7 key supply chain cost reduction strategies

April 22, 2022

Ensuring cost-effectiveness is a vital pillar of supply chain management. Reducing costs across your supply chain operation can significantly impact your bottom line, especially if your net profit margins are currently a single-digit percentage. Which business doesn’t love enhancing profits without having to do anything to boost sales?

Another benefit of pursuing cost savings as a headline objective is that you’ll see benefits across the board. A more cost-effective supply chain will improve overall supply chain performance, meaning you could:

  • Reduce lead times and get products to the necessary locations quicker
  • Enhance customer satisfaction by having better order fulfilment processes
  • Grow your sales thanks to having more consistent availability and fewer stockouts or shortages

Due to modern supply chains’ multi-faceted and sometimes complex nature, there are many ways you can reduce operational costs to unlock all these benefits.

Before you make changes, know your current reality

Before you start making changes to your supply chain, take the time to understand your current situation regarding your supply chain costs. As well as looking into these as an overall percentage of your cost of sales, you should also drill down into each cost line.

In addition, you should look to:

  • Identify some benchmarks specific to your industry
  • Understand what your ideal (but realistic and achievable!) spend is in each area
  • Determine which key performance indicators (KPIs) you want to focus on so you know what success looks like
  • Speak to suppliers who aren’t your current service providers to understand what alternatives are available
  • Ensure you involve your entire procurement team in this process

This will leave you in a solid position to determine your priorities when targeting lower costs and ensure you can negotiate and have conversations with existing and potential service providers that focus on your cost-saving and operations planning goals.

Let’s explore seven potential strategies that could help you streamline your supply chain operations, reduce your costs, and unlock various additional benefits.

1. Embrace IT and automation

How easy was it to get all the data you needed to decide where you should focus your cost-saving efforts? If it was a cumbersome process involving collecting data from various sources, you’re probably already on board with this strategy!

Improved IT systems and automation can help reduce costs across your supply chain both from a data processing and an operational perspective.

Automation doesn’t necessarily have to mean making a significant investment into robotics, either. It can be as simple as having workflows set up to provide notifications of changes in a supplier’s risk profile or placing orders with suppliers.

The keys to introducing automation are:

  • Identifying repetitive, labour-intensive tasks that are effectively sucking money from your supply chain by needing human input
  • Getting the buy-in of your procurement teams by highlighting the benefits of automation and that you’re using it to help them be better at their job rather than replacing them

2. Improve how you forecast customer demand

This is one area where bringing automation into your supply chain operations will potentially positively impact your business. Automating your forecasting processes can make you better placed to meet customer demand, but it’ll also help you manage inventory levels, plan your warehousing better, and manage your cash flow more effectively.

However, if you’re not using the best forecasting model for your business and customer profile, automation could make the problem worse! Review your supply chain forecasting methods to ensure your model fits your business and your customers’ needs.

As an added benefit, improving your customer demand forecasting will also build added resilience into your supply chain, as you’ll have a more accurate idea of how much excess inventory you need to keep on hand at a given time.

3. Reduce touchpoints across order processing

Depending on what you sell and your supply chain model, your supply chain could have multiple touchpoints that potentially increase the time it takes from a customer placing an order to receiving an item. This rings true whether you’re selling goods through a brick and mortar store or from an e-commerce platform.

The more places goods travel to, and the more people are handling them, the greater the chances of something going wrong. For example, goods can get lost, delayed, delivered to the wrong place, delivered in part, or damaged in transit.

The best solution is to make your order processing and fulfilment workflow as simple as possible. This might mean you:

  • Find suppliers who can offer dropshipping so that they can deliver e-commerce purchases direct to your customers
  • Find logistics partners who can provide an end-to-end service from your supplier to your warehouse or customers.

Automation has a role to play here, too, in informing customers or your procurement teams where products are at any given time.

