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.
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.