Whatever your supply chain role might be, monitoring and controlling costs is almost certain to be an important area of responsibility for you. However, when you’re busy with the day-to-day activities of keeping materials moving and fulfilling customer orders, it’s not difficult for increases in operational expenditure to go unnoticed until before you know it, you’re dealing with one or more supply chain cost blowouts.
Cost blowouts are something that can happen to the biggest and best of supply chain organisations. However they are also avoidable if sufficient focus is concentrated in the right areas.
If you’re not deeply experienced in supply chain management, the first step is to understand what those areas are. In this post therefore, I’m sharing four of the most common supply chain cost pain-points, so you know what to watch for to prevent those undesirable supply chain cost blowouts.
1. Process-inefficiencies and Waste
While this article is not going to focus on lean practices, the importance of keeping waste and process inefficiencies to a minimum can never be stressed enough when it comes to controlling expenditure and preventing cost blowouts in the supply chain. When process costs do get out of control, it’s often a result of one of the following factors:
- Poor supply chain visibility
- Lack of accountability
- Lack of ability to innovate
- Fear of change/change resistance
- Ineffective use of technology/software
How to fix the problem: Some measures that your company can take to prevent supply chain cost blowouts as a result of inefficiency include:
- Implement a continuous improvement program, such as lean or Six Sigma
- Improve integration of IT applications to improve visibility
- Work on employee engagement to improve accountability and encourage innovative thinking
- Improve change management to ensure that changes and improvements are properly adopted
- Implement performance metrics and monitor a selection of key performance indicator
Supply chain cost blowouts resulting from poor inventory management are commonplace, even though many companies today try to pull, rather than push inventory through the supply chain. The problem is usually created by holding too much static inventory.
There are a number of ways in which excess inventory drives up the cost of a supply chain operation. Naturally, there is the direct cost of procuring and holding the inventory. Aside from that though, inventory has to be managed, meaning that the more inventory your company holds, the higher are the costs of moving it, storing it, counting it and monitoring its quality. In some cases, there are other costs involved too, such as insurance.
How to prevent inventory cost blowouts: Steps your company can take to ensure inventory isn’t the cause of supply chain cost blowouts include:
- Negotiating smaller, more frequent deliveries from suppliers
- Reducing supplier lead time
- Working with suppliers to improve reliability and therefore reduce the need for safety stock
- Making improvements to forecasting
- Utilising technology to gain real-time visibility of supply chain inventory levels (this helps you to synchronise supply with demand)
3. Freight Costs
The expense of freight transportation can also be a source of supply chain blowouts. This is often linked closely to inventory management, since freight costs are inflated as inventory levels climb and vice versa. However there can be other issues which influence the cost of transportation; for example:
- The rising cost of fuel
- Inefficient use of transportation modes
- Over-charging by freight carriers
- Driver shortages and high labor costs for over-land freight transportation
- Over-servicing customers (frequently expediting deliveries to appease customers)
How to prevent freight cost blowouts: Prevention of transportation cost blowouts is largely a matter of careful inventory management, combined with regular auditing of freight costs and evaluation of whether the most appropriate modes of transportation are being used. Other things to look at might include:
- Use of alternative, lower-cost fuel, such as natural gas
- Outsourcing logistics to a third party provider
- Investigate options to use lightweight packaging
- Renegotiating freight-transportation contracts
- Optimisation of the supply chain network (locate warehouses closer to customer concentrations)
4. IT implementation Costs
The cost of IT implementation (especially for large projects such as the implementation of an ERP system), can easily exceed budget and frequently does so. Indeed, when an ERP, warehouse management system or other platform is successfully implemented within budget and on time, it’s a real cause for celebration.
Why is it though, that so many implementation projects result in cost blowouts for supply chain companies?
There can be many reasons, but more often than not, one of the following issues plays a part:
- Poor project management and a lack of prior planning
- Miscalculated estimates of time and financial expenditure
- Neglecting the importance of change management and training
- Rushed implementation
How to prevent IT project cost blowouts: Thorough planning up front will go a long way towards ensuring your company’s new IT platform is implemented successfully. Some other safeguards against IT project cost blowouts include:
- Diligent vetting and evaluation of software vendors
- Prioritisation of communication and user-training
- Assembling an experienced team of representatives from all the functional units which will be using the platform
- Assigning a dedicated project manager—preferably one with extensive experience of implementing systems similar to that which your company is investing in
Complacency and Complexity are Your Enemies
While keeping an eye on costs from one end of the supply chain to the other is no easy task, the more vigilant you are, the better equipped you’ll be to spot the potential for supply chain cost blowouts.
Always seek to simplify your operations, since complexity often results in increased costs and at the same time, makes issues harder to identify.
There is a lot to be said for implementing continuous improvement initiatives. If nothing else, programs such as lean or Six Sigma encourage regular reviews of performance in the different areas of your operation. They also promote a focus on simplification.
Remember too, that you can only manage what is measured. Developing a good suite of financially focused KPIs will help you to spot patterns and trends that indicate a supply chain cost blowout looming on the horizon.
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