I sat opposite the Marketing Director. She was a formidable woman, with a fierce reputation and did not suffer fools gladly. I felt like a school kid being dragged before the Principal… You know the feeling. This is just NOT going to go well.

Supply Chain Cost Reduction

Reducing Supply Chain Cost may not be as ‘hard’ as it seems

At a board meeting I had just outlined how her business could save $10 million per year. She let me have it, with both barrels. When she finished, she said “If the solution was that simple, we would have done it years ago”… A week later, having thought about it some more… she started to come around. A year later, when we caught up for lunch… I had a new best mate! Because it had worked. Like a Dream.

In the World of Supply Chain, most things are not complicated. It’s not rocket science, and I should know, but that‘s another story. 80% of the problems I see in Supply Chain and Logistics have quite an easy fix. So let’s play the old 80/20 rule here and pick on some of the easy stuff that will really make a difference for you.

Service Policy.

One of the fastest ways I know to ‘burn’ money in Supply Chain management is not to have clear customer service policies or to have service policies that are poorly implemented and communicated. I have seen businesses burn up to $650,000 a year because of this. So…

  1. Make sure you understand what service your customers want and expect.
  2. Make sure that your customer service policy meets that as closely as you are willing to go, in terms of complexity and cost.
  3. Don’t have a one size fits all customer service policy. Customers are NOT all one size. Never have been. Never will be. So group your customers into sensible groups that have similar service needs. For example, large customers that need weekly deliveries but within 1 hour delivery ‘slots’. Or smaller customers that need urgent deliveries within 4 hours of ordering.
  4. Communicate the service policy to external and internal customers.
  5. Manage the policy. Police it. Enforce it.

A Story. Company X was a $2 billion business. Customers were retailers large and small. If a customer ordered over $500 in value, then delivery was free. But delivery costs seemed higher than expected. Particularly since many orders were below the $500 free delivery threshold.

I sat in the customer service centre for an hour, just listening to the calls. Like most call centres the staff were very good. Polite, cheerful, very helpful. Maybe a bit too helpful…

Because every time a customer called to complain about a late delivery, or a delivery that was incomplete, the customer service staff calmed them down by waving the delivery fee.

Regardless of the order size! You can picture what was happening, can’t you? The customers started to learn how to get free delivery! Just ring up and complain!

Needless to say… that stopped. And the focus quite rightly also became raising customer service performance.

 

Order Size and Order Frequency.

Another obvious one but a good one. This is simple, but let me make it even more simple.

Consider these two ways of doing your grocery shopping. The grocery store is 5 kms from your house and you need to use your car to get there.

As you need it. You need some sugar. You jump in the car, drive to the store, park the car, go into the store, find the sugar, go to the check out, wait in the line, pay for the sugar, go to your car, drive home, park the car, go inside your home to continue cooking.

Now you need some flour. You jump in the car, drive to the store, park the car, go into the store, find the flour, go to the check out, wait in the line, pay for the flour, go to your car, drive home, park the car, go inside your home to continue cooking.

Get the idea?

Buy More at once. You jump in the car, drive to the store, park the car, go into the store, spend a bit longer in the store this time, as you buy sugar, flour, rice, milk and a dozen other things. Go to the check out, wait in the line, pay for items, go to your car (using a trolley this time), drive home, park the car, go inside your home to continue cooking.

The activities in both scenarios were the same weren’t they? The only difference really, was in the ‘buy more’ scenario we spent a bit more time at the store picking more items into a trolley and at the check out paying for them. Getting the car out, driving there and back, parking the car, all these activities took the same amount of time regardless of how much we bought at the store.

Now I’m sorry if I am over simplifying this, but way too many people just can’t understand the business impact if you operate your Supply Chain and Logistics like this.

Imagine now that these scenarios are taking place in your warehouse and transport operations. The ‘shopping’ is actually your customers placing orders on your business. The store is your warehouse where your staff are making up the customer orders large and small. The driving back and forth by car is your customer delivery transport.

It’s all about leveraging your warehouse, staff and transport more effectively. The more you can encourage your customers to order in larger quantities and order less frequently (the two tend to go hand in hand) the more cost savings you will make. Cost savings that can be so large, that you can afford to offer incentives to customers to order less frequently, in larger quantities. Customers love a bargain, and you save money too.

Stock Availability. This one too is obvious. But many businesses don’t effectively manage their stock (inventory) effectively. What happens is, they have too much stock overall. Lots of the stuff that does not sell very well, and not enough of the stuff that does sell well. To the extent that they run out of these ‘fast movers’ and lose sales and customers.

 

Money Saving Outsourcing Tips that a 12 Year Old would Understand!

I guess I shouldn’t have been surprised. After all it’s very common, even amongst the so called biggest and smartest businesses out there.

I was watching the CEO’s face as John Cole, one of our outsourcing and freight specialists outlined his first impressions of the client’s freight operations. The freight was all outsourced of course. The CEO’s face started off blank and he listened intently. Then as he comprehended the magnitude of the issue; frustration and disappointment seemed to set in. And then finally, relief.

Because the issue had been identified and quantified and did not seem too hard to fix. And the ‘fix’ would save his business a lot of money. The fix was really simple. Oh so simple. As it often is, when you know where to look. They were buying the wrong transport service (Express when general freight was fast enough for them) and they were paying the wrong rate. (The way the freight was being charged). Easy.

No one was ‘at fault’ as such. They were just buying the wrong thing.

A bit like buying self raising flour by the 1KG bag, when 25KG bags of plain flour would be perfectly OK for the recipe at hand. It’s not about being overly aggressive with your warehousing or transport providers. In my experience that’s fairly pointless. But it’s about being an informed buyer. After all when you go to buy the latest flat screen TV at the store, you take your time don’t you? You check out the different models, the different functions, all to make sure it meets your needs and your budget. Well it’s the same with warehousing and freight. A large part of successful outsourcing is picking the right company to ‘partner’ with.

