Do you know how much your supply chain costs impact your bottom-line profit? Do you know how much improving the productivity in your supply chain can increase your net profit?

In the globalised age, where competition is harder and harder, looking at internal efficiencies becomes a powerful driver for increasing net profit. A reduction of supply chain costs by 5% can impact your profit and loss (P&L) and could  potentially double net profits.

It’s not uncommon for efficiency improvements to yield annual savings of between 2 million and 10 million Euros, depending on the size of the company.

Based upon these numbers, the advantages of improved supply chain efficiency have caused many to implement long-term strategies to reduce costs. If you are thinking in adopting such a strategy, there are a several questions to consider:

  • How much does your supply chain cost you today?
  • How much should it be costing you?
  • What’s your roadmap to strategic cost reduction look like?
  • How can you use technology as a tool to achieve your financial goals?

How Much Does Your Supply Chain Cost You?

 

Before you do anything, you need to run an analysis on your supply chain costs. Depending how your systems are set-up, this can be as easy as clicking a button or as complex as forming a team to perform a thorough cost analysis. If you have a complex system, you may want to consider a suitable IT solution to ease the burden of analysis in the future. Understanding the numbers proves critical in later phases of this process.

According to The Hacket Group:

“While 94% of organizations say digital transformation will fundamentally change supply chains, only 44% have a strategy for getting there.”

In their report “Analytics: Laying the Foundation for Supply Chain Digital Transformation” the group has set the four stages of maturity to analytics capabilities.

Supply Chain Analytics Maturity Model

Most companies still operate in stage 1 and stage 2, with small pockets building towards stage 3, but the trend indicates that most companies will operate on steps 3 and 4 over the next three to five years. You need to take action now in order to simply keep up with the market and your competition.

How Much Should Your Supply Chain Be Costing You?

Once you understand your supply chain costs, you need to benchmark your organisation against best-in-class supply chains in the market. The list below from Benchmarking Success shows average and best-in-class enterprises over different industries:

metrics across industry

This benchmark can give you a sense where you stand. However, long-term cost savings need much more than a competitive benchmark goal. To achieve these savings, you need to be strategic and follow a systematic and ambitious approach.

What’s Your Roadmap to Strategic Cost Reduction Look Like?

When executing strategic, long-term cost savings plans, focusing resources to stimulate growth and differentiation matters much more than cost cutting. Strategic ambition and an underlying culture of innovation and customer-focus differentiates successful programs from those that focus solely on technology.

In PwC’s “More for less: five steps to strategic cost reduction,” the organisation notes that a strategic process to move the business forward ─ optimising rather than just cutting expenses ─  ensures your business can sustain competitive relevance and maximise its potential. This process should look like the following.

1. Start with the strategy.

A clear view of your global strategy ensures consistent understanding across your organisation. It also enables you to see how viable your projected cost returns will be five years from now, especially in the face of new technology. Plus, understanding how costs occur across business units leads to more clarity into strategy and cost projections.

2. Align costs to strategy.

Differentiate the strategically-critical costs from the non-essential costs. Targeting where resources earn the best return, rather than just cutting costs, leads to strong results. To get started on t this process, you should differentiate the capabilities needed to fuel profitable growth (‘good costs’ targeted for investment) from low-performing business and inefficient operations (‘bad costs’ targeted for overhaul or elimination).

3. Aim high.

Be bold, be brave and be creative. Look beyond what’s always been done.  Ask why. Find more alternatives. Look beyond marginal efficiency savings, and use the 10X concept to achieve a game-changing boost in capabilities. Examples include the opportunities opening in robotic underwriting or automated materials handling.

4. Set direction, and show leadership.

Deliver cost optimisation as a strategic, business transformation programme. Ensure central governance, secure senior management agreement and buy-in. Engage the workforce at all levels, and develop ways to encourage personal ownership and organisational collaboration.

5. Create a culture of cost optimisation.

Ensure you embed a culture of ownership and incentivise continuous improvement. Regularly review strategic cost reduction priorities. Update them in the same way as your business assesses the relevance of its strategy and the opportunities ahead.

How Can You Use Technology as a Tool to Achieve Your Financial Goals?

By following these guidelines, you can achieve significant savings. For example, you could implement an enterprise-wide automated guided vehicle (AGV) deployment plan. AGV systems have established themselves over the years as reliable drivers of improved efficiency and can help you achieve your 10X goals. Deploying several systems throughout an enterprise can save you up to €35 million (based upon previous customer experience).

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Ultimately, carefully examining your supply chain costs and working toward improved operational efficiency can transform your business. It has the potential to maximise profits and usher your company into Industrie 4.0.