Strategic Cost Reduction for Supply Chain Success – Reduce Spend, Risks & Cost
The are many avenues to realizing cost reduction, including the traditional areas of price, delivery, quality, warranty, and payment terms. In this blog, we will explore many other avenues for cost reduction realization. We will examine the methodology and benefits of a big picture, strategic systems thinking the approach to cost reduction. This dynamic approach requires the application of a number of tools, cross function acumen, and thought processes. The required thought processes are anchored in understanding or at least striving to comprehend one's business and operational landscapes. Yet the underpinning is the convergence of vision, purpose, technical, interpersonal, and strategic alignment.
A relentless focus on value and value creation should be the focal point of all operational, supply chain, and procurement philosophies. In the Body of Knowledge of this blog, 5 critical domains of Cost Reduction are mentioned and 4 will be the points of reference.
The Critical Domains of Strategic Cost Reduction for Supply Chain Success are:
Rationalization of Customers | Supply Chains
Making future decisions to continue to serve particular customer segments or not is a huge opportunity for cost reduction. Similarly, decisions around choosing one supply chain methodology versus another can provide significant cost reduction opportunities. Measuring the Total Cost to Serve Customers of Supply Chain types provides an impetus for such analysis. Total Cost to Serve is the assessment of the cost of servicing customers at the product and customer levels.
This is the assessment of the profile of products and services to identify areas for improvement. Quality Function Deployment is a methodology that can be leveraged to probe for cost reduction opportunities in existing products and to build new products with profitable cost structures. Quality Function Deployment (QFD) also known as House of Quality is a methodology to translate Prioritized Customer Requirements (the "What's") into Prioritized Design, and Production Parameters (the "How's"). QFD aides in the organization and documentation of product and service design thought processes to ensure no critical elements are left out.
Process Analysis and Improvement
This is the study of process elements to identify cost reduction opportunities. In this activity, steps that do not add value are quantified and documented. These non-value add elements are usually from the domains of what is known as the 8 Deadly Wastes in Business, which are captured in the Total Cost to Serve Matrix or the Hidden Factory. Value Stream Process Mapping is one of the most effective ways to detect 7 of the Deadly Wastes
Processes must be improved to increase:
- Upside Supply Chain adaptability, which Is the maximum sustainable % increase in delivered quantities of products and services that can be realized within 30 days.
- Downside Supply Chain adaptability, which is the reduction in ordered quantities sustainable at 30 days before delivery with zero cost or inventory penalties.
- Flexibility or Upside Flexibility, which is the measurement of the number of days needed to accomplish an unplanned and sustainable 20% increase in quantities delivered to customers.
- Order Fulfillment, which is the measurement of the ability to deliver products and services as required, contracted, and promised. It is the % of orders delivered in-full, undamaged and defects free, on-time, as a percentage of the total orders delivered
- Return on Working Capital, which is a metric which determines the magnitude of an investment relative to an organization's working capital position vs the revenues generated from its supply chain activities. Components include inventory, accounts payables, accounts receivables, supply chain revenues, cost of goods sold and supply chain management costs.
- Return on Supply Chain Fixed Assets, which measures the return an organization receives from its investments on capital in supply chain fixed assets. This includes the fixed assets used in Return, Plan, Source, Make, and Deliver activities.