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How to Position Cost Optimization to the CFO

By Jane Barrett | March 17, 2016 | 0 Comments

There is no silver bullet to cost savings and improving efficiency in Supply Chain. We all know that, we have been at it for decades and pretty good at it (especially beating up suppliers for lower costs). But we have been silo’d in our approaches. Our benchmarking shows that companies are still pushing for savings in one function, which negatively impacts something else – net result is not optimum.
As we face economic headwinds and budgets are again being cut, there is a way to think more broadly and creatively about cost optimization – note the term optimization not just savings.
Supply Chain leaders should think about three levels of cost optimization and ensure the CFO and board understand this end-to-end approach.

1. Get the best pricing and terms. And not by just by focusing on price. There are creative ways to do this, and get tangible short term ROI. For example, ensure you buy only what you need, uncover hidden costs, know who the right providers are and build in the right service levels. Our logistics analysts for example have helped clients
o Identify $500,000 in unnecessary fees in a large logistics contract
o Understand the shift to dimensional weight for parcel pricing, which saved 30%
o Ensure they have all the necessary terms and conditions in their master services agreement, thus avoiding future potential costs and risks

2. Benchmark your supply chain. Don’t just benchmark individual metrics. Look at a broad set of metrics across the entire Supply Chain and understand their interdependencies and the tradeoffs being made. In our benchmarking with clients we regularly need to describe how cost optimization is analogous to a triathlon. It does not help to be best in just one discipline, you need to be the best overall. We also help clients understand that for example, having higher transportation costs than the peer group may be the right thing to do if it supports your inventory strategy and service levels. Conscious choice needs to be made, and appropriate targets set looking at the overall supply chain and tradeoffs, not just a metric in isolation. Through this benchmarking our analysts have helped clients identify major benefits (30-50% savings or inventory reduction) that are driven by changes to the network, operating tactics and/or processes.

3. Transform your Supply Chain. Have you done an assessment of your overall and functional Supply Chain maturity? Taking an outside-in view helps with end-to-end alignment, and prioritization of the right initiatives and investments. As digital business opportunities expand, the Supply Chain leadership and organization needs to become bimodal where
o Mode 1 continues with traditional continuous improvement, operational excellence and provides reliability, efficiency and quality. This frees up money and resources to fund mode 2.
o Mode 2 capabilities must be built where the focus is exploratory, creative thinking, taking risks to find those breakthrough innovations. Disrupt or be disrupted – to thrive in a digital world we need to break the rules to stay ahead of the game. Unconventional and emerging examples include logistics as a profit center, 3D printing, drones, manufacturers selling data and analysis. Becoming bimodal is a priority for visionary heads of Supply Chain.

Cost optimization is a team sport in the age of digital business. For the next game you can improve the pricing and terms of your contracts. For the season make sure you have benchmarked the e2e Supply chain and ensure you are making the right tradeoffs. And for the long term build bimodal capabilities – be the disruptor, not the disrupted!

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