If you were to tell me that your company had never looked at its supply chain costs and sought to deliver reductions, I would be mightily surprised. On the other hand, if you told me your company hasn’t been able to sustain any progress in supply chain cost reduction, I wouldn’t be surprised at all.
Most companies begin with the best intentions to achieve successful and sustainable supply chain cost management, but somehow seem to lose momentum, only to see costs increase again in short order.
The following five mini case studies explore a few high-profile companies that have managed to sustain their supply chain cost-reduction efforts and keep expenses under control. The challenges faced by these organisations and the steps they took, may provide some inspiration for successful long-term cost management within your organisation.
1. Deere & Company
Deere & Company (brand name John Deere) is famed for the manufacture and supply of machinery used in agriculture, construction, and forestry, as well as diesel engines and lawn care equipment. In 2014, Deere & Company was listed 80th in the Fortune 500 America’s ranking and was 307th in the 2013 Fortune Global 500 ranking.
Supply Chain Cost Reduction Challenges: Deere and Company has a diverse product range, which includes a mix of heavy machinery for the consumer market, and industrial equipment, which is made to order. Retail activity is extremely seasonal, with the majority of sales occurring between March and July.
The company was replenishing dealers’ inventory weekly, using direct shipment and cross-docking operations from source warehouses located near Deere & Company’s manufacturing facilities. This operation was proving too costly and too slow, so the company launched an initiative to achieve a 10% supply chain cost reduction within four years.
The Path to Cost Reduction: The company undertook a supply chain network-redesign program, resulting in the commissioning of intermediate “merge centers” and optimization of cross-dock terminal locations.
Deere & Company also began consolidating shipments and using break-bulk terminals during the seasonal peak. The company also increased its use of third-party logistics providers and effectively created a network that could be optimized tactically at any given point in time.
Supply Chain Cost Management Results: Deere & Company’s supply chain cost-management achievements included an inventory decrease of $1 billion, a significant reduction in customer delivery lead times (from ten days to five or less) and annual transportation cost savings of around 5%.
One of the world’s largest manufacturers of computer chips, Intel needs little introduction. However, the company needed to reduce supply chain expenditure significantly after bringing its low-cost “Atom” chip to market. Supply chain costs of around $5.50 per chip were bearable for units selling for $100, but the price of the new chip was a fraction of that, at about $20.
The Supply Chain Cost Reduction Challenge: Somehow, Intel had to reduce the supply chain costs for the Atom chip, but had only one area of leverage—inventory.
The chip had to work, so Intel could make no service trade-offs. With each Atom product being a single component, there was also no way to reduce duty payments. Intel had already whittled packaging down to a minimum, and with a high value-to-weight ratio, the chips’ distribution costs could not be pared down any further.
The only option was to try to reduce levels of inventory, which, up to that point, had been kept very high to support a nine-week order cycle. The only way Intel could find to make supply chain cost reductions was to bring this cycle time down and therefore reduce inventory.
The Path to Cost Reduction: Intel decided to try what was considered an unlikely supply chain strategy for the semiconductor industry: make to order. The company began with a pilot operation using a manufacturer in Malaysia. Through a process of iteration, they gradually sought out and eliminated supply chain inefficiencies to reduce order cycle time incrementally. Further improvement initiatives included:
- Cutting the chip assembly test window from a five-day schedule, to a bi-weekly, 2-day-long process
- Introducing a formal S&OP planning process
- Moving to a vendor-managed inventory model wherever it was possible to do so
Supply Chain Cost Management Results: Through its incremental approach to cycle time improvement, Intel eventually drove the order cycle time for the Atom chip down from nine weeks to just two. As a result, the company achieved a supply chain cost reduction of more than $4 per unit for the $20 Atom chip—a far more palatable rate than the original figure of $5.50.