So here are some simple outsourcing tips that apply just as well to outsourced warehousing and transport.

Share/Be Open.

I don’t know why, but I often see businesses that have gone into an outsourcing relationship with an attitude that is almost like ‘let’s see what we can get for nothing’? It may not have been a conscious approach, but the end result is the same. Higher than expected outsourcing costs, and a very strained relationship between the two parties.

Openness in the relationship is so important, but absolutely vital as the relationship is starting to form and commercial arrangements are being negotiated. So do yourself a favour, and before launching into or renegotiating an outsourcing relationship, think about the aspects of your business that will have a material impact on the commercial arrangements.

And No, I haven’t been put up to this by the 3PLs! My interest is purely in helping to make outsourcing relationships more rewarding for both parties.

Here’s a few examples where early disclosure will assist in making sure that contract resources and fee structures are appropriate:

  1. Returns. What level of returns do you normally experience? Is this around certain times of the year? How do these returns need to be handled?
  2. Bundling. Are there value added tasks that often have to take place for certain products and/or customers? This might include ‘bundling’ different products together, or adding items into the packages for the local market (power cords being a good example).
  3. Special Handling. Are there products or customers that need special handling? Products might need specific packaging for example, or need to be loaded onto vehicles differently. Top loads, loaded last etc. Maybe certain customers have stringent ‘time slotting’ of deliveries or additional paperwork needs, such as prompt POD (Proof of Delivery)
  4. Surge Storage. Are there expected peaks and troughs at certain times of the year when you’ll expect your outsourcing partner to handle much higher or lower order throughput levels or storage levels as you ‘build stock’ to meet a peak sales period?
  5. Other Stuff. Yes, there is always that ‘other stuff’ that clients forget to mention, (probably thinking it was unimportant) that creates additional resource demands. Additional stock taking; stock turnover, handling inter facility transfers, POS (Point Of Sale) materials and so the list goes on.

I’m sure you get the idea? If your outsourcing partner comes ‘cap in hand’ to you 6 months after the contract has been implemented, looking for an increase in fees, it may not be totally their fault….. In many cases it can be traced back to a lack of disclosure and information sharing that got ‘missed’ through the rush to select partners and award/win contracts.

 

Pick the Right Partner!

Here’s another easy trap to fall into for the less experienced. I wish I had a dollar for every time I have seen this happen. It generally goes something like this… Don’t laugh! It happens all too often.

The business decides to embark on outsourcing an aspect of Logistics. So the procurement team is tasked with ‘finding’ suitable service providers. Now I have nothing against procurement teams. They are wonderful people and do a wonderful job, but…. Sometimes, if they are new to buying logistics services, they might need a bit of guidance on exactly what they are buying and the types of services that best suit the business.

So what can often happen, is that the procurement team comes up with a ‘short list’ of potential outsourcing partners by searching the Internet, the phone book and asking friends who have ‘done this before’.

So the short list looks like this:

It has too many companies on the list. This merely flags to the outsourcing companies that they are dealing with an uninformed buyer, who does not really understand who is a good ‘fit’ for them and is spreading the net very wide in the hope that they will ‘catch’ the right partner.

It includes companies that are really not suited to the client’s needs. Either because of the range of services required or the specific industry experience and capability being sought.

It includes companies that realistically will have no interest in the client, because of potential contract size, industry sector, or service needs.

So in selecting a short list of outsourcing partners with whom to discuss your needs and ultimately invite to tender for your business, I’d suggest you include:

Companies that you know can provide the range of services you require. If you don’t know, find out!

Companies that have experience in your specific industry.

Companies that are a good fit in terms of size. By that I mean, don’t approach a $10 billion warehousing company expecting them to get excited about your $200,000 warehousing contract.

Companies that are a good fit culturally. This is really important. Hopefully this is going to be a long term relationship, unless you want the drama of changing outsourcing partners every few years. So look for a partner that has a similar culture and values to your own.

 

Understand Rate Structures.

Now rate structures, can be a real mine field for the less experienced, particularly transport rate structures. What I will say, is that the actual rate, dollar per pallet for example, is one thing. But the essential element is understanding how the rate is applied!

Here’s a simple, perhaps overly simple example. The rate is x dollars per pallet, to transport the pallet from location A to location B. But what is a pallet? What is ‘classed’ as a pallet? Often it is the number of ‘bits of wood’ that go onto the truck. So if all your pallets when fully loaded are only 400mm high, but stacked one on top of another, you may be paying too much under this ‘rate’ structure.

If on the other hand, your pallets are 1.8 metres high you are occupying a much greater space, or cube, on the vehicle.

Similarly with warehousing rates. And this can be a trap for both parties of course. Maybe the ‘rate’ is based on a ‘handling in’ charge and a ‘handling out’ charge per pallet, with the storage merely being covered by the handling charges. This is fine until the client starts to build stock levels and the poor warehouse operator is overflowing and not gaining any revenue for the ‘long term’ storage they are providing.

Now, rather than explain the intricacies of rate structures here, let me make this simple. Here are some videos we prepared earlier that I have posted on YouTube for you:

Videos

There are loads more videos on my YouTube channel that you can have a look at.

 

If you missed our previous Bulletins, where John Cole gave some of his insider secrets on reducing freight costs, you can still see those articles here: Freight Part 1 and Freight Part 2
Rob O'Byrne

Best regards,
Rob O’Byrne
Email or +61 417 417 307

 

 

I hope you find this information of value. Feel free to let me know what tips you would like to hear about in our next Bulletin. Just send your requests to my PA Jaris.