Why your Supply Chain Costs are too High
If you ask most business owners if reducing their costs is important, they won’t hesitate to answer, “Why, yes, of course!” But, when it comes to reducing their supply chain costs, many of these same business owners have no clue what to do, or even where to begin. In this article you’ll learn why your supply chain represents a unique cost-reduction challenge, and what you can do to improve these costs so that your bottom line meets your objectives.
Reason 1: Nobody Knows
The first reason that supply chain costs are difficult to reduce has to do with the fact that these costs can be hard to pin down in the first place. This lack of supply chain visibility has to do with the fact that, due to the nature of the supply chain process, costs and expenses are not just confined to the host company’s budget, but dispersed all throughout the supply chain, including vendors, manufacturers, distribution partners and so on.
As a result, it can be exceedingly difficult to get exact numbers to factor into your cost reduction strategies. In addition, different companies in your supply chain may have different levels of motivation when it comes to helping you reduce your supply chain costs. Just because you want to maximize your earnings immediately doesn’t necessarily mean your distributor has any incentive to help you do so.
One way to counteract this problem is through the use of technology. Particularly, through the use of activity-based costing software or another supply chain management software solution. The downside to using this software is that it has to be monitored in order to be effective, which can lead to an additional workload that undermines the purpose of identifying costs.
Still, the benefits of this software are valid because, even when not used regularly, it still allows excessive supply chain costs to be identified. At the very least, an occasional activity-based software analysis should be performed.
Reason 2: Faulty Design
Another difficulty in reducing supply chain costs has to do with the product itself. For products that are designed poorly, problems and unnecessary costs are bound to arise. These problems can range from issues with storage, difficulties in replacing parts that are obsolete, to parts that break easily and have to be replaced.
Many of these problems stem from the tendency to design products “in a vacuum”, with no thought to the actual reality of packaging, transporting, delivering, and replacing products. These design issues are another reason why software applications with tracking capabilities can be useful, and in many cases, are necessary.
Reason 3: Lack of Communication
Maintaining effective, ongoing communication between your company and your supply chain partners is a crucial ingredient in the formula for reducing costs. Unfortunately, a lack of communication among entities involved in a supply chain business relationship has traditionally been the rule, not the exception. And unlike many of the other issues that interfere with costs, a supply chain management software solution alone cannot offer a solution.
The basis of good communication between your company and your supply chain partners is relationship-building. The more your trust and confidence your partners have in your company and your vision, the more willingly they will share information with you, and the more persuasive you will be when trying to persuade them to adopt new technologies or take other measures that will result in mutually beneficial reductions of supply chain costs. This relationship-building process is a long process that has to be maintained and ideally should start at the very beginning of your relationship with your supply chain partners.
The key lies in demonstrating to your partners that you are both knowledgeable and credible and that you have their best interests in mind.
For example, after much research and analysis, you may have come to realize that your supply chain costs could be reduced significantly through the use of RFID tracking tags. Not only would these tags provide you with more accurate data about the efficiency with which your products moved through the supply cycle, but they could also provide you with information regarding customer demand and number of units sold at what locations. You decide that you want to move your company in the direction of using these tags. Naturally, this sounds like a good idea.
However, while this seems like a perfectly reasonable course of action to you, your distributor sees a problem. Why should they be forced to implement a costly new strategy so that you can save money? Why should they be made to rethink their existing supply chain infrastructure to deal with this new technology when there is no obvious benefit for them to do so?
The problem here is that, like yourself, your distributor is motivated to do what’s best for his bottom line. Alliances aside, his priority is his own financial objectives. Like the old sales adage goes, “Everybody’s favorite radio station is WII-FM: ‘What’s In It For Me?’”
In this situation, unless you held a position of financial superiority such that your distributor and the rest of your integrated supply chain had no choice but to follow your lead, the solution to your problem would be to stress the benefits of adopting RFID technology to your partners.
Like a good salesman, you would show your partners how their lives would be easier and better if they adopt this technology. Point out the increased supply chain visibility that RFID technology provides, as well as the fact that RFID scanners can scan far more units of product than traditional barcode scanners.
Ultimately, when your partners’ focus switches away from the problems associated with adopting RFID technology and towards the increased profit potential, the prospect of integrating this technology seems much less threatening.
Ultimately, this comes down to being a leader. This type of leadership means not only having authority in your company or industry, but also being a leader in the sense of providing ongoing guidance to your entire supply chain.
Because of the nature of commerce today, the more influence your company has over your entire supply chain, the more profitable your company will be. Managing all these elements requires a substantial investment of both time and resources.
In the end, it is an unwillingness to make this degree of investment that prevents most companies from taking action, despite the benefits. So, the question to ask yourself is whether or not the costs of adopting a proactive leadership role over your supply chain is worth the costs of not taking on this level of responsibility.
One of the most important factors in this type of leadership is in managing not products, but people. Asking people to make any kind of changes to their accustomed-to ways of operating and doing business will often be met with resistance. People have a tendency to form habits and get into comfort zones with respect to how they work.
This tendency is problematic because it inhibits future growth (for example, by being reluctant to adopt a new technology). Not only that, but this tendency to keep on doing what’s worked in the past can actually form an attachment so strong that people will cling to old methods, even when presented with direct evidence that new methods are faster, easier or more efficient.
In a leadership role, your job is to convince people that new technologies and processes will benefit them. This is where personal vision, conviction and a track record of credibility come into play. The more you truly believe that the direction that you want to take your supply chain in is the right one, and the more certain you are that these changes are the best choice your supply chain could make for themselves, the more faith other people will have in you.
Another thing to consider is the process of technology implementation itself. When integrating any new technology into your supply chain, know that there will be glitches and unforeseen problems, especially in the beginning. Take these factors into account and proceed accordingly.
Rather than try to rush the technology out to your entire supply chain at once, start small by testing the technology in-house first. Next, your can proceed in small increments down through the various members of your vertical supply chain. Integrating new technologies in this fashion allows glitches and bugs to be identified and worked out at the top levels of the supply chain before they have major ramifications on the day-to-day operations of the lower levels.
Reason 4: Uncertainty
Another reason why supply chain cost reduction is difficult is the uncertain nature of supply chain. For all the reasons mentioned above, it can be a challenge to make detailed assessments, let alone predictions and forecasts about a supply chain. The primary method that companies use to counteract this uncertainty is through the use of software that makes the supply chain process more visible to managers and logistics experts.
One example of how you could reduce uncertainty is by having retailers send you detailed, up-to-date information regarding product purchases. Among other things, this data would give you accurate information about the product cycle in question. The more timely and precise this data is, the easier it becomes to improve your supply chain logistics and make future projections about product manufacturing and shipping needs.
On the other hand, not all of this uncertainty is caused by the process itself. Some of this uncertainty stems from people’s behavior, specifically the people who make supply chain management decisions. Poor management decisions at any level in the process, but especially at the top, can lead to errors that corrupt the entire supply chain.
While a technology solution is most people’s first choice in situations like this, a better solution might be in meeting with your top-level decision makers and training them as necessary to adjust the way that they deal with supply chain problems so that these types of errors will be reduced or eliminated altogether.
So, in conclusion, there are four main issues that make reducing your supply chain costs a challenge:
1. Nobody knows the scope of the problem. This means that due to the fact that, by its very nature, a supply chain encompasses different parties and organizations, it can be difficult to pin down exactly where in the process costs are accumulating. Furthermore, not all parties will be willing to help you reduce your supply chain costs, especially if there is no obvious incentive for them to do so.
2. Faulty Design. Remember the fact that products are often designed without proper consideration of whether design aspects will interfere with storage, shipping, delivery and return options. This leads to higher supply chain costs that could have been easily avoided. The use of tracking software can help minimize these issues.
3. Lack of Communication. Maintaining ongoing and effective communication between your company and your partners is essential in any effort to reduce supply chain costs. In order to accomplish this, you must take up the role of a leader. You must build a relationship of trust and credibility between your company and your partners. And most of all, you must show them that you have their best interests in mind. Only then will they begin to support you in your reduction endeavors.
4. Uncertainty. Shifting, unclear and inconsistent data leads to challenges in analyzing and predicting product trends. Using software solutions to improve the quality and availability of data can help, but you must also deal with the human elements that lead to uncertainty, such as poor decision making, starting by training your top-level management to be better equipped to handle the stressful situations that will inevitably arise.
While the issues mentioned in this article have historically been barriers to reducing supply chain costs, each of these issues is definitely surmountable. In some cases, technology offers a supply chain solution. In others, a human touch is needed. Still other problems may call for a combination of technology and human relations. In the end though, regardless of the issue, the future requires that in order to successfully reduce your supply chain costs, you will have to take on a position of leadership and guidance. This is the only way to ensure that people follow you towards the goal you desire.