Like Intel, Starbucks is pretty much a household name, but like many of the most successful worldwide brands, the coffee-shop giant has been through its periods of supply chain pain. In fact, during 2007 and 2008, Starbucks leadership began to have severe doubts about the company’s ability to supply its 16,700 outlets. As in most commercial sectors at that time, sales were falling. At the same time, though, supply chain costs rose by more than $75 million.
Supply Chain Cost Reduction Challenges: When the supply chain executive team began investigating the rising costs and supply chain performance issues, they found that service was indeed falling short of expectations. Findings included the following problems
- Fewer than 50% of outlet deliveries were arriving on time
- Several poor outsourcing decisions had led to excessive 3PL expenses
- The supply chain had, (like those of many global organisations) evolved, rather than grown by design, and had hence become unnecessarily complex
The Path to Cost Reduction: Starbucks’ leadership had three main objectives in mind to achieve improved performance and supply chain cost reduction. These were to:
- Reorganize the supply chain
- Reduce cost to serve
- Lay the groundwork for future capability in the supply chain
To meet these objectives, Starbucks divided all its supply chain functions into three main groups, known as “plan” “make” and “deliver”. It also opened a new production facility, bringing the total number of U.S. plants to four.
Next, the company set about terminating partnerships with all but its most effective 3PLs. It then began managing the remaining partners via a weekly scorecard system, aligned with renewed service level agreements.
Supply Chain Cost Management Results: By the time Starbucks had completed its transformation program, it had saved more than $500 million over the course of 2009 and 2010, of which a large proportion came out of the supply chain, according to Peter Gibbons, then Executive Vice President of Global Supply Chain Operations.
Like Deere & Company, AGCO is a leading global force in the manufacture and supply of agricultural machinery. The company grew substantially over the course of two decades, achieving a considerable portion of that growth by way of acquisitions.
As commonly happens when enterprises grow in this way, AGCO experienced increasing degrees of supply chain complexity, along with associated increases in cost, but for many years, did little to address the issue directly, primarily due to the decentralized and fragmented nature of its global network.
In 2012, AGCO’s leaders recognised that this state of affairs could not continue and decided to establish a long-term program of strategic optimisation.
Supply Chain Cost Reduction Challenges: With five separate brands under its umbrella, AGCO’s product portfolio is vast. At the point when optimisation planning began, sourcing and inbound logistics were managed by teams in various countries, each with different levels of SCM maturity, and using different tools and systems.
As a result of the decentralised environment, in which inbound logistics and transport management were separate operational fields, there was insufficient transparency in the supply chain. The enterprise as a whole was not taking advantage of synergies and economies of scale (and the benefits of the same). These issues existed against a backdrop of a volatile, seasonal market.
The Path to Cost Reduction: Following a SCOR supply chain benchmarking exercise, AGCO decided to approach its cost reduction and efficiency goals by blending new technology—in the form of a globally integrated transport management system (TMS)—with a commitment to form a partnership with a suitably capable 3PL provider.
As North and South American divisions of the company were already working with a recently implemented TMS, leaders decided to introduce the blended approach in Europe, with commitments to replicate the model, if successful, in its other operating regions.
With the technology and partnership in place, a logistics control tower was developed, which integrates and coordinates all daily inbound supply activities within Europe, from the negotiation of carrier freight rates, through inbound shipment scheduling and transport plan optimisation to self-billing for carrier payment.
Supply Chain Cost Management Results: Within a year and a half of their European logistics solution’s go-live, AGCO achieved freight cost reductions of some 18%, and has continued to save between three and five percent on freight expenditure, year-on-year, ever since. Having since rolled the new operating model out in China and North America, the company has reduced inbound logistics costs by 28%, increased network performance by 25% and cut inventory levels by a quarter.
Headquartered in Westport Connecticut, Terex Corporation may not be such a well-known name, but if your company has ever rented an aerial working platform (a scissor-lift or similar), there is a good chance it was manufactured by Terex and dispatched to the rental company from its transfer center in North Bend, Washington.
