If you’ve been working with supply chain companies for any length of time, you’ll know how important it is to control operational costs. On occasion though, some supply chain companies’ cost reduction efforts get taken too far, especially when ambitious initiatives are embarked upon, intended to significantly reduce operational costs. What tends to happen is that leaders fall under the seductive influence of a business model, ideal or technological solution which promises great savings.

Cost Reduction

Pursuing the promise with gusto, they find out too late that instead of achieving the intended savings, they are incurring new costs, sometimes to devastating effect. The following paragraphs describe three such supply chain companies’ cost reduction nightmares, with the aim of helping you to avoid falling into the same traps when the pressure is on to drive costs down.

 

1. Taking lean to the extreme:

Lean programs can be a very effective way to take cost out of your supply chain. However there is such a thing as taking it too far. Some supply chain companies’ cost reduction efforts have been based on employing a “lean strategy”. This is almost always a mistake.

The lean methodology is a theory and a model to eliminate waste and increase value. By making your supply chain too lean though, you can actually hamper its responsiveness. At that point, the cost reductions that may be seen while all is going well can soon be neutralized for example, when inventory levels prove insufficient to cover even the slightest supply chain disruptions.

 

2. Death by automation:

Automation will continue to play a greater and greater part in supply chain companies’ cost reduction plans and that is only right. As technology continues to advance, fully automated “lights out” warehouses are becoming more commonplace and when implemented correctly, can save an absolute fortune in the cost of human labour.

However some company leadership teams have been seduced into the belief that automation is a silver bullet that will slash manpower costs and eliminate the problems caused by human error. Some of those leaders have later found out to their cost that automation is no substitute for smart strategy and efficient supply chain processes.

Automation alone will not solve all problems. Indeed, implementing such technology before the demand really justifies it and rushing into a full-scale, big-bang go-live, can prove to be an extremely costly mistake.

 

3. Blind faith in outsourcing:

Just like automation, outsourcing can aid supply chain companies in cost reduction, provided the right partners are chosen and the partnerships are effectively managed. Again though, there have been more than a few outsourcing agreements arrived at in a hurry, with buyers failing to properly engage the market and subsequently getting into bed with a mismatched partner.

A common mistake companies make when outsourcing for cost reductions, is to race to the bottom by looking for the cheapest offering. While a low bid might seem attractive at the time, if it’s arising from the fact that the 3PL is relatively new to the market and inexperienced, you might soon find that you really do get what you pay for.

 

Pitfalls Only Await the Unwary

The three mistakes described above are all avoidable. For every organisation that’s had a lean program go too far, overcooked its automation project, or lost out on outsourcing, there are other examples where supply chain companies’ cost reduction strategies have greatly benefited from these same initiatives.

Strategy is really the operative word here. Careful planning and regular evaluation of the options, will keep your company on the path to calculated cost reductions. Maintaining a clear strategy with specific objectives will reduce the temptation to grasp at popular (and sometimes very expensive) solutions which may or may not be right for your company’s particular set of circumstances.

 

Rob O'Byrne -Logistics Bureau Group Managing DirectorBest Regards
Rob O’Byrne
Email or +61 417 417 307

 

 

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