The Need to Reduce Costs Through Supply Chain Network Optimization
We’ve learned a lot about supply chains over the past year, haven’t we? Even the most sound supply chains have been challenged in all kinds of ways with COVID-19. Increased consumer demand, shortages, temporary trade restrictions, and risky dependencies continue to rattle supply chains. Now, more than ever, organizations are taking a closer look at how to reduce costs through supply chain network optimization, as well as build in contingencies when the unexpected happens.
Accenture reports that an astounding 94% of Fortune 1000 companies are seeing supply chain disruptions from COVID-19, with 75% saying they have had “negative or strongly negative” impacts on their businesses. What is all of this doing to business operations and projections? The study showed that more than half of companies plan to downgrade their growth outlooks or have already done so.
As growth declines, costs should follow suit. Companies can’t afford to waste dollars on inefficiencies or disruptions that could have been avoided. By reducing costs in the supply chain network, organizations are in a better position to withstand market contractions.
Why Reducing Costs in the Supply Chain Network Is So Hard
One of the biggest problems with the supply chain network is that supply chains are inherently risky, and not all risks are detectable or preventable, at least not at first look. COVID-19 is a prime example. While organizations can plan for the potential of a pandemic, few to no organizations have any experience in implementing a plan. The last pandemic in the U.S. was in 1918 with a global influenza outbreak.
We now understand more clearly how what we can’t see (or predict) can hurt us, particularly in the pocketbook. Why is it hard to optimize supply chain costs? Among other causes, Gartner research analysts blame short-term and functionally-focused supply chain cost management models. They say, “Short-term cost goals are prioritized over long-term business value, and narrow, function-specific focus limits the ability to pursue big change and meet full performance potential.”
Supply chain leaders must be able to expect and navigate any disruption, whether it comes in the form of a pandemic, global political unrest, a recession, or even the most improbable scenario. Essential to this is to understand all of the inter-dependencies in the supply chain. It is not enough to know your direct risks from Tier 1 suppliers. You have to calculate your Tier 2, 3, and 4 suppliers as well.
Gartner says the best supply chain leaders are able to do both and then align and collaborate with stakeholders around key operating outcomes to optimize supply chain costs.
Supply Chain Cost Reduction Techniques
There are many ways to reduce costs through supply chain network optimization. Harvard Business Review outlines a few steps:
- Identify your vulnerabilities.
- Diversify your supply base.
- Hold intermediate inventory or safety stock.
Let’s start with identifying your vulnerabilities. As we said, you have to go deep and wide, looking at not only your suppliers but your suppliers’ suppliers and their suppliers. Avoid being short-term and functionally-focused. Mapping out the entire supply chain as far out as possible can be labor-intensive, but it is well worth the effort to know where your risks might be hiding.
For each risk, ask “what if.” It is critical to grasp how one potential disruption can lead to another. What if the part you get from China is no longer available or delayed by a month because of the Chinese New Year? What if a category 4 hurricane hits your facility in a Gulf state? Your map and scores will help illustrate dependencies and prioritize risks.
Scoring risks is a great prioritization technique and will establish a common definition that everyone understands. For instance, instead of simply saying something is “low risk,” give it a numerical score. Is it a 1? A 3? And what do those scores signify? What is the difference between a 1 and a 3? Tying these scores directly to what matters to your organization is best, such as revenue impact, production delay shipping delays, etc. The important thing to know here is how each risk can be expected to impact business-as-usual operations.
The second step is to diversify your supply base. Once you know where you are vulnerable, it may make sense to transition from being wholly dependent upon one supplier for a particular part or product to have a backup plan should the predictions come to fruition. Since COVID-19, the more agile organizations have been able to minimize supply chain disruptions by being able to shift suppliers from China, for instance, to Vietnam.
Another way to reduce costs through supply chain network optimization is to stay more regional when possible. The closer your suppliers, the lower your transportation and some other costs can be. An example of this has been with grocery stores that are sourcing more produce from local and regional farms instead of Chile or Mexico.
The goal may not be to divorce the supply chain from China. It’s more plausible to diversify so you have a disaster recovery plan of sorts in place should you need it. Remember that even small supply chain disruptions can cause costs to escalate. You need to be able to quickly and smoothly transition from one supplier to another when you assess risk exceeds your tolerance.
Finally, holding intermediate inventory or safety stock is a good idea if you can manage it, even though low inventory is often more cost-effective and preferred these days. Yes, the stock can age, spoil, and/or become obsolete as it’s being held, but it can also save your supply chain and your finances if you can use it to carry you over until the threat subsides.
Supply Chain Network Optimization Tools
Nearly all of the experts recommend using automation to reduce costs in the supply chain network. It’s one of the best investments to drive supply chain network optimization. Note that your supply chain is complex and involves many stakeholders; therefore, you will likely require multiple optimization tools.
For many companies, some of their biggest risks come with logistics. An ice storm, hurricane, flood, wildfire, infrastructure outage, or social hazard can bring the supply chain to a screeching halt. Freight can be easily damaged or delayed, causing a ripple effect that impacts costs and customer satisfaction.
How do organizations manage these potential disruptions? Currently, too many are relying on manual processes to gather weather forecast data and try to map where the risks might be at a certain time along a route. This may work if you have a few shipments going in and out in one day, but if your operation involves many shipments (and perhaps different transportation modes) across a broad geography, how realistic is it to accurately predict every possible threat to each shipment along each route?
Predictive analytics from Riskpulse is helping organizations rapidly and reliably detect and analyze risks for each shipment and route. It also offers the most optimal options on how to mitigate those risks. For instance, the software scans shipments up to 10 days before tender for potential risks. It simulates the entire lifecycle for each shipment, considering the type of freight, the proposed vehicle type, destination and route, pick up, and arrival times.
The software automatically scores each shipment based on all of this data, plus the potential and severity of identified risks. This is an essential element because before you jump into action, you have to know whether a threat will impact that shipment.
For example, let’s go back to our Gulf hurricane scenario. A weather forecast may give a hurricane a 70% chance of hitting the Gulf on Monday. While that’s helpful, it’s not necessarily actionable. What you really need to know is will the shipment that is scheduled to be passing through Mobile, Alabama at 10 AM on Monday be at risk for road closures, high or residual traffic, severe weather, or flooding?
If the system gives you a high risk score for that shipment a week or even 10 days ahead of time, you have breathing room to make smart adjustments to that shipment. But how do you know if changing the route or altering the shipment date is best? The software automatically suggests the best lower-risk alternatives to your current plans. Decision-makers have all of the data they need, plus the recommendations, to choose the best option.
Having this kind of automation and data at your fingertips enables you to respond faster with greater confidence. Many of these decisions lead to cost reductions, as well. Extremely low temperatures predicted for a shipment’s route can be used to your advantage. You may not need a pricier reefer truck after all.
Supply chain network optimization is helping companies reduce costs and be more nimble to change. By using innovative technology, you can have greater confidence your risk analysis is comprehensive and accurate. You can also reduce response times and create a more efficient supply chain.