How to use data to gain flexibility and cut costs in your supply chain

For the most part, your opportunity for flexible cost reduction will fall across six areas. They are:

1. Portfolio complexity

How complicated is the product mix you’re selling to your customers? Variations of the same product can introduce more and more complexity and increase the number of stock-keeping units (SKUs) into your system. You may find that you’re better off abandoning some of these variations or introducing more standardization at the finished-good and component level. For example, maybe you offer 12 different colors of the same product. Consider whether in a post-COVID-19 world more SKUs are necessary — or if there is room for rationalizing your product portfolio.

For another approach, when you look at your SKUs, study the entire product life cycle from start to finish — how the products are designed at the start and how they are used in the market at the end — for varying customer segments and preferences. Examine what you’re selling the most and where you’re getting the most margin. You’ll see what you should be making, the product profitability and where you can potentially simplify your portfolio. Additionally, you might change the design for greater ease of manufacturing or serviceability in the aftermarket.

2. Sourcing

SKU rationalization can lead to supplier rationalization, as you reflect on the raw materials required and the suppliers needed for fewer SKUs. And in the post-COVID-19 world, companies face a greater need to examine supplier risk — the delicate balancing act between accepting some redundancy as a backup for needed materials while still optimizing the spend on multiple suppliers.

Analytics also has a role to play in identifying ideal pricing and helping you negotiate contracts, as well as in seeing whether your suppliers are living up to the terms and conditions set in your contracts. For instance, look across different sourcing categories. Take something as basic as office supplies. Perhaps you are buying products from several large retailers as well as directly from the manufacturers. You might gain savings by sourcing all your office supplies from a single vendor for economies of scale.

If you want to go big, you could also think about outsourcing various tasks to suppliers, with tight service-level agreements (SLAs) and good governance practices.

3. Footprint/network strategy

In a post-COVID-19 world, it is very likely that consumers will value delivery options that can get them products by the next day or even the same day. In this environment, it’s worth scrutinizing the footprint for your manufacturing and distribution centers (DCs), as this could be an area for cost takeout.

Explore not only how close your DCs are to your customer base but also options for direct shipping. And think beyond distribution and into manufacturing — as in, are your manufacturing facilities close enough to offer the items customers need now and in the future? What is their proximity to suppliers? There may be an opportunity to close some locations and open new ones that can serve customers more efficiently and reduce the number of shipping lanes.

Another place to look for cost reduction: inbound and outbound shipping costs, considering things such as mode and number of carriers; even evaluating synergies with companies similar to yours may allow you to share DCs and warehouse space and logistics.

4. Planning synchronization

Analytics has a huge role to play in forecasting and demand planning. Keeping supply and demand in balance with a rightsized inventory, at a time like now when cash is king, is vital. But for most organizations, planning was broken even in the best of times — and in times of severe disruption, it’s worse.

Having a firm grip on your demand signals helps alleviate the overproduction of goods, a misstep that ties up money in inventory and has associated carrying costs. To identify what the appropriate inventory levels should be, and to set parameters to sustain those levels, it is important to understand not only demand but also material and capacity constraints.

This is easier said than done. Emerging technologies such as artificial intelligence and analytics have a role to play in sensing demand, and you should closely collaborate with suppliers and production to further synchronize your ability to meet changes in customer demand. In addition, there are many places where third-party data is available for purchase to supplement your own forecasts — whether from satellite companies tracking shipping routes and ports, social media platforms to gauge customer sentiment, or firms that aggregate and sell retail point-of-sale (POS) data.

5. Operating model design

An operating model defines resource allocation, capability needs, where skills are sourced and where work is performed. As customer demand and preferences shift, reviewing whether you have the right operating model can yield significant savings. Although changes cannot always be executed quickly, shared services, outsourcing, workforce rightsizing, organizational design and work placement, when considered thoughtfully, are worth exploring.

For example: if you have a customer service function and you’re serving multiple geographies, should you have a customer service center for managing orders in each region, or perhaps a centralized center with fewer resources? There are also alternative models, such as full or partial outsourcing, with contracts and SLAs to make sure the work gets done in agreed-upon time frames. Whatever the case, operating model design must be aligned to corporate strategy.

6. Aftermarket

Spare parts have their own product complexity and distribution networks, with similar avenues toward cost savings. Cost reduction for the aftermarket considerations are derivatives of the areas described above.

In summary, perhaps you already have an idea of where to begin, but if not, here are some guidelines to consider in your journey toward sustainable cost reduction.

1. Stand up a solid analytics function

Your goal is to solidify your view of supply chain costs from end to end. Once you understand your baselines, it makes it easier to know which levers to pull.

2. Explore your inventory

Identify key products and components and forecast how demand will change in the near- and medium-term, then establish target inventory levels through analytics and scenario planning. Consider updating your sales and operations planning functions to be inclusive of finance for budgeting and forecasting purposes. This is the path to integrated business planning, which can lead to inventory reduction and overall supply chain cost reduction.

3. Move on to suppliers

Conduct spend analytics and identify key categories for savings, then start running sourcing events. Categories that typically yield the most immediate return include office supplies; travel; IT hardware and peripherals; maintenance, repairs and operations, and real estate, depending on the company.

4. Refine your network/footprint strategy and operating model

Scrutinize added cost considerations around where manufacturing takes place, and material movement, freight costs and areas such as global trade, to begin to build out a tax-efficient supply chain. Adopt an “asset light” mentality.

As your organization faces new pressures and greater uncertainty, a cost-efficient yet flexible supply chain is a must-have. But this is a journey, and your goal is not to make the leap in a day but to set priorities and focus areas to continue making strides down the path to sustainable cost reduction.