The supply chain network and processes contribute significantly to the operational expense of the company. Businesses and companies employ various strategies and techniques to make their SC processes and operations efficient and reduce costs. Today, we’ll discuss the top 10 strategies for cost reduction in supply chain management.
The objective of SCM is to perform the following functions, and some of them are as follows;
- Sourcing raw material
- Develop an ideal product or service
- Order management
- Inventory control
- Demand planning
- Delivering to the target customers
What is Cost Reduction in SCM?
As the name implies, cost reduction in supply chain management is the method of decreasing the expenses of the company in order to amplify its revenue and profitability. Achieving cost efficiency on your SC activities and processes have a great impact on the end result.
For instance, if your organization is facing the challenge of low profitability, then it is significant to remove all of those expenses that aren’t adding value to customer service. It means streamlining various processes, activities, and operations in order to amplify productivity. However, the focus of cost reduction efforts is to achieve financial advantages.
Cost Reduction in Supply Chain Management – Top 10 Strategies
Let’s discuss the top 10 strategies for cost reduction in Supply chain management, and they’re as follows;
Implementing automation technology to automate various SC processes and activities help businesses and companies to achieve cost efficiency. Manual processing of following administrative tasks and activities would consume a lot of time and resources;
- Order Placement
The automated tools would perform and run various tasks and activities efficiently and quickly. They allow you to run on your own and decrease human error, and the limited errors would decrease the overall expenditure cost.
Many businesses and companies invest a significant amount of capital and resources in analyzing their SC processes and activities. But they avoid checking their performance, whether their implemented SC strategies are delivering any good results or not. In fact, some companies don’t even monitor their existing SC strategies, and they have no idea whether their practices are working or not.
- Establishing KPIs and metrics
- Make sure they are realistic and consistent
- Taking steps that would help you to reach your goals
- Monitoring your performance
Storing inventory in the warehouse may seem like a good idea but it has a price. It is significant that you should analyze your current methods and strategies to determine whether you are utilizing the space efficiently or not. You would find a cost-efficient method of utilizing the space, then you should reorganize the inventory to achieve maximum advantage of the space. However, it is possible that you would find out that you are paying rent for a much larger space than needed.
Analyzing Customer Demand
It is important for businesses and companies to beware of customer orders ad their demands. Recognizing the order patterns would help you to recognize the key areas in your SC process that needs improvement. For instance, you develop a pattern that changes from season to season and annually, and then it would help you to make better order decisions.
According to an estimate, inventory cost contributes 75% of the total cost. It comprises various elements ranging from raw materials to elements in the assembly line. JIT (just in time) inventory management system would help you to decrease the inventory cost. However, JIT allows you to order inventory when the company needs it, rather than keeping and maintaining large stock of inventory. It would remove all the overhead costs along with the inventory carrying cost.
The order processing method should be clear and efficient when it comes to decreasing the SC cost. It is significant that you should employ particular software that would help you to perform various ordering tasks, and benefits you in the following ways;
- Avoid confusion by directing all the employees to use a single tool
- Stops duplicate and multiple order placement of the same product
- No wastage of time and resourcing
- Only approved personnel would place orders
- Avoid the risk of ordering unnecessary and irrelevant products
Estimating SC Network Cost
Many SC managers and seasonal purchasing experts are very cautious about per-unit cost. When you are analyzing successful SC operations, then the per-unit cost is a very important element. But things would only become clear when you focus on the total production cost and delivering it to the customers. While calculating the per-unit production and manufacturing cost, then you should keep in mind the following elements;
- Losses due to the damages that you can’t recover from service providers
- Warehousing cost
- Logistic expenses
Transportation Cost Management
One of the expensive areas in the SC and warehousing processes is delivering the finished product to the end consumers. When it comes to decreasing the shipment cost, then it requires you to closely analyze how you are sending orders and deliveries. It would be very costly if you are processing it among internal departments.
However, you should consider outsourcing it to any expert transportation company. Doing so would help you to decrease the cost of supplier management, and you won’t have to hire full-time employees to manage demands.
Operation & Sales Planning
For the smooth running of SC processes and activities, you need to develop sales and operation planning. In fact, proper planning and development could be difficult, complicated, and expensive; but your optimum performance is heavily reliant on them. If you are collaborating with 3rd party SC and logistic service provider, then sales and operation planning would benefit you in the following ways;
- Manufacturing and demand scheduling and making adjustments
- Outdated and slow-moving inventory
- Frequent wrong forecasting
- Out-of-stock occurrence
- Uncontrollable SKU generation
Recognizing Inefficient Areas
Inefficient SC processes and operations would result in the form of wastage of capital and resources. It is significant to recognize the critical areas and try to resolve them if your objective is to decrease costs. Inefficiency could be in the following areas;
- Production and manufacturing
- SC processes
- Stock management
In order to recognize inefficiency, you should recognize data and estimate how much time it would take for you to develop the product with how many employees. It is significant to know how many suppliers you need to contact for various components.
Conclusion: Cost Reduction in Supply Chain Management – Top 10 Strategies
After an in-depth study of the top 10 strategies for cost reduction in supply chain management; we have realized low cost in SCM processes would ensure your company’s profitability. If you are learning about decreasing costs in SCM, then you should keep in mind the abovementioned strategies.
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