Supply chain inefficiencies significantly impact businesses’ bottom lines due to time and materials lost. Those costs often comprise a considerable percentage of the sales price of a product or service. A reduction in supply chain costs can actually double net profits, so reducing inefficient practices offers many benefits, and there are many areas that are ripe for pruning.
- Transaction costs. Placing orders can be deceptively expensive. They include labor costs for the inspection of goods received, confirming delivery arrangements, placing the goods received in stock, handling queries, issuing a supplier's invoice and issuing a supplier payment. Fulfilling orders, likewise, has associated costs. Issuing and managing invoices, organizing deliveries, responding to customer queries and checking progress all add to the overall cost. Some of the cost of transactions comes from processes that are too complicated and some of it is simply from subpar information sharing. E-commerce platforms can ameliorate some of those challenges. Often, costs can be dramatically reduced by the adoption of collaborative working supported by modern B2B e- commerce tools. Today’s technology lets companies easily connect supply chains from one end to the other. Coupled with cloud-enabled solutions, companies can keep the costs of communication across networks relatively low.
- Inventory. Businesses need to know where their goods are from the time the order is placed until the time the final product is sold to the end user. Not having reliable tracking systems results in guesswork that costs businesses. Many companies end up stockpiling inventory “just in case” — which can result in expensive carrying costs. If every link in the supply chain — from raw materials to work in progress, to finished goods to regional distribution centers — holds more inventory, the costs begin to pile up (much like the goods). Inventory costs money to store and manage, and because it ties up working capital, it diverts that capital from making business investments. Obsolete stock is often hard to dispose of and too often is sold at a loss. The Logistics Bureau reported that inventory holding costs of as little as one month can eat up the entire profit margin on certain items.
- Accountability. When someone, or a team, is tasked with any specific responsibility, odds are the job has a better chance of being successfully completed than those that are deemed the responsibility of everyone. The duties must be clearly defined; if there is a cost-reduction target, it should be not only articulated but discussed with a plan put into place to specifically reach that goal. Often, the responsibility of making sure the supply chain runs smoothly falls on the Chief Procurement Officer (CPO). When the CPO holds someone in the supply chain accountable, the vendors are attended to, the purchase orders are studied and inventory is scrutinized. When problems arise, an organized plan of identifying and solving the issue is implemented.
In addition, common sense moves such as economies of scale — not only buying supplies in larger quantities but producing goods in larger batches — and better use of space can also save costs throughout the supply chain. Looking at ways to trim costs from the very first supplier to the very last invoice sent can help companies build stronger, more efficient bottom lines.