5 minute read 27 May 2020
Supply chain

Getting Ahead of the Curve: The imperative to manage supply chain costs during uncertain times

By EY Ireland

Multidisciplinary professional services organization

EY Ireland, a leading global professional services organisation providing assurance, tax, audit, strategy and transactions and consulting services.

5 minute read 27 May 2020

By Alan Dickson

When Jeff Bezos presented Amazon’s first quarter earnings, he said that “shareholders may want to take a seat” for the announcement that was about to come.

Despite significant uptake in demand, Amazon’s results suffered due to the costs of ramping up its supply chain to withstand the disruption caused by COVID-19.

The crisis needed a solution that would keep employees safe while successfully and safely delivering the surge in customer orders across Europe and the US, with brick-and-mortar retail outlets closed and people confined to their homes. The solution: Amazon vowed to invest the value of the anticipated $4bn USD second-quarter profit into optimising its entire operation and supply chain to facilitate COVID-19-driven requirements.

The details: amending more than 150 processes to accommodate employee social distancing protocols; providing PPE for employees; temperature checks across the company’s worldwide operations; paid sick-leave for infected employees; developing scalable employee testing; increasing pay to attract and retain employees to handle increased order volumes; financially supporting supply chain partners and delivery drivers; and actively combatting price gouging on high-demand items during the pandemic to protect customers. In essence, the solution was to vaccinate every part of Amazon’s entire organisation and supply chain against the impact of the virus.

When we consider the sheer scale of Amazon’s business, the cost to implement these measures is tremendous. However, huge costs are being faced by all businesses relative to their size, and generally in scenarios without the luxury of pockets as deep as Amazon’s.

Adapting processes to keep employees safe and handling unusual demand patterns are affecting supply chains for companies in all sectors. While this means reinvesting one quarter’s anticipated profits for the e-commerce giants, less profitable companies are increasingly struggling with the cost impact caused by COVID-19-related measures. Many sectors also face revenue volatility and channel shifts that require significant investments to be made into IT infrastructure and fulfilment capabilities in the future.

More than ever, companies are looking to reduce costs across their organisation to support corporate objectives. With 50-75% of costs directly influenced by the supply chain of the company, CFOs are often seeking ways to identify cost reduction potential in this area of the business. 

When thinking about sustainable cost reduction in the supply chain, six key areas can be identified:

1.  Reducing Portfolio Complexity:

Complex portfolios have a significant impact on costs associated with sourcing materials, which can reduce operational efficiency. To overcome and reduce this complexity, in the immediate term, companies need to assess product configurations and options to establish sustainable batch sizes, quantities and parameters, and use advanced analytics to understand where their portfolio can be simplified.

After the initial crisis phase has ended, it is time to look at streamlining the variety of products, product configurations and services offered to clients, consolidating the supplier base, and carefully considering outsourcing opportunities. Beyond the crisis and looking at the horizon, say six months ahead, implementing advanced analytics and machine learning tools will help companies to sustain their reduced portfolio complexity in the long-term while aligning the product portfolio closely to customer expectations.

2.   Amending the sourcing strategy:

Product portfolios and strategic decisions will drive your sourcing strategy. Decisions will need to be made around whether to make certain products and services in-house or outsourcing elements of or the entire end-to-end production. At this stage of the COVID-19 crisis, businesses should conduct a detailed analysis on their external spend. This can include the assessment of spend by product, by service category, by supplier and importantly should aim to evaluate the total cost of ownership.

A key objective at this stage is to rapidly implement sourcing controls and conduct contract compliance audits to detect any costs created by lack of adherence to agreed contractual terms or pricing.

Next, optimising demand drivers, consolidating and segmenting suppliers and reviewing options to simplify the sourcing product list will be on many companies’ agendas. Further down the track, optimising and automating the purchase-to-pay process and introducing intelligent automation and innovative contracting methods will become key to run a cost-efficient procurement organisation in the future.

3.    Closely analysing the company’s footprint strategy:

An organisation’s logistics footprint need and therefore cost will be influenced by decisions around outsourcing, strategic network - such as the quantity, set-up and geographical spread of production and service facilities - and channel strategy. 

The current situation is an opportunity for companies to take stock and review their end-to-end footprint and route to market, as well as their customer segmentation with a focus on optimising cost to serve. Creating end-to-end visibility and predictive analytics across the network becomes increasingly important, and in the long term intelligent automation in logistics planning and management will increase efficiency and effectiveness.

4.    Synchronising planning:

With demand patterns impacted by COVID-19, a rapid review and resetting of inventory targets is key to most companies’ initial reaction. Next the focus will shift on to visibility with predictive analytics and pro-active issue avoidance while enabling existing digital planning tools. In the long run, companies will look to optimise their planning operating model and enhance visibility across the end-to-end value chain by using AI and predictive analytics to improve planning performance.

5.    Amending aftermarket services:

While customer centricity is at the core of most businesses’ mission statements and values, now is the time for businesses to put their money where their mouth is, and review discount strategies and pricing as well as focusing on customer segmentation and aligning service levels accordingly.

Improving aftermarket services by sourcing and reviewing options such as vendor-managed inventory and implementing innovative distribution collaboration solutions can present levers to reduce costs in the long term while successfully focusing on the customer’s needs.

6.     Adjustment of the supply chain operating model:

The size, location and scope of the supply chain organisation presents a large cost-reduction opportunity, which is often missed when looking for cost reductions within the business. Now is a good time to review opportunities to leverage outsourcing, offshoring and process automation. Next, conducting an end-to-end process, role and efficiency review in the supply chain organisation and evaluating the footprint of the existing operating model will highlight potential opportunities to optimise the supply chain operating model sustainably.

While companies focus on adapting to immediate changes in demand patterns and process amendments to maintain employee and customer safety and wellbeing, the Amazon story is an indicator that this is a pivotal moment to create an exceptional customer experience, while also focusing on their people and brand, but also keeping an eye on costs. 

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Now is the time to fundamentally review your supply chain and to love your customers. Meeting customer expectations globally and providing exceptional service during uncertain times will be remembered and will help you stay ahead of the competition.

About this article

By EY Ireland

Multidisciplinary professional services organization

EY Ireland, a leading global professional services organisation providing assurance, tax, audit, strategy and transactions and consulting services.