One of the major challenges facing businesses today is to optimize supply chain costs so they can be competitive in their market. While many may think that the key to achieving this goal is simply by cutting costs, there are certain areas within a business’s supply chain where cost optimization is a far more complex issue.
In this article, we look at how a business can reduce costs in six key areas: materials, inventory management, warehousing and distribution, transportation, production processes and outsourcing.
Let’s jump in and explore these points in greater detail.
Materials Costs
Material costs are driven by the products that a business buys from suppliers. In an effort to lower material costs, businesses should work with suppliers to understand their costs of manufacturing products. This will give suppliers the opportunity to lower product costs so they are able to pass along the savings.
While material costs are important, they may not be as expensive as inventory carrying costs which include holding stock or raw materials either in a warehouse or on the production line. Therefore, it is also important for businesses to look at how they can reduce their inventory holding costs.
Outsourcing Costs
To cut costs, it may be beneficial for your business to outsource some of its work where this is feasible. For example, if your business has a high level of overheads, you may want to outsource the printing and distribution. Another suggestion is if your business is able to produce a quality product you may consider outsourcing the delivery to end-user, for example, delivery courier jobs which is a prime illustration of a common problem in the restaurant supply chain being resolved by outsourcing.
If your business is outsourcing, it is important that you are aware of how it will affect your costs. For example, you need to factor in the cost of creating agreements with external parties or renegotiating contracts as they come to an end.
Inventory Management
Keeping little or no stock of goods is often referred to as ‘Just in Time’ (JIT) sourcing, since it means that the supplies are delivered just in time before your business needs them. This practice is designed to cut out warehouse storage space and increase a business’s cash flow. However, in some industries there is a danger that you will lose sales if the products are not available when your customer wants them.
Therefore it is important to find the right balance between having sufficient stock and JIT purchasing.
Warehousing and Distribution
The two main categories under warehousing and distribution costs are storage and transportation, as the cost of warehousing or distribution is ultimately determined by the space that a product requires. In order to reduce costs it is important for businesses to look at ways in which they can change some of their processes so they require less storage space.
For example, you can use a drop ship strategy where your business distributes products directly to consumers from the supplier’s warehouse rather than storing them in your own space. This will reduce warehousing costs significantly and may increase your business efficiency.
Transportation Costs
Today businesses are able to use a vast number of transportation options such as air, road, rail and sea freight to transport their products around the world. All these modes of transportation have their own advantages and disadvantages, so it is important for businesses to look at what type of transportation will suit their products best. For example, a business may choose not to use air freight for small items in order to reduce the transportation costs.
Production Processes
In an effort to cut production costs, many businesses look at how they can produce their products as cheaply as possible. In order to do this, businesses will look at the input costs of their product and compare them with their competitors.
This approach is best used in a highly competitive market where prices need to be very low so that customers choose your product over another’s. However, if you are a business which offers a high quality service or product, you should not try to compete on a price basis. Instead businesses should provide something different from their competitors which will make customers choose them over the other options available.
Other Miscellaneous Tips
Here’s a few more areas that we recommend you look into in order to further streamline your business processes. Here they are as follows, in no particular order:
- Use a TMS (Transportation Management System) to monitor costs and generate reports of transportation spending for each vendor, mode of transport, area of the business or company as a whole. This will allow you to determine your best shipping methods and costs.
- Reduce the number of deliveries by consolidating them and getting a group of customers to receive a combined drop ship order. This will reduce the number of deliveries and therefore transportation costs.
- If you have a new product, avoid using air freight at first when negotiating with suppliers as it can add between 10-100% to prices. Instead use sea or road transport which will be cheaper but you may need to use air freight later on in order to get the product more quickly.
- Try and negotiate with suppliers for prices which are cheaper than the market rate, but ask for volume discounts so that if you have to pay higher rates, they are not so expensive. Also, look at ways of reducing your supplier’s costs such as paying them electronically
Conclusion
Reducing your supply chain costs can be difficult, but if you keep the above points in mind then you will certainly be on the right track. It is important for businesses to look at ways in which they can reduce their costs because this will increase their profitability and allow them to have a better business strategy.