On top of all this, take steps to protect your bottom line by ensuring your contracts and supplier codes of conduct hold them accountable for any delays and damages.

4. Review your inventory management and warehousing processes

When pursuing cost reductions and optimal supply chain operations, it’s easy to get tunnel vision looking solely at what your suppliers can do better.

Yet, sometimes, the most significant improvements are the in-house changes that are staring you in the face.

While we often look at inventory management through a lens of stock levels, there are potentially dozens of processes you can improve to reduce your overall supply chain costs massively.

These include:

  • Space management in your warehouses
  • Classification and location of inventory so your team can pick and package orders quicker
  • Reviewing stock handling procedures to reduce damages and stock loss
  • Reducing how much packaging you use, which gives you a sustainability win, too
  • Considering inventory pooling
  • Considering a multi-client warehousing solution, so you share costs with other businesses - like how an Amazon FBA centre works

5. Review third-party logistics and transportation costs

Every supply chain has logistics costs. While this is absolutely an area where you can challenge your service providers to provide a better service and lower transportation costs, it’s also one where you might be able to find an optimal process yourself.

For example, consider:

  • How efficient your third-party logistics and transportation costs are. If you’re paying a flat rate for shipments from a supplier to your warehouse, you’re losing money every time shipping containers or trucks are at anything but 100% capacity. In reviewing your forecasting model, look at how you can match your needs with what your logistics partners can provide to remove this inefficiency.
  • If you’re paying for things you don’t need. Logistics features like overnight shipping or preferred day can seem appealing, but they come at a price. Is it business-critical that your goods turn up within a specific timeframe or be waiting at your warehouse in the early hours of the morning? If the answer is yes, consider whether optimising other processes can reduce the need for this. Why are you paying for such a service if the answer is no?
  • What you’re offering to your customers. Offering free delivery to your customers is a fantastic way to grow your sales but potentially costs you a significant sum of money. Try removing this feature and see if it impacts your sales. If you have a high customer retention rate, you could always offer free delivery on first orders. At a minimum, consider only offering free shipping above a specific spend threshold where you’ve made enough from the sale to absorb the shipping costs.

6. Identify “hidden” inefficiencies and costs within your supply chain operations

The amount of money your business spends on processes you take for granted might surprise you but could represent the most significant inefficiencies across your entire supply chain.

Consider the things essential to the success of your supply chain and your business. What needs to happen? At a minimum, you need to buy goods from your suppliers and service providers, and your customers need to buy them.

But those processes come at a cost and could be draining your bottom line.

Drill down into the payment processing platforms you use and look into things like overseas bank fees and even if you’re getting a raw deal when it comes to currency conversions. If you’re a business with tens of millions of dollars of cash flow at both ends of your supply chain, reducing your transaction fees by even half a percentage point represents a significant saving.

7. Ensure you’re looking at overall costs across your supply chain network

Even the most experienced procurement professionals and supply chain managers can obsess too much about unit costs. While unit cost is a critical consideration of any successful supply chain operation, you only get the complete picture by focusing on the total cost of getting goods made and, ultimately, into your customers’ hands.

When you look at what a product costs your business, you need to consider:

  • Logistics costs
  • Warehousing costs
  • Losses via damages or other means that you’re unable to recoup from your service providers

Taking this bigger picture view will help you make smarter decisions. For example, a product costing $3 to produce in China may have a long lead-time and high associated shipping costs to get to Western Europe. You might have chosen this path because the alternative is a $4 production cost in Eastern Europe. But if the logistics costs and damages are lower, does this path represent better value?

Supply chain strategies to reduce your costs

While your supply chain may be multi-faceted and complex, the strategies you need to follow to reduce your costs are often simple. The challenge is ensuring that all stakeholders across your supply chain understand what you expect and the changes you want to make to your operations.

By accessing your business data and understanding where your most significant opportunities for improvement lie, you can reduce your supply chain costs, enhance your bottom line, and deliver on all your KPIs.

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