transportation costs, which include freight, fuel, and warehousing, often represent a significant portion of overall expenditures, though those costs are beginning to drop. In 2023, U.S. business spending on logistics services decreased by 11 percent to $2.4 trillion as supply chains stabilized following the significant disruptions caused by the COVID-19 pandemic, according to the “State of Logistics” report released by the Council of Supply Chain Management Professionals. inventory holding costs encompass storage, handling, obsolescence, and carrying costs. A significant portion of inventory costs are tied to storage, which includes rent, utilities, labor, and equipment for warehouse operations. Production costs refer to the costs incurred in actually manufacturing and assembling products, which includes overhead, equipment, and labor. And then there are the distribution costs not directly associated with transportation, which include packaging, handling, and order fulfillment.
Strategies for Effective Supply Chain Cost Management
Effectively managing these costs requires strategic approaches. Accurate demand forecasting prevents overstocking or understocking, while route optimization software reduces transportation expenses. Inventory management techniques like Just-In-Time (JIT) or Vendor-Managed Inventory (VMI) help control inventory levels. JIT minimizes inventory by producing only as needed. VMI outsources inventory management to suppliers.
In addition, strong supplier relationships lead to better pricing. Continuous process evaluation and technology adoption, including supply chain management software and analytics, provide valuable insights for cost reduction.
Modern supply chain management can’t function without technology. Advanced analytics, artificial intelligence, and machine learning can optimize various aspects of the supply chain. For instance, demand planning software can improve forecast accuracy, reducing the risk of stockouts or excess inventory. Additionally, effective transportation management systems (TMS) have one major advantage: they’re a roadmap to slashing costs by pinpointing the most efficient routes and assigning the best carriers. Lastly, warehouse management systems (WMS) enhance inventory visibility and control, minimizing carrying costs.
The Importance of Continuous Improvement
When it comes to managing supply chain costs, identifying opportunities for ongoing improvement is the lifeblood of an optimized supply chain. This involves a systematic approach to finding, analyzing, and ultimately eliminating wasteful activities and inefficiencies within the supply chain network. The key to success is a culture of innovation and a commitment to ongoing optimization.
One important component of continuous improvement is cost benchmarking. Comparing their own supply chain costs to standards across the industry can help organizations find underperforming areas. A thorough root cause analysis can then help the business delve deeper into these challenges, ultimately undercovering the hidden issues contributing to higher costs. Once these root causes are understood, corrective actions can be implemented to address the problems and prevent recurrence. This can include, but is not limited to, changing processes, making technology upgrades, and even changing supplier relationships.
Successful continuous improvement depends on effective collaboration across the breadth of the supply chain. By securing hands-on involvement from suppliers, carriers, and other partners in cost-cutting initiatives, organizations can find areas of mutual benefit that become a win-win for everyone involved.
The Role of Plastic Pallet Pooling
Partnering with a plastic pallet pooling supplier, like iGPS, can help companies identify considerable opportunities to lower their supply chain management cost. The benefits are numerous:
- No pallet overhead costs: Companies that participate in a pallet pooling system don’t have to worry about storing, shipping, repairing, or discarding of their own pallets.
- Cleaner and more automation friendly: Plastic pallets don’t shed splinters and nails the way that wood pallets do. Not only does this improve productivity because less cleanup is required, but it also minimizes costly jamming of equipment.
- Safer for workers: Plastic pallets are lighter than wood, with no protruding nails and sharp splinters that can cause puncture wounds and lost productivity.
- Reduce fuel usage: Because plastic pallets are lighter than wood, they consume less fuel and produce less greenhouse gases during shipping.
- Easier to clean and sanitize: The uniform, non-porous surface of plastic pallets makes cleaning and sanitization a breeze, as opposed to wood pallets that can absorb moisture and harbor pathogens.
The costs of procurement, storage, transportation, and distribution quickly add up. As the marketplace battles inflation while continuing to grow more competitive, companies face significant challenges in managing their costs while still keeping prices reasonable for their customers. The organizations that relentlessly pursue strategies for effective supply chain cost management and continuous improvement will always come out ahead.
In Summary: Key Q&A
Why is supply chain cost management so important?
Supply chain cost management is vital for maintaining profitability, ensuring customer satisfaction, and mitigating risk.
What are the primary areas within the supply chain that incur costs?
While methods for categorizing costs vary, most costs are incurred in the areas of procurement, transportation, inventory holding, production, and distribution.
What are some important strategies for supply chain cost management?
Crucial strategies for supply chain cost management include demand forecasting, effective use of analytics and other technology tools, and effective supplier relationship management.
What is the role of continuous improvement?
Using strategies to control costs is not enough. Organizations must also identify opportunities for continuous improvement by employing cost benchmarking, performing root cause analyses to root out underlying costs, and creating a culture of collaboration throughout the supply chain.
How can plastic pallets play a role in optimal supply chain cost management?
Plastic pallets, such as those available from iGPS, are lighter and safer for workers. They consume less fuel during shipping, create fewer messes than wood pallets due to their absence of nails and splinters, and are optimized to flow through automated equipment without snagging. Ultimately, companies that use plastic pallets are able to lower their Total Cost of Business on every pallet shipped.
Manufacturers striving to lower their Total Cost of Business opt for iGPS pallets for all their shipping needs. Our pallets are lighter, safer, and optimized for automated environments and sustainable shipping. For more information, contact us at 800-884-0225, email a specialist at switch@igps.net, or visit our contact page.
