Some Quick and Easy Tips for Supply Chain Cost Reduction
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 this lady’s business could save $10 million per year, when 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, things are mostly 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.
Getting the Service Policy Right
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 here’s how to make sure yours isn’t one of those businesses:
1) Make sure you understand what service your customers want and expect.
2) Make sure that your customer service policy meets those expectations 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. They never have been and never will be. Segregate your customers into sensible groups that have similar service needs. For example, perhaps you have…
- Large customers that need weekly deliveries but within 1 hour delivery windows
- Smaller customers that need urgent deliveries within 4 hours of ordering
4) Communicate your 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. However, 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 soon stopped… And the focus was quite rightly turned to raising customer service performance.
Order Size and Order Frequency
This is another obvious, but good one. It’s simple, but let me make it even more so.
Consider the following two imaginary scenarios in which you’re doing your grocery shopping. The grocery store is 5 kilometres from your house and you need to use your car to get there.
Scenario 1 – 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.
Scenario 2 – 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, and go inside your home to continue cooking.
The activities in both scenarios were the same weren’t they? The only difference really, was that in the ‘buy more’ scenario we spent a bit more time at the store picking more items into a trolley and a bit more time at the checkout 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. Perhaps I’m oversimplifying this, but way too many people just can’t understand the business impact of running a Supply Chain and Logistics operation like this.
Don’t Permit Scenario 1 in Your Supply Chain
Now let’s juxtapose those same scenarios into 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.
In fact, these 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.
More Stock Doesn’t Equal More Availability
This one too is obvious, yet many businesses don’t effectively manage their stock (inventory) effectively. What happens is, they have too much stock overall, comprising lots of the stuff that does not sell very well, but not enough of the stuff that does sell well. Then they end up running out of these “fast movers” and as a consequence, lose out on sales—and perhaps even lose customers too.
Even small improvements in inventory management can add up to a whole lot of savings over time. Here are a few questions to consider. Your answers might help you identify some quick steps to save through effective inventory control:
Do you practice clarity and honesty when reporting inventory levels? Every company has some excess or obsolete inventory, as well as safety inventory and of course, replenishment inventory. If you want to manage inventory effectively, your reporting must include a breakdown of these three categories.
How do you calculate the quantities of safety inventory to be held? A lot of supply chain organisations take a rule-of-thumb approach to calculating safety stock levels. However, this is seldom the best way to optimise inventory. It’s far better to employ formulas that take the following factors into account:
- Historical data for individual SKUs
- Sales forecast accuracy
- Service level requirements
- Manufacturing lead times
How often do you review safety inventory levels? Companies that excel in inventory management review their safety stock levels at least twice a year.
Have you implemented a sales and operations planning (S&OP) program? As long as one functional department is setting schedules for manufacturing or purchases, your company is at risk of sub-optimal inventory levels. Cross-functional collaboration by way of an S&OP program (involving logistics, manufacturing, and purchasing functions can, if well-managed, reduce inventory carrying costs by as much as 10%, according to research organisation APQC.
Money Saving Outsourcing Tips 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. Better still, the ‘fix’ would save his business a lot of money.
That fix was really simple—Oh so simple!—as it often is when you know where to look. The company was 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).
No one was “at fault” as such. They were just buying the wrong thing: A bit like buying self raising flour by the kilo bag, when 25-kilo bags of plain flour would be perfectly find 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 is 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 find a TV that meets your needs and your budget. 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.
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 always 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 or renegotiating an outsourcing relationship, think about the aspects of your business that will have a material impact on the commercial arrangements.
In case you’re wondering, 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 are a few examples to illustrate where early disclosure will help you ensure 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 through the year when you’ll expect your outsourcing partner to handle much higher or lower throughput or storage levels as you “build stock” to meet a peak sales period?
5) Other Stuff. Yes, there’s always that “other stuff” that clients forget to mention (probably underestimating the importance) that creates additional resource demands. Additional stock taking; stock turnover, handling inter-facility transfers, point-of-sale (POS) 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” in 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’ve seen this happen. It generally goes something like this… Don’t laugh! It happens all too often.
The business decides to embark on outsourcing some logistics activity. 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, procurement people might need a bit of guidance on exactly what they are buying and the types of services that best suit the business.
In the absence of this guidance, the procurement team comes up with a “shortlist” of potential outsourcing partners by searching the Internet, the phone book, and by asking friends who have “done this before”.
So the shortlist 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.
Obviously a list like that is far from ideal, so in selecting a shortlist of potential outsourcing partners, 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 minefield 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 in 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? I mean, 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:
This one relates to the different types of warehousing rate structures: A Guide to Warehousing Contracts – Don’t make these mistakes!
This one, which you might find of value, looks at the reasons for outsourcing: What is Logistics Outsourcing? – Trick or Treat?
And here, John Cole one of our freight specialists gives you some tips on freight optimisation: Freight Optimisation.
There are loads more videos on my YouTube channel that I’m sure you’ll find informative, and 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.
Editor’s Note: This post was originally published in April 2013 under the title “Quick and Easy Cost Reduction Tips”, and has now been revamped and updated with more comprehensive information.