How to reduce supply chain costs and adapt to market uncertainty

Supply chain leaders should identify efficiencies and reduce costs, making sure initiatives are targeted and sustainable.

In brief

• Becoming more efficient is a rising concern for supply chains amid financial pressure and unpredictability in the global markets.
• Supply chain executives are looking for sustainable cost reductions that go beyond stop-gap efforts.
• Cross-functional levers should be employed, so that programs are not solely confined to the procurement function.

Global market uncertainties and disruptions continue to put pressure on supply chains. Supply chain executives already tasked with navigating bottlenecks and materials shortages are now facing demand fluctuations, trade tension, talent shortages and tight margins. Meanwhile, material, manufacturing and construction costs remain high. For instance, on a year-on-year (y-o-y) basis, the U.S. Bureau of Labor Statistics’ Producer Price Index (PPI) rose 8.5% in September 2022, with PPI for inputs to nonresidential construction increasing at a significantly higher rate than the overall index (+12.6% y-o-y).¹

The focus on supply chains has been unflinching since the start of the pandemic, but the challenges are no longer just about meeting demand. Now, with signs pointing to slowdown of the global economy, demand is tightening, and the role of supply chain is evolving to become more strategic than before, with a keen focus on cost reduction, resiliency, and efficiency. Invariably, supply chains will be a target, as an estimated 50% to 75% of the cost of doing business is influenced directly by supply chains.²

As we have learned from past economic waves, this environment of high economic uncertainty does not call for drastic decisions but for strategic planning.  In addition to considering the internal capabilities, companies will also need to reconfigure their supply chains in a cost-efficient way to support external market fluctuations and changing customer preferences. This will enable them to optimize financial performance and achieve sustainable profitability. The need to have a comprehensive rapid cost reduction strategy is getting very high media coverage and visibility in the current macro setup, with many of the initiatives and decisions at organizations being driven by board-level mandates.

In meetings with clients, Sumit Dutta, EY Americas Supply Chain & Operations Leader, advises them not to rush into drastic decisions. “It’s important to engage the stakeholders and make sure they understand what’s driving this imperative,” says Dutta. “The fastest way to make a big impact is to have this come from the top down.” Often, Dutta says, companies get better results when one person is appointed to lead transformation and savings, rather than having savings be the second or third priority for someone focused on other endeavors.

EY Americas Supply Chain Cost Reduction Solution Leader, Brian Waits, also sees the benefit of a deliberative approach, rather than tackling many smaller cost-savings and cost-takeout programs at once. “Companies that go after fewer things in a bigger way typically have better results,” says Waits. “Focus on a few big items and tie them together in a meaningful way.”

While cost-cutting results may be sought quickly, the methods cannot be short-sighted, especially considering that the goal is not just savings for now but adding resiliency in the longer term. Near-term initiatives (e.g., benchmarking KPIs vis-à-vis industry leaders and averages) help establish a solid foundation to drive sustainable results over time. Executives typically start with a holistic approach and a baseline organization scan that compares performance and rates with external benchmarks. This review process is designed to reveal operational inefficiencies, engage stakeholders and set a tone for collaboration efforts, such as working with suppliers to improve forecasting and implementing planning capability tools.

Ideally, executives then identify specific cost reduction steps and timelines to be applied across the organization. Rapid cost reduction strategies in supply chains can net value in a single quarter or six months, and these quick wins can be used to propel further actions. Short-term cost reduction initiatives often include the following:

And finally, after identifying specific cost reduction steps and timelines that are feasible, executives start driving out cost via a collaborative three-step process.

1. Prepare: Aligning on principles to build a baseline strategic and financial model and defining key targets.
2. Design: Conducting detailed planning workshops to outline specific next steps focused on rapid cost takeout.
3. Execute: Building a structured program based on identified targets and available budget.

Special thanks to Brian Waits, Sudhanshu Wasan and Scott Curtin for contributing to this article.