Driving Cost out of the Supply Chain

As the uncertainty in Europe continues, whilst other parts of the developed world are growing relatively quickly, there are serious implications to corporate supply chains. Companies have to change the way they manage supply chain costs if they are going to weather the storm. Supply chain management has become increasingly difficult over the past few years. The challenges are many and varied: manufacturing in low-cost countries has an associated impact on lead times and cost, as inflation increases are imported, yet can’t be passed on to the consumer. There are pressures on working capital, and a constant struggle for cash flow.

Access to cash is a fundamental of business continuity, but the lines of credit we used to take for granted have dried up and shareholders are considering their investments with far more circumspection. With no extra money available from outside, only the prudent will survive.

Driving waste and cost out of the supply chain is essential for improving the financial performance of it. Organisations need to identify where value is being created and destroyed, and repair the value chain where it is broken. Visibility is key to this, and for offsetting risk. You have to know where spend, especially unnecessary spend, is occurring, and have forward-looking data on what is likely to happen to commodity prices. Access to financial data from suppliers is important too.

This is where Integrated Business Planning (IBP) comes in. A business management process for running the entire organisation, it provides a 24-36 month rolling horizon, directly links the corporate strategy and financial plans, and exerts control over the extended supply chain.

Change is occurring continuously, so processes with a quarterly update or six-monthly review are denying the company leaders the opportunity to take action soon enough, meaning in many instances decisions have to be rushed rather than planned.  IBP, in contrast, has monthly review meetings, where reassessment of the plan and financials take place, as well as scenarios of supply approach, for example if the price of oil rises, what would be the impact on costs of imports from China etc. This continuous scanning of the future horizon ensures that any changes can be identified, evaluated and the appropriate response decided.

Benchmarking is another valuable tool for improving financial performance. With potential savings running in to €millions, the benefits are clear. Identifying what best-in-class looks like can highlight performance gaps, and having a financial evaluation of the gains that can be made off the back of performance improvement is incredibly advantageous, particularly in organisations which are already well-organized and where cost-saving opportunities are less evident.

The control, which comes from strong business process management – both internally and out into the supply chain – is fundamental. Without it, companies will always be playing catch up in terms of speed of response and implementation of cost-effective change.  For example, if your planning and control processes are not robust and reviewed constantly, you run the risk of unnecessarily spending large sums of cash in raw materials, packaging, plant and equipment, labour, storage and distribution – all without any immediate return.

In the contemporary business environment, improving the financial performance of your supply chain is imperative. There are three steps every organisation needs to take: benchmark to compare your performance and identify opportunities; use Integrated Business Planning to improve control and visibility of the future; and finally collaborate across the extended supply chain to leverage capability and performance.

Paul Archer, Partner Supply Chain Design and Optimization Specialist at Oliver Wight