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Reducing costs can deliver enhanced supply chain resilience along with improved competitive advantage.
In brief
- Businesses risk missing out on the benefits of post-pandemic sales recovery if they fail to manage costs effectively.
- The primary objective of supply chain cost management should be to deliver value to the business and not just cost reductions.
- Organisations need to invest in advanced technologies and data analytics to gain visibility across the value chain.
In today’s ever more competitive global marketplace, businesses need to continue to innovate and find ways to reduce costs across their supply chains. Pandemic related disruptions turned a spotlight on the high degree of fragility and complexity of global supply chains while there were conversations around building resilience of supply chains. This played well in the context of unfolding geopolitical events which placed further strains on supply chains as well as pressure on organisations to reconfigure supply bases to bring them closer to home in near-shoring and friend-shoring strategies.
This made a lot of sense, particularly in light of events like the Suez Canal being blocked for six days¹. Skyrocketing energy prices and consequent raw material and labour cost increases in the wake of the Russian invasion of Ukraine served as further reminders of the importance of rigorous supply chain management.
But while improved risk mitigation and resilience in supply chains are always welcome, the primary focus must always be on cost control and that imperative was sometimes lost sight of in post-COVID conversations.
Increased supply chain costs can quickly wipe out top line gains made through hard won sales increases. Organisations that allow their margins to be squeezed by rising costs find themselves running to stand still and vulnerable to competitors with superior supply chain management systems.
Focus more on value, not just cost
The challenge facing the majority of enterprises is finding the right balance between cost reductions and enhanced resilience. Other factors like sustainability are increasingly coming into play as well. The cheapest option may turn out to be too costly in environmental or social terms or due to its consequential impacts within the organisation.
The starting point in meeting this challenge is to change the nature of the conversation and the narrative from cost to value. Instead of focusing purely on price, the endeavour should be to view this through the lens of the value it can bring to the organisation.
And value is not only measured in terms of direct contribution to profits. It can manifest itself in the form of a higher share price, an improved customer experience, or even improvement in carbon footprint.
Equally important is the quantification of the full impact of supply chain decisions. Procurement departments and supply chain managers can often end up being their own worst enemies by creating very complex supply chains that do not possess the inherent strengths required to withstand even fairly minor external disruptions. Those weaknesses were exposed quite brutally during the pandemic. Taking out that complexity to improve resilience without increasing costs must be a priority.
In this context it should be remembered that cost reduction and resilience are by no means mutually exclusive. In fact, effective cost management helps build resilience by creating the financial buffers that allow organisations to better withstand unforeseen challenges and risks.
Effective cost management also drives improved operational efficiency by ensuring that the resources within the supply chain are utilised efficiently and effectively. It also confers market advantage by enabling companies to offer competitive pricing for their products and services.
Achieving those outcomes requires full end-to-end visibility and collaboration across the entire value and supply chains.
If a supply chain is only as strong as its weakest link, it is essential to be able to identify where the points of weakness lie so they can be addressed. It may not be possible to eliminate them, but being cognisant of them will support mitigation efforts.
Transparency in value chain need of the hour
What is required is connectivity between all elements of the value chain from the smallest suppliers right through to the end customer and including all relevant areas of the business including manufacturing, distribution, sales, procurement and so on. The aim is to create a system as close to seamless and frictionless as possible where sales at customer level transmit signals in real time to pull supplies through the chain and where supply constraints are communicated instantaneously to the business and its customers.
Arguably, that already exists in some of the world’s more advanced corporations, but usually as a result of special circumstances such as the particular nature of the products involved. For example, the pharma industry has developed highlight sophisticated systems to predict market demand and manage every point in the supply, production and distribution chains.
Every business should aspire to emulating that end-to-end transparency and collaboration. It breaks down the barriers between different areas of the business and allows a clear view of the true landed cost of the product, and not just the manufacturing cost.
There are systems available that will deliver that end-to-end connectivity and visibility but not without significant upfront investment. That expense is more than justified by the value the technology can bring. The more information is shared within a business, the more efficient they can make their operations. The more a business can automate and digitise transactions, the more costs it can drive out, and the more value it can derive from its data.
Advanced analytics can help eliminate waste
Applying advanced analytics to that data can deliver further cost savings. The production process can be analysed to examine what value different elements are producing. It is often the case that activities and processes are carried out almost out of force of habit because that is the way things have usually been done. Closer scrutiny can uncover opportunities for process redesign, waste elimination and the application of Lean management and other principles that can reduce costs still further.
Furthermore, when predictive analytics and business intelligence are applied additional value can be delivered through more accurate and precise demand forecasting. It should be possible for a business not only to predict a general increase or decrease in demand for particular product lines, but also to forecast the geographies and localities where the fluctuations will be most pronounced.
These systems can also be employed to scenario plan potential changes to supply chains and predict their wider impacts for the business. For example, a switch to a lower cost supplier may be attractive in pure financial terms but if the production facilities are located in areas prone to worsening flooding during monsoon seasons as a result of climate change, the risk may not be worth taking.
On the other hand, a move to more sustainable packaging may increase the unit cost of products but the top line value it delivers to the business can be enormous. Even a slight improvement in an organisation’s sustainability rating may open it up to a new cohort of institutional investors and this, in turn, may drive up the stock price. Enhanced sustainability credentials can also boost product sales.
That is probably the main difference between now and five years ago. Prior to the pandemic, cost management was viewed almost purely in financial terms with scant attention being paid to other factors. It is now a much more holistic exercise with the primary focus being on the value that can be delivered to the business.
Summary
Effective cost management is critically important for the competitiveness and operational efficiency of a business. By using advanced technologies and data analytics, to look at how they plan, what they buy, how they make their products, how they deliver them, and by costing each step in the process, organisations can develop the roadmaps which will help them prioritise where to take costs out and how to take them out safely.
How EY can Help
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Discover how EY's supply chain team can help your business redefine its end-to-end supply chain and operations to support your enterprise objectives.
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