What We’ll Unpack in This Article (TL;DR)
Businesses today need to reduce supply chain costs if they want to maximize their profitability. But how can you do so without sacrificing efficiency or service? To cut costs, you need to:
- Understand what’s driving them (like holding too much of the wrong inventory).
- Use more accurate demand forecasts to inform ordering and safety stock practices.
- Segment inventory based on importance and value.
- Leverage AI-driven tools, which give you advanced insights into anticipated demand, metrics, and real-time trends.
In this article, we’ll cover proven ways to identify and reduce unnecessary supply chain costs, so your business can be as profitable as possible
Supply chain leaders need to be hawk-eyed when it comes to costs. Too often, little leaks and common ordering missteps drain margins – from holding too much of the wrong inventory to using the same ordering policies for each SKU. But with the right approach and some easy tweaks to your current strategy, you can reduce supply chain costs, while keeping efficiency and customer satisfaction high.
How can organizations effectively lower unnecessary costs, at-scale, without making concessions when it comes to quality? It all comes down to improving your data, enhancing your inventory practices, and keeping suppliers accountable. Most critically, organizations need to be leaning on artificial intelligence (AI) to guide smarter decisions and improve inventory visibility.
Here’s how you can quickly and easily reduce costs in your supply chain, without putting a dent in service.
What Drives Supply Chain Costs?
As a whole, running a business has become more expensive in recent years, due to everything from inflation to rising operational costs. To successfully reduce supply chain expenses, you have to first know what the specific culprits are, so you can take action.
The biggest cost drivers for supply chain businesses include:
- Holding too much of the wrong inventory: Excess and slow-moving inventory tie up working capital.
- Inaccurate demand forecasts: When demand forecasts are off, it leads to over-ordering or under-ordering, both of which can be costly (industry studies show inventory distortion costs upwards of $1.7 trillion a year).
- Supplier variability: Long or unreliable supplier lead times can cause cascading problems, like lower-quality customer service or the need to trigger expedites.
- Global shipping challenges: Research from the United Nations shows that, since 2020, global shipping costs have surged – first due to the coronavirus pandemic, and more recently, due to disruptions in major routes like the Red Sea and Suez Canal.
- Improperly regulated product policies: Not all of your products should be ordered equally. Reorder points and quantities should be chosen per-item, based on forecastability and value.
How Do You Cut Cost Without Crushing Service Levels?
Reducing supply chain costs without eroding service is about precision and visibility. Here are steps you can follow to cut back on excessive costs (and improve profitability).
1. Tighten up your demand forecasts
Shoring up your demand forecasting means you’ll order just enough to meet consumer needs, without buying too much. While standard Enterprise Resource Planning (ERP) solutions might have built-in forecasting features, these often don’t provide the level of nuance and granular controls that result in truly accurate forecasts. Instead, leverage advanced, AI-powered demand forecasts, which allow you to predict demand down to the SKU-level and incorporate external data (like real-time market signals).
2. Set safety stock by data – not by gut
Your safety stock levels are a critical buffer, but without the right data, they can quickly contribute to excess. For safety stock levels to be low-yet-effective, your calculations need to be rooted in accurate demand forecasts – not gut feeling. Use a calculation that ties together demand forecasts, lead times, and target service for individual SKUs. Also, avoid blanket reorder levels, and regularly recalculate to ensure accuracy.
3. Segment inventory (and govern what you stock)
Practices like ABC analysis help you prioritize inventory based on their value and importance, by dividing inventory into categories:
- A items (high value, low quantity): These are the most critical inventory items. They account for a small percentage of your total stock, but a large portion of total value.
- B items (moderate value, moderate quantity): These items fall in the middle, contributing moderately to total value, and making up a reasonable portion of stock.
- C Items (low value, high quantity): These items make up the majority of stock but contribute the least to overall value.
“A” items require the tightest inventory control, precise demand forecasts, and frequent monitoring/reordering. With “B” items, you can take a balanced, moderate approach. “C” items call for minimal oversight and simpler replenishment strategies. Using this strategy helps you to focus resources on the items that matter most.
4. Reduce supplier-driven variability
When suppliers are late (leading to rushed orders), or prices fluctuate, it can bleed into your profitability. By using supplier performance tools, you can clearly see how your suppliers are doing, and use those insights to make smarter choices and guide your partners appropriately. For example, you can track active lead times and get real-time alerts when orders are late, helping you avoid empty shelves.
5. Improve your transportation and logistics
Logistics is often one of the most costly aspects of running an inventory-based business, with data showing that US businesses spent nearly $2.6 trillion on shipping-related expenses in 2023 (the most recent year for which data is available). To keep shipping costs as low as possible, use real-time tracking systems to gain visibility into the location and status of shipments, enabling proactive decision-making (such as addressing potential delays, rerouting shipments, and optimizing schedules). You can also collaborate with your suppliers to find ways to improve performance, consolidate shipments, and make other cost-effective decisions.
To reduce supply chain costs, you don’t need to order less, slash items, or accept unnecessary costs as part of doing business. You need to improve visibility, leverage data, and make decisions based on insight – not instinct.
The Power of AI for Supply Chain Cost Reduction
When it comes to cutting supply chain costs, artificial intelligence plays a crucial (and powerful) role. Here are specific ways AI can help you identify and reduce excessive costs in your business:
- More accurate demand planning: AI-powered demand forecasts go beyond simple projections based solely on historical data – they predict demand more accurately by incorporating external signals (like seasonal spikes and real-time market conditions). This can lead to more accurate ordering, and other benefits like lower safety stock levels.
- Powerful forecasting algorithms: There are novel types of forecasting algorithms which can help you see further into your data, and better cut costs. For example, one of the toughest problems in inventory planning is knowing when a product is about to stop selling. Traditional forecasts assume something will sell, but typically don’t help with end-of-life or long-tail SKUs. However, emerging zero-demand forecasts predict when an item is going to drop to zero sales, so you can stop ordering products before they become obsolete.
- Sophisticated supply chain metrics: AI is driving unparalleled visibility into supply chain performance metrics. For example, AI-powered tools give you real-