In 2021, supply chain teams need to safeguard supplies in challenging circumstances, navigate financial volatility – and rein in costs. The pandemic may be the latest trigger for the renewed spotlight on spending, but it won’t be the last. Given that 50-75% of costs are directly influenced by the supply chain, this current period of disruption is an opportunity to take a closer look at the supply chain and align it to shifting needs and conditions. Targeted analysis reveals inefficiencies that inevitably creep in as global supply chains grow increasingly complex. Optimization programs can dramatically improve top-line revenue, as well as COGS and SG&A which impact the bottom line. They also relieve pressure on liquidity – that all-important survival factor in today’s precarious economic environment.
Against this background, the role of supply chain is becoming more strategic than ever before, and Chief Supply Chain Officers have a unique opportunity to shine.
To establish a comprehensive understanding of cost development – and also cost-cutting potential – the supply chain function should focus on all SCOR dimensions, planning, sourcing and procurement, manufacturing, logistics and distribution. Supply chain segmentation further enables optimization levers to be identified and prioritized for immediate benefits and longer-term substantial savings. The levers will vary depending on the company’s business model but applying EY’s hypothesis-driven methodology provides a structured approach to rapid and sustainable cost reduction.
Once identified, key levers can be split into NOW, NEXT and BEYOND. This enables the immediate benefits of quick wins and low hanging fruit while also setting the course for a cost reduction roadmap that promises ongoing and lasting improvements in costs and controls.
Five ways to cut costs within the supply chain
1. Understand customer service level requirements
Truly understanding customer needs is the first step in identifying improvement opportunities. As you consider measures based on your insights, keep in mind the right balance between service level and costs. A supply chain rapid assessment covering qualitative and quantitative aspects can help here, as can a segmentation exercise that enables you to adapt your supply chains as outlined below.
2. Enhance your supply chain planning and synchronize
A cost-efficient supply chain is stable and optimized – from production to end-to-end ﬂow. That means starting with planning. Prepare to transform by analyzing whether to centralize planning and/or automate or even outsource certain planning activities for better planning consistency, capability and quality. Another important aspect is improving S&OP/IBP effectiveness and efficiency. Get this right, and you can align supply chain requirements – and costs – to future demand and manage strategic priorities. Integration of end-to-end supply chain visibility enables supply chain professionals to proactively manage issues and exceptions, feeding both executional and IBP processes. Implementation of Digital Twins allows enhanced what-if simulation of your business, unveiling critical elements and scenarios which result in improved bottom lines. Segmentation and synchronization of rhythm, frequency and volume, including planning parameter optimization (production, procurement, distribution), empower your teams to run smooth, cost-efficient supply chains. It also supports a better control environment.
3. Review your supply chain footprint and network strategy
As your business model and environment shifts, it’s likely that inefficiency will creep in, whether in terms of space, ways of working, touchpoints or routing. With a renewed understanding of better differentiated service level requirements, you can right-size the network end-to-end, i.e. across manufacturing, distribution and global trade. Diving deeper into your network strategy, consider how to design and implement a logistics operating model (in-house, 3PL, 4PL, shared, etc.) and manufacturing operating model (contract manufacturing vs. in-house, fixed vs. variable labor) that works for your business. This also presents an opportunity to drive implementation of smart factory elements as part of your operational excellence efforts. Look at standard ways of working, digital coaches and daily management systems to find the right fit. Finally, review your global trade and identify where you can reduce customs duties, leverage available free trade agreements and improve your total landed costs.
4. Adapt elements of your supply chain operating model
When your business model changes, it’s important to make sure operations keep pace. You should ensure that you actively translate relevant elements into the operational setup. Revise your shoring strategy and analyze insourcing vs. outsourcing to ensure your on-, near- and off-shore value drivers are delivering the best cost-efficiency. Review your supply chain operating model setup and look for savings potential in areas like organizational design, sizing and location, roles and responsibilities, processes and governance model. Given the significant shifts we’ve seen recently in the world of work, you may also find significant potential for savings in your workplace and real estate costs.
Liaise with relevant internal stakeholders to ensure tax and compliance aspects don’t fall by the wayside. Cost reductions must never come at the risk of jeopardizing compliance with tax, legal and regulatory frameworks or favorable rulings.
5. Consider digital drivers
The supply chain has been undergoing digital transformation for some time, with leading adopters investing in digital transformation initiatives in the areas of automation, robotics, advanced and predictive analytics with machine learning, blockchain, IOT, 3D printing and self-driving supply chain systems. After the initial outlay, technology is a key source of additional efficiencies and cost reduction. The right tools offer near real-time visibility and provide data that drive more cost-efficient solutions and controls across the supply chain. Deployment of digital tech (e.g., AI in forecasting, demand sensing, segmentation, supply planning, etc.) also improves planning outcomes, while end-to-end SC technology (including ERP systems and enabling digital tools) has come a long way in optimizing processes, costs and controls. EY has supported clients using digital enablers such as our Supply Chain Intelligence Platform, EY Catalyst, EY Wavespace and open ideation platforms.