The North Bend facility is always full of lifting equipment. The company makes most pieces to order and customizes them to meet customers’ unique preferences. Terex maintained a manual system for yard management at the transfer centre, which generated excessive costs for what should have been a relatively simple process of locating customers’ units to prepare them for delivery.
The Supply Chain Cost Reduction Challenge: A wallboard and sticker system was a low-tech solution for identifying equipment items in the yard at Terex. While inexpensive in itself, the solution cost around six minutes every time an employee had to locate a unit in the yard. It also required a considerable number of hours to be spent each month taking physical inventories and updating the company’s ERP platform.
The Path to Cost Reduction: Terex decided to replace the outdated manual yard management process with a new, digital solution using RFID tracking. Terex decided to replace the outdated manual yard management process with a new, digital solution using RFID tracking. Decision-makers chose a yard management software (YMS) product, and then had the transfer centre surveyed before initiating a pilot project covering a small portion of the yard.
After a successful pilot, the company approved the solution for full-scale implementation, replacing stickers, yard maps, and wallboard with electronic tracking and digital inventory management. As of December 2017, Terex was planning to integrate the yard management solution with its ERP platform to enable even greater functionality.
Supply Chain Cost Management Results: While the YMS cannot reconcile inventory automatically with the Terex ERP application, it does at least provide a daily inventory count via its business intelligence module. That alone has saved the labour costs previously incurred in carrying out manual counts.
More importantly, though, the RFID-based unit identification and location processes have saved the company around 70 weeks per year in labour costs, by cutting the process-time down from six minutes, to a mere 30 seconds per unit.
Avaya is a global force in business collaboration and communications technology, and not so many years ago, was operating what, by its own executives’ admission, was a worst-in-class supply chain. That situation arose as the result of multiple corporate acquisitions over a short space of time. The company was suffering from a range of supply chain maladies, including a long cash-to-cash cycle, an imbalance in supplier terms and conditions, excess inventory, and supply chain processes that were inefficient and wholly manual.
The Supply Chain Cost Reduction Challenge: After Avaya purchased Nortel Enterprise Solutions in 2009, the freshly merged company found itself but loosely in control of an unstable and ineffective supply chain operation. Aside from having too many disparate and redundant processes, the company had multiple IT solutions, none of which provided a holistic view of the supply chain or supported focused analysis.
The Path to Cost Reduction: Avaya’s senior management team realized that its technology solutions, which varied from being inadequate to inappropriate, were causing many of its problems. The various acquisitions and mergers had transformed Avaya into a different kind of enterprise, and what it needed, rather than a replacement for all the discrete systems, was one solution to tie them all together.
To that end, the company put its trust in cloud technology, which was relatively immature at the time, and migrated all processes onto one platform, which was designed to automate non-value-added activities and integrate those critical to proactive supply chain management, namely:
- Point of sale analysis
- Procurement analysis
- Supplier communication
- Supply and demand planning
- Inventory planning
- Inbound and outbound logistics planning
Of course, the technology was merely an enabler, and to transform its supply chain operation, Avaya embarked on a long-term, phased program to standardize processes, initiate a culture change, invest in top talent, and implement a system of rigorous benchmarking and KPI tracking.
Supply Chain Cost Management Results: Avaya’s program of transformation took place over a period of three to four years, between 2010 and 2014. The path to cost reduction was a long one, but ultimately successful.
By making a conscious effort to lead the enterprise into a new way of thinking, change business culture, and unify technology under a single platform, Avaya has improved inventory turns by more than 200%, reduced cash tied-up in stock by 94%, and cut its overall supply chain expenditure in half.
This dramatic turnaround also required the company to switch from a preoccupation with improving what it was doing, to a process of questioning what it was doing and why.
7. Sunsweet Growers
This final mini-case study in our collection, highlights how sometimes, excess supply chain costs are not about warehousing and transportation, but can be attributable to inefficiencies in manufacturing or production and—often at the root of it all—forecasting and planning.
Sunsweet Growers is the world’s biggest producer of dried fruits and a little over a decade ago, found that while it was managing distribution operations well, high production costs were inflating end-to-end supply chain expenditure.
The Supply Chain Cost Reduction Challenge: When the leadership at Sunsweet looked into the company’s production cost issues, recognition soon dawned that the distribution network was at least partly behind the problems. As a result, the company looked at how it could redesign the network to take out some of the production costs.
Later, it became apparent that although a redesign would yield some benefits, one of the most significant issues was in the approach to demand forecasting. Sunsweet was using a manual forecasting approach, with spreadsheets being the only technology involved.
The inefficiencies of this approach proved not only to hamper effective forecasting and production planning, but the knock-effect was an excess of warehouses in the network—so forecasting proved to be both a driver of production cost, and a key to improving the distribution network.
The Path to Cost Reduction: As in a number of the studies we’ve explored here, technology played a large part in solving Sunsweet’s problems. After evaluating some 30 different software solutions, the company finally settled on a supply chain planning suite, and planned its improvement program to make use of each of the solution’s modules in sequence, allowing ROI to be realized in phases as each module was implemented and leveraged.
At the same time, Sunsweet implemented a sales and operations planning program (S&OP) that once established, enabled plant resource requirements to be anticipated months—rather than weeks—in advance. As the overall improvement plan passed through its five phases, positive results accumulated and as hoped, software ROI reached 100% even before the company completed its full implementation.
Supply Chain Cost Management Results: Of course, the objective of Sunsweet’s improvement program was not merely to achieve a 100% return on investment in its supply chain planning platform. The aim was to reduce production costs, and although the company hasn’t published hard figures to quantify the total financial gain, it has claimed the following wins:
- A 15 to 20% increase in forecasting accuracy
- A reduction in overtime from 25% to 8% in production facilities
- A 30% reduction in finished-goods spoilage
- Number of warehouses in the United States cut from 28 to just eight
- A transportation cost-per-unit that remained static for two years despite increased utilization of costly refrigerated transport and rising fuel costs
From the achievements documented above, and highlighted in several industry publications and articles, you don’t need to be too much of a mathematician to deduce that cost savings would have been considerable.
Making Supply Chain Cost Reductions Stick
Of course, the above case studies are merely summaries of the changes these high-profile brands made to their supply chains. What can be seen from these brief accounts, though, is that for an enterprise to make significant and sustainable cost improvements, substantial change must take place.
- Deere & Company had to overhaul its network completely.
- Intel had to shift an entire supply chain to a new and previously unheard of strategy in its sector.
- Starbucks had to shake up its third-party relationships and increase production capacity.
- AGCO had to invest in technology and collaborative partnerships with external service providers.
- Terex had to implement costly (but effective) RFID tracking capabilities.
- Sunsweet Growers needed a best-of-breed software solution, and an S&OP program to improve forecasting and planning.
- Avaya needed to change company culture, implement cloud technology, rethink processes completely, and invest in the best supply chain talent it could find.
At the same time, none of the changes took place overnight. Each of the companies tackled issues in phases, effectively learning more as they went along.
You Won’t Find Savings in the Comfort Zone
When it comes to making supply chain cost reductions that stick, you should explore every avenue. However, at the root of high costs, there will usually be one major factor requiring innovation, whether it’s the network, inventory strategy, the working relationships with supply chain partners, or some other element of your operation.
Seldom do companies make decent savings by whittling away piecemeal at what seem, on the face of it, to be the most pressing issues of the day (such as direct transportation costs or supplier pricing).
If you want to see sustainable cost reductions, your company will need to view the big picture from a new angle or two, and be prepared to step outside of the comfort zone to which it will have become accustomed.
Editor’s Note: We originally published this post in June 2016 under the title “3 Mini Case Studies: Successful Supply Chain Cost Reduction and Management”. We have since expanded it to include four new case studies, so that there are now seven mini case studies in total.