Marketplace agility and responsiveness are essential requirements for supply chain leadership.
Summary: Faced with sluggish revenue growth in mature markets, many global companies know that optimizing the operational efficiency and cost-effectiveness of their supply chain can generate sustainable cost savings and increase profit margins. Companies can improve margins in mature markets with attention to three main areas of the supply chain.
1. Reconfigure the supply chain to create cost competitiveness
Cutting costs is never easy, especially as many companies have already implemented a series of cuts to help them through the recession. Their challenge is to decide how and where to make further cuts without damaging service levels and growth.
When reconfiguring their supply chain, companies should consider customs duties and fuel price sensitivity (e.g., oil at $80, $100 and $150) as well as warehousing and transportation costs in order to lower total delivery costs and enhance margin.
A realistic view of costs at the product and category levels depends on a proper understanding of the true total delivered cost (TDC), cost of goods sold (COGS) and cost to serve (CTS) to gain greater transparency and enable fact-based decision-making.
Moving overhead costs to variable costs and aligning fixed cost decisions with corporate strategy, represent critical steps toward improving the balance between cash and working capital.
2. Optimize global spend through cost reduction, tax incentives
We estimate that a 1% reduction in costs, achieved through a sophisticated procurement strategy, is equivalent to a 10% increase in sales. Companies can gain a distinct competitive advantage over rivals simply by producing their goods or services cheaply.
Low cost economies are likely to offer cost savings in materials procurement, but the calculation involves more than geography and price. Companies must determine the net impact of relocating manufacturing facilities while considering factors such as logistics, taxation, and labor costs.
Sixty-nine percent of survey respondents already have procurement centers in one (16%) or multiple (53%) emerging markets, with an additional 29% expecting to open their first center over the next 24 months.
Interestingly, 81% of our respondents stated that tax plays an “important” or “very important” role in the supply chain, yet the figures reveal that only slightly more than one-third (35%) backed this statement with a belief that tax is an integral part of the supply chain.
Changing tax incentives are another factor causing companies to rethink their supply chains, with many relocating headquarters or regional offices to more tax-efficient jurisdictions such as Switzerland. Furthermore, India is attracting foreign investment through tax incentives like the Special Economic Zone (SEZ), which has been adapted to benefit export activities.
3. Improve operational agility and responsiveness
Customers are becoming more demanding and demand itself is becoming more unstable, even in developed markets where promotions and tenders add volatility. In addition, supply chains are under pressure from:
- Rising energy and transportation costs
- Fluctuating commodity prices
- Changing labor conditions
- New environmental regulations
The supply chain has traditionally responded by focusing on cost control and maintaining service through holding high inventories. However, to stay competitive today’s supply chains must optimize costs, minimize inventories and maintain high service levels, all within a more agile and responsive supply chain.
The effectiveness of an agile supply chain hinges on its ability to rapidly respond to fluctuating demand. However, a rapid response alone is not enough; an agile supply chain must exhibit four elements:
- Speed of sensing and responding to demand changes
- Ease of response
- Predictability
- Consistent high quality
The supply chain must be configured to meet all the requirements placed upon it. This has led some companies to streamline previously complex and geographically diverse supply chains to allow them to get closer to their consumers. Others are using new supply chain models such as near shoring and home shoring to deliver products quickly and cost-effectively.
Case study: supply chain improvements to enhance margins in mature marketsErnst & Young’s experience of international free trade agreements was brought into play when a leading manufacturer of fast-moving consumer goods approached us. The company wanted to re-examine its factory footprint and reassess how its supply, inventory and manufacturing locations serviced each market. Ernst & Young combined its network design, customs and international trade competencies to identify opportunities to reduce total landed costs, materials and finished goods inventories and manufacturing assets. Rather than focusing exclusively on freight costs, Ernst & Young helped the manufacturer to investigate available free-trade agreements and duty issues for its product range. The team discovered that by relocating the source of supply for one component to a manufacturing plant in a neighboring country, they could cut customs duties by around £0.5m per year. Given that the manufacturer operates in more than 120 markets worldwide, the potential cost savings across its global network are significant. |
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