As the year draws to a close, the one thing that’s probably on your mind is starting the coming year with a strategic advantage over your competitors. And if your organization supplies goods, you understand how much supply chain costs contribute to your business’s competitiveness and overall bottom line.
When you reduce your supply chain costs, you ultimately offer better product prices for your customers. This is because lower supply chain costs translate to lower production, transportation, and inventory costs, so you don’t have to compensate with higher product prices to solidify your margins. That’s why supply chain cost optimization should be at the top of your mind as you look for ways to reduce your overall business costs and improve your competitiveness.
Overview of Supply Chain Costs
The last few years have been tough on supply chains. If it wasn’t disruptions caused by global developments such as the COVID-19 pandemic and the wars in Ukraine and Palestine, it was inflation, natural disasters, and other unforeseen events. Notably, since the start of the pandemic in 2020, supply chain costs have exhibited dramatic growth. For instance, the Council for Supply Chain Management Professionals' State of Logistics Report indicated that U.S. business logistics costs increased by more than 19%, reaching a record $2.3 trillion in 2022.
Key Cost Drivers in the Supply Chain
A supply chain isn’t just a single entity — rather, it’s a complex network of interconnected processes that all work together to supply goods to the end customer. As such, supply chain costs are usually a culmination of different factors and processes. These include:
- Procurement costs: These are expenses associated with sourcing and acquiring raw materials from suppliers. They may include supplier relationship management.
- Production costs: These are expenses associated with turning raw materials into finished goods. In other words, they're the manufacturing costs.
- Inventory costs: These are incurred before goods reach the end user. After production, goods must pass through various stages of the supply chain — from manufacturers to distributors or retailers and, finally, the end customer. These stages involve costs such as storage, warehousing, security, and management.
- Labor costs: These are expenses associated with the workforce involved in manufacturing, transportation, warehousing, and other supply chain activities.
- Transportation costs: These are incurred when products move through the supply chain (up and down). Transportation costs may entail shipping, fuel, logistics, and more.
- Operating costs: These are costs that are necessary for the day-to-day functioning of the supply chain. These include supply chain management costs related to facilities, utilities, maintenance, and other operational expenses.
- Regulatory compliance costs: These are costs associated with ensuring that supply chain operations adhere to regulatory standards and regulations. These costs may include conducting compliance audits, hiring compliance auditors, and implementing regulatory standards.
Strategies for Cost Reduction in Supply Chain Management
The cost drivers affecting supply chains are inevitable. However, this doesn’t mean they can’t be optimized. With effective cost management across the entire supply chain, reducing your supply chain costs is possible. Here are some supply chain cost management strategies you can implement.
Implement Lean Inventory Management Practices
According to UpKeep, you likely spend 25% to 35% of your total budget on inventory management. While these are normalized costs, that’s quite a lot to spend on just managing your inventory. And if you have too little or too much stock, these costs could inadvertently go up. Therefore, adopting lean inventory management practices is essential for supply chain cost minimization.
Lean inventory management practices are strategies that help reduce overall costs by optimizing inventory levels and minimizing waste in the supply chain. The goal is to ensure that the right amount of inventory is available at the right time and place to meet customer demand while avoiding excess stock and the associated holding costs. Here are some lean inventory management practices you can implement:
- Demand forecasting: This practice involves leveraging past data to accurately forecast the demand for goods so that warehouses have the right amount of stock. When just the right amount is available to meet customer demand, you save on the warehousing and management costs associated with inventory management.
- Just-in-time (JIT) inventory: Instead of storing goods or products in a warehouse and waiting for customers to order them, JIT works by having goods produced or delivered just in time to meet customer demand.
Streamline Transportation and Logistics Processes
Transportation and logistics are major cost drivers. Therefore, streamlining these processes can effectively reduce your supply chain costs. For instance, you can utilize route optimization and dynamic routing, combine shipments, consolidate freight, and use load optimization to reduce your transportation costs.
On the other hand, strategies such as collaborative logistics (collaborating with suppliers, carriers, and other stakeholders to improve coordination and information sharing), real-time tracking, and partnering with experienced third-party logistics (3PL) providers can help optimize your logistics operations.
Optimize Supplier Relationships and Negotiations
You shouldn't ignore the human aspect of the supply chain. That’s why developing strong supplier relationships and optimizing negotiations is important. Combined, you can secure better prices and favorable contract terms. There are several things you can do to optimize your supplier relationships and negotiations, such as:
- Regularly assessing supplier performance based on quality, reliability, and adherence to delivery schedules
- Establishing long-term partnerships that encourage suppliers to offer better terms and pricing
- Developing effective negotiation skills to secure favorable terms, discounts, and contractual agreements
Leverage Technology for Operational Efficiency
On the surface, adopting technology might seem like an additional cost, which would defeat the overall goal of cost minimization. In the short run, yes, this may be true. However, technology can improve your efficiency through operational cost reduction in the long run. One of the most apparent ways to leverage technology is through automation, which can take care of repetitive and time-consuming supply chain activities such as inventory management, order processing, invoicing, data entry, and tracking through IoT technology.
Data analytics is another way technology can facilitate supply chain optimization. Analytics can help with operational efficiency strategies such as demand forecasting and safety stock optimization by providing insights into inventory levels, demand patterns, and supplier performance.
Partner With the Leaders in Supply Chain Management for a Competitive Edge
In a highly competitive environment, a competitive edge is essential. That’s why partnering with a leader like Surgere is your best bet at reaping the benefits of effective supply chain management. With Surgere, you can automate your manual supply chain processes and develop solutions that address all of your supply chain challenges.
Contact us today and let us optimize your supply chain.