Why supply chain cost reduction has become a boardroom discussion

Cost reduction can be targeted. But continuous improvement requires process discipline, data reliability and the right technologies.

In brief

• Supply chain leaders should focus on these five strategies for sustainable cost reduction.
• Reducing costs within the supply chain is crucial for stability, and it begins by identifying the areas most at risk.
• A continuous cost reduction journey ensures resiliency within the supply chain.

For most companies, supply chains represent about 50-70% of their operating costs¹. Confronted with continual disruption, how can your supply chain become more flexible and agile, yet also cost-efficient? How can you establish a cost reduction program that is sustainable over the long term? And how can reducing the expenses of your supply chain be a catalyst for business growth?

What are the areas to target for supply chain cost reduction?

Your opportunity for sustainable supply chain cost reduction primarily lies within five key areas:

1 . Sourcing

Today’s supply chain leaders have tough decisions to make regarding using their procurement function to cut expenses. Considerations include supplier selection (e.g., which suppliers offer the best reliability, quality, location and cost); collaborative negotiations (e.g., which suppliers are willing to streamline their processes and improve efficiencies); location (e.g., proximity of supply base to keep supply chain costs down; and sustainability (e.g., which suppliers are ethically sourcing, efficiently using natural resources and setting sustainability goals). To control costs, some companies have adopted vertical integration tactics to either purchase suppliers outright or manufacture key parts.

2 . Product and portfolio complexity

To manage your entire product or service portfolio effectively, have a firm grasp of your commercial and business objectives and of how your cross-functional organization supports those goals. Make sure there is communication among your business units and functions to guarantee there is product development alignment with your marketing and supply chain strategy. In addition, SKU proliferation is an issue for companies coming out of the pandemic. Too many variations of the same product can introduce complexity, excess inventory and supply chain costs while also increasing the number of stock-keeping units (SKUs) into your system. 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 simplify your portfolio for cost reduction.

3 . Footprint and network strategy

To manage costs in your supply chain network of the future, data visibility across your network, from supplier to customer, will be critical. A supply chain network strategy must include some level of control and visibility of all flow paths, including product information, suppliers, manufacturing, logistics and finance. Visibility in the supply chain helps reduce risks and improve resilience.

In today's market, expedited delivery options, including next-day or even same-day delivery, are highly prized by most consumers. Given this landscape, it’s crucial to meticulously examine the footprint of your manufacturing and distribution centers (DCs), as well as your supply base. This presents a potential avenue for optimizing supply chain costs. There may be an opportunity to consolidate certain locations and establish new ones that cater to customers more effectively while streamlining shipping routes.

4 . Planning synchronization

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. One approach to solving this issue is the implementation of end-to-end business planning that utilizes advanced tools, including analytics, to capture demand signals and align them with supply and production. Emerging technologies, such as artificial intelligence (AI) and its subset machine learning, and analytic enablers have a role to play in sensing demand. You should closely collaborate with suppliers, sales and manufacturing to further synchronize your ability to meet changes in customer demand and respond to disruptions.

5 . Operating model design

Now more than ever, constantly shifting customer needs are shaping enterprise operations. Companies are forced to ensure they are looking at innovative ways of delivering customer satisfaction across the value chain. This requires a clear understanding of organizational roles, responsibilities, routes to market, technology enablers, and the data structures and environments required to support demand.

As customer demands change, reassessing your operating model can lead to substantial cost savings in the supply chain. While changes may take time, it's worthwhile to carefully consider options such as shared services models, outsourcing noncritical tasks, restructuring the organization to be more customer-focused and reevaluating where work is completed to become more responsive to market conditions.

Getting started with small steps in cost reduction

Where are you in your journey to cut supply chain costs? Some companies will look for foundational cost takeout by finding areas to reduce waste and improve efficiencies. In other instances, cost reduction may play a vital role in helping companies overcome challenges related to insolvency or improving financial stability (see Figure 2). Still, others might be scrutinizing supply chain functions such as procurement, logistics or manufacturing to wring out costs and improve margin.

Whatever your focus, we recommend you begin by identifying potential cost reduction areas within the business that are in the most distress or that involve the biggest return on investment (ROI). Assess qualitative and quantitative levers: utilize the enterprise resource planning (ERP) data you have and interview stakeholders for context and insights to gain a complete picture of the business.

Figure 2. Sustainable cost reduction and continuous improvement

Perhaps you already have an idea of where to begin, but if not, here are guidelines to consider in your journey toward sustainable supply chain cost reduction.

Review your data and technology capabilities

It’s critical to have a firm grip of costs from your end-to-end supply chain enablers. Understanding your baseline will help you know which levers to pull to get immediate return on investment and to measure for long-term improvement. First, start with a data quality and integrity check, working across both business and IT.

Next, contemplate utilizing technologies such as digital twins to simulate product development, optimize operations and test scenarios for improving the efficiency of facilities and plants. Predictive analytics can tell you when maintenance is required on machinery and robotics, and when changeovers are needed. Consider establishing a “control tower” to improve visibility across your manufacturing plants and your extended supplier network or to optimize transportation routes to control costs.

Explore automation opportunities

Supply chain leaders should seek automation opportunities to modernize operations. Robotic process automation (RPA) can help digitize manual tasks for greater efficiency and accuracy. Moreover, integrating emerging technologies such as generative AI can assist with cost reduction efforts. This technology might help enhance and simplify your collaboration and negotiation with suppliers, optimize shipping routes and, using natural language interfaces, turn your supply chain knowledge base into easily queried information.

Improve your inventory visibility

Effective supply chain cost management requires transparency about what inventory you have and where in your network it is located. Maintaining strong inventory control is a key cost reduction strategy. Similarly, monitoring the flow of goods can keep you from overproducing and overordering.

Optimize your supplier spending

Data and analytics are essential for supply chain cost optimization with third-party partners. Consider conducting spend analytics to identify savings opportunities in key categories, then start running sourcing events where appropriate. A note of caution: it’s important to remember that building successful supplier relationships requires collaboration. If your sole focus is on negotiating cost savings today, it could strain relationships, lead to supplier shortcuts to meet cost targets and may pose a financial risk to your suppliers down the line.

Develop a resilient operating model and workforce

Begin to build out a tax-efficient supply chain. Scrutinize added cost considerations around R&D manufacturing locations, material movement, freight costs and areas such as global trade. Evaluate shared services models to reduce supply chain costs for procurement, planning and logistics functions by centralizing and streamlining activities and processes.

Workforce initiatives should extend to the entire supply chain network. Expectation-setting, upskilling and engaging employees are critical to making any cost reduction and process improvement efforts stick. Your team must be onboard and should understand and see the value brought to daily execution and, ultimately, the shareholders. With a committed workforce, continuous improvement becomes a mindset in which everyone is working toward the same goals.

Scott Curtin, Senior Manager, Ernst & Young LLP, also contributed to developing this article.