Managing any Supply Chain is always a balancing act between keeping costs down and maintaining adequate customer service levels.
But when times are tough it gets harder, and all too often customer service starts to suffer and an awful downward spiral starts to occur.
Many organisations in our region are facing tough times right now. Whilst some industries are doing OK, not many are actually flourishing and still others are hurting badly. So in this article I thought it would be useful to share some tips on how to cut costs, without impacting customer service.
These tips are based on our consulting and benchmarking work over the last 16 years, with 1,300+ client assignments in 23 countries. So I’m sure that some of these tips will apply to everyone. I genuinely hope so. I’ve picked some tips that are easy to apply and that you can do yourself with minimal effort. But they can make a big difference!
This is one of the easiest ways I know to make some quick cost savings. Take a look at your warehouse customer order profile. In particular:
- How many orders are your processing per month?
- How many lines per order?
- How many units per order?
- And what is the sales value of the order?
Take a download of a full month of data if possible.
To start with, we’ll use the variable costs and a crude allocation of fixed costs. Yes, I know we have to account for the fixed costs as well, but this is just a first pass to see if we have a problem, and the fixed cost allocation is a little harder to do, as we have to base it on stock turns by product group. So for now, we’ll just lump it into the ‘bucket’.
So create your bucket of monthly costs. Include:
- Staff costs
- MHE costs
- Static Equipment cost/depreciation
- Maintenance costs
- Warehouse rent or imputed rental if owned
- Consumable costs
- Insurance costs
- Power costs
- Admin costs
- IT Costs
- Grand Total Costs for the Month
Now start to ‘test’ your order profile against your warehouse costs. Typical tests should include:
- Average Cost per Order
- Average Sales Value per Order
- Average Sales Value of lowest 20% of orders in value terms
- Average Sales Value of top 20% of orders in value terms
That should be enough to see if you have any problems. What proportion of your lower value orders are actually costing you money to process?
I have not seen many businesses where all orders actually made money. In fact none!
If your figures cause alarm, there is no cause for panic yet! But it’s worth taking the analysis to a more detailed level, by establishing a more accurate cost per order, based on the lines, units, cube of each order. And allocating warehouse space on the basis of warehouse cube utilised. (taking into account stock turns)
OK, so what can you do if you have a large number of orders leaving the warehouse with no profit margin remaining? (once you have deducted the warehouse costs).
Obviously you may have warehousing costs that are too high. But the easiest ‘fix’ is to increase the size of the orders, which improves the utilisation and hence costs of your warehouse resources.
How can you increase order sizes? Impose minimum order value on customers. Maybe you do but it’s not enforced? Encourage customers through incentives to buy in larger quantities. Discount for case quantities, pallet quantities. Buy 5 get one free, that type of thing. The whole purpose is to make the warehouse operation more efficient and reduce the handling costs.
Yes, I can hear the sales and marketing people screaming that they cannot afford to reduce prices. Yes you can! I have never…… ever…… ever, seen a case where by the use of a simple incentive, the handling cost savings did not MORE than account for the discount offered. Because you make sure the numbers work, before you offer the discount!
How do you measure your inventory? Days of stock, value? If you are like 75% of businesses I have seen, you are carrying too much inventory somewhere.
Check your inventory record accuracy. If that is poor you are really in trouble, because if you cannot find the inventory, you cannot sell it!
Then have a look at your forecasting and demand planning. How accurate are your forecasts? Who is accountable for them? How are forecasts calculated?
I’ve seen multi million dollar forecasting systems that were useless, because they were incorrectly configured. And I’ve seen forecasting done around a meeting table with a whiteboard that worked really well. So it doesn’t always need a very expensive ‘fix’ to improve things.
Take a look at your own forecasting processes and see how accurate they are. Who drives the forecast numbers? Who sets the targets? Even slight improvements in the process and accuracy will reap huge benefits.
And if you have been looking at that long list of SLOB (Slow and Obsolete) stock for way too long, move it! It’s costing you money to hold it and it’s taking up valuable warehouse space. Move it to another sales location, where it can be sold. Sell it off at a discount. But move it.
And set some realistic targets for your inventory and drive towards those. Be it days of stock or overall value. What you focus on, will get managed better.
The Right Assets. When did you last review your transport assets? Are you actually using the right size and configuration of vehice for the task at hand? If you’re not, you could be wasting capacity, incurring additional loads and increasing your costs unnecessarily.
OK, if you own the assets, it’s not such a quick fix, but if you are outsourced or using leased vehicles, it can be a much easier fix.
The Right Carriers. If you have transport services outsourced are you actually using the right carriers and services? By that I mean carriers that provide the right level of service and the right assets for your operations. For example, I very often see clients who are buying the wrong type of service, maybe using Express Road when General Road would suffice, or using carriers that do not have the right vehicles for the job.
The Right Rates. By this I don’t mean the actual ‘rate’ as in the $/Pallet, $/KG and so on. I mean the right rate structure! Check your rate structures to see if they make sense.
For example, are you paying a load rate, but the trucks are often not full. Or are you paying a pallet rate when many of your pallets are not full size.
