7 minute read 17 Jan 2023
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How to reduce supply chain costs and adapt to market uncertainty

By Sumit Dutta

Principal, Supply Chain & Operations, Ernst & Young LLP

Supply chain aficionado. A true global citizen and explorer with experience working in over 25 countries. Father and personal tutor/homework helper to two daughters.

7 minute read 17 Jan 2023
Related topics Consulting Supply chain

Supply chain leaders should identify efficiencies and reduce costs, making sure initiatives are targeted and sustainable.

In brief

  • Becoming more efficient is a rising concern for supply chains amid financial pressure and unpredictability in the global markets.
  • Supply chain executives are looking for sustainable cost reductions that go beyond stop-gap efforts.
  • Cross-functional levers should be employed, so that programs are not solely confined to the procurement function.

Global market uncertainties and disruptions continue to put pressure on supply chains. Supply chain executives already tasked with navigating bottlenecks and materials shortages are now facing demand fluctuations, trade tension, talent shortages and tight margins. Meanwhile, material, manufacturing and construction costs remain high. For instance, on a year-on-year (y-o-y) basis, the U.S. Bureau of Labor Statistics’ Producer Price Index (PPI) rose 8.5% in September 2022, with PPI for inputs to nonresidential construction increasing at a significantly higher rate than the overall index (+12.6% y-o-y).¹

The focus on supply chains has been unflinching since the start of the pandemic, but the challenges are no longer just about meeting demand. Now, with signs pointing to slowdown of the global economy, demand is tightening, and the role of supply chain is evolving to become more strategic than before, with a keen focus on cost reduction, resiliency, and efficiency. Invariably, supply chains will be a target, as an estimated 50% to 75% of the cost of doing business is influenced directly by supply chains.²

As we have learned from past economic waves, this environment of high economic uncertainty does not call for drastic decisions but for strategic planning.  In addition to considering the internal capabilities, companies will also need to reconfigure their supply chains in a cost-efficient way to support external market fluctuations and changing customer preferences. This will enable them to optimize financial performance and achieve sustainable profitability. The need to have a comprehensive rapid cost reduction strategy is getting very high media coverage and visibility in the current macro setup, with many of the initiatives and decisions at organizations being driven by board-level mandates.

In meetings with clients, Sumit Dutta, EY Americas Supply Chain & Operations Leader, advises them not to rush into drastic decisions. “It’s important to engage the stakeholders and make sure they understand what’s driving this imperative,” says Dutta. “The fastest way to make a big impact is to have this come from the top down.” Often, Dutta says, companies get better results when one person is appointed to lead transformation and savings, rather than having savings be the second or third priority for someone focused on other endeavors.

EY Americas Supply Chain Cost Reduction Solution Leader, Brian Waits, also sees the benefit of a deliberative approach, rather than tackling many smaller cost-savings and cost-takeout programs at once. “Companies that go after fewer things in a bigger way typically have better results,” says Waits. “Focus on a few big items and tie them together in a meaningful way.”

While cost-cutting results may be sought quickly, the methods cannot be short-sighted, especially considering that the goal is not just savings for now but adding resiliency in the longer term. Near-term initiatives (e.g., benchmarking KPIs vis-à-vis industry leaders and averages) help establish a solid foundation to drive sustainable results over time. Executives typically start with a holistic approach and a baseline organization scan that compares performance and rates with external benchmarks. This review process is designed to reveal operational inefficiencies, engage stakeholders and set a tone for collaboration efforts, such as working with suppliers to improve forecasting and implementing planning capability tools.

Ideally, executives then identify specific cost reduction steps and timelines to be applied across the organization. Rapid cost reduction strategies in supply chains can net value in a single quarter or six months, and these quick wins can be used to propel further actions. Short-term cost reduction initiatives often include the following:

Rapid cost reduction levers Description
Deploy product quality analytics and root cause methodology Identify and analyze the underlying causes that contributed to the deviation from the desired outcome, using advanced cognitive and predictive technology.
Implement late-stage differentiation strategy for similar products Redesign the technology ecosystem to accommodate late-stage differentiation approach, i.e., establish a process that utilizes similar/same equipment for initial steps and limits use of new tools for finalization.
Improve energy management Decrease utilities spend by deploying demand and supply forecasting strategies for locations.
Improve inventory management Drive cross-functional collaboration and coordination to reposition inventory to maximize sales and revenue.
Align team on production road map Combine/align on product road map across functional teams (engineering and sales).
Rapid cost reduction levers Description
Drive SKU simplification and optimization Work to ensure product catalog is organized based on assessment of customer demand, storage availability and SKU sales data.
Identify best raw material price Conduct a benchmarking exercise to map the current market price range and rationalize pricing and identify discounts (such as, early payment and volume discounts).
Rapid sourcing execution Consolidate spend with top suppliers and identify opportunities for volume discount based on combined spend.
Identify supply managed inventory (SMI) opportunities Build a SMI program based on a system benefiting both the organization and involved suppliers and keep the communication channel open when setting goals of the SMI program.
Minimize supplier risk Prioritize suppliers and run real-time monitoring of risk categories and map commodity as well as parts risk.
Rapid cost reduction levers Description
Manpower optimization Rightsize the manufacturing and operations functions.
Optimize production schedule by reducing changeovers Implement the Single-Minute Exchange of Dies (SMED) method to dramatically reduce the time it takes to complete equipment changeovers and establish standard changeover protocols.
Define manufacturing operations model Define business/functional requirements; conduct a cost-benefit assessment of contract vs. in-house manufacturing.
Implement predictive maintenance solution Implement Condition-based predictive maintenance (CBPM) to monitor the equipment’s performance in real-time against critical parameters.
Integrating digital technologies to optimize the manufacturing process Adopt Internet of Things (IOT)-powered monitoring and collaboration tools for daily operations (quality, safety and overall equipment effectiveness (OEE) monitoring).
Rapid cost reduction levers Description
Labor optimization in warehouse Focus on improving productivity, spans of control, workforce planning and shift scheduling.
Quick transportation spend analytics Identify cost reduction opportunities by analyzing current transportation spend and volumes across different modes, routes and carriers.
Optimize warehouse capacity Identify underutilized space and reduce aisle width in the racking area.
Implement predictive analytics to proactively manage and prevent delays Focus on logistics demand forecasting using customer buying patterns/seasonality and historical data.
Define and implement logistics operations models (in-house, 3PL, 4PL, shared, etc.) Conduct an internal assessment to identify cost/benefit analysis, map out inbound and outbound operational requirements and develop appropriate contract terms and conditions.

Reducing waste, water, electricity and fuel consumption are also top concerns for senior supply chain executives in the 2022 EY Sustainable Supply Chain survey. Although 61% of respondents were motivated by cost savings, they also were focused on broader sustainability goals such as regulatory compliance, better operational risk management and potential for improved revenue growth.

Longer term, transformational supply chain cost reduction efforts that rely on building simulations or an analytics function can lead to ongoing structural savings. Some enterprises are turning to digital tools and advanced optimization software to improve supply chain configuration and logistics, which add efficiencies. Operations leaders are also conducting simulations with technologies, such as digital twins, to model and explore the potential of supply chains to provide more efficient products and services to customers. Initiatives for structural supply chain savings include streamlining the longer-term impact levers such as smart factory deployment, manufacturing operations model redesigning, and sustainability. Sustainability companies can further prioritize aspects such as energy management responsible sourcing and last-mile fulfilment via innovative solutions such as drones.

In addition, through capacity-related closures such as manufacturing line balancing and business unit/product line shutdowns — due to poor sales or other issues — businesses can achieve targeted reductions while refocusing on their most profitable programs. These opportunities allow operations leaders to take a more active role in big-picture strategies, such as an operating model review, while balancing difficult daily supply chain decisions, such as how to make and move their products. No matter whether there are economic headwinds or strong and robust markets, supply chain cost reduction is imperative to secure your ability to respond to uncertainty and thrive during disruption.

Besides timelines, operations leaders also consider the cost reduction potential of each priority under consideration.

And finally, after identifying specific cost reduction steps and timelines that are feasible, executives start driving out cost via a collaborative three-step process.

  1. Prepare: Aligning on principles to build a baseline strategic and financial model and defining key targets.
  2. Design: Conducting detailed planning workshops to outline specific next steps focused on rapid cost takeout.
  3. Execute: Building a structured program based on identified targets and available budget.

Special thanks to Brian Waits, Sudhanshu Wasan and Scott Curtin for contributing to this article.

Operations leaders’ agenda

In times of global business disruption, operations leaders should seize the opportunity to build enterprise resilience, drive transformation and reframe the future of their organizations.

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Supply chain executives are evaluating their full value chains, looking for ways to reduce costs in a sustainable manner. As a result, quick wins can be realized right away, and a road map for other cost reduction initiatives can be established. Long term, these efforts should also improve the financial health of the organization, which is necessary to become more resilient to global market fluctuations.

About this article

By Sumit Dutta

Principal, Supply Chain & Operations, Ernst & Young LLP

Supply chain aficionado. A true global citizen and explorer with experience working in over 25 countries. Father and personal tutor/homework helper to two daughters.

Related topics Consulting Supply chain