The Right Routing. This is a very common issue. If you have regular multi drop delivery ‘runs’ or ‘routes’, when did you last check them for efficiency? A delivery route will consist of multiple ‘drops’ to customers, who are hopefully in the same geographc area. And the run will be built up to make the most efficient use of the delivery vehicle.
If these runs have not been tested for a while, or are just made up manually through ‘experience’ they will often be inefficient and wasteing money.
Take a look at your runs. Do they make sense. Can you make some manual adjustments? Or maybe a simple IT based routing exercise could improve things?
This is a big one. Because many businesses provide either a one size fits all customer service policy, that doesn’t in fact fit many at all. Or, they over-service many of their customers and waste resources and money.
Some things to check are:
Customer Service Policy. Do you actually have one? Does it vary by customer type or is it a one size fits all? That can work for some businesses, but not many.
Does it include things like minimum order sizes if applicable? Or who pays for freight? And of course it needs to cover order lead time. That is, once an order is placed, when will the order be delivered. As an example, here in Sydney we can order office supplies online, and get free delivery (if the order is of a minimum size) and if we order before 11 am get same day delivery!
Do we need same day delivery? Not often. Would we pay extra for same day delivery? Probably. Do we tell the supplier that…… Why would we?
Is your customer service policy actually enforced? Here’s an example of what I mean. Company X offered free delivery if the order value was over $200. But they were not recovering enough freight costs for the smaller orders for some reason. What was happening? Well, after I sat in the customer service department for 2 hours it was obvious!
Everytime a customer called to complain about a late delivery, or an item missing from their order, the customer service staff would waive any delivery fee, just to keep the customer happy. Do you think the customers did not realise this? They were ‘giving away’ $500,000 a year in free delivery……
What is your service ‘promise’ and is it actively managed and ‘policed’?
Supply Chain Strategy Alignment
All too often a Supply Chain Strategy does not actually exist, or it was prepared in a dark back room somewhere by the Supply Chain team……..in isolation.
Let’s be clear about two things here.
One. You must have a Supply Chain Strategy. Even if it is a one page outline. Without a Strategy, how do people know what the objectives are? It would be like sending a football team onto the field, with no training, no coaching and no game plan, other than……..WIN.
Two. The Supply Chain Strategy has to be developed ‘top down’. In this way it is derived from the Business Strategy. And also it’s focus and direction is set by the leaders of the business.
So ask yourself these questions.
Do we have a Supply Chain Strategy? If not, why not?
Is our Supply Chain Strategy aligned to the needs of the Business?
Is our Supply Chain Strategy understood across the business?
If you don’t have a Strategy, you can start one on a whiteboard quite easily. Start with this.
What are the key objectives of our Business / Organisation?
What 3 or 4 things must our Supply Chain achieve to help the business reach those objectives?
For each of those 3 or 4 Supply Chain ‘Goals’, what would be the single ‘stand out’ thing that we could do, that would make the biggest difference in us reaching those Goals?
Then plan to start achieving those! And put all your attention on those!
Sounds simple? It is. And in fact I take a business through this whole process in a much more detailed way, in about 3 days….. It’s not rocket science.
Are Your Team Performing?
Take a look at your Supply Chain Team. Who are the strong players that need to be stretched and developed? Who are the weaker players who need to be assisted to perform better?
What skills do they lack? What tasks do they perform well at and what tasks do they struggle with? Are there some improvement opportunities you are not getting to, because of a minor lack of capability or skill?
How best can you boost the performance of your team? Some mentoring from you or an external source? A short course? Some longer training programs? Supply Chain School?
Invest in your team, because a little can go a long way in terms of lifting performance.
Is Your Supply Chain Performing as well as it Should?
This one should probably have come first!
I’m sure you are maintaining a great set of Key Performance Indicators (KPIs), and maybe your performance is even slowly improving against those KPIs? But do you know what good ‘looks like’?
By that I mean, whatever your industry, what level of performance is classed as average or ‘Best in Class’? Do you know? If not, you need to find out. Because otherwise how can you set targets for yor own Supply Chain’s performance? You are probably fooling yourself.
To take a Sports analogy again. Let’s suppose I can run 100 metres in 22 secs. I decide to lose some weight and train every day. I’m amazed and very pleased to see that after 8 weeks, by time is down to 19 secs. I’m content, because I made a big improvement.
Then someone tells me that actually the Best runners in the World, can run 100 metres in under 10 secs. My bubble is burst and suddenly the time I was very proud of seems pathetic in comparison with what others are achieving……
I’d suggest you find out, what your top KPIs are. Such as Supply Chain cost as a percentage of sales, DIFOT (delivery in full on time) and stock turns. Just these three as a starter.
Then find out the average and best in class performance for your industry. How do you match up? Where are the big gaps (opportunities)?
To win the game…… you need to study how good the competition is…… and exploit their weaknesses.
My aim here was just to share a few simple tips, that apply to most industries, and are simple enough that you can easily make some improvements yourself.
In tough times we cannot just stick our head in the sand. We need to actively seek ways to improve. And in Supply Chain it comes down to two simple things:
- Improve Sales. (Through better service)
- Reduce Costs. (Through being more efficient)
I hope these tips have been of use to you. Feel free to contact me anytime via email or phone +61 2 8799 2175
Email or +61 417 417 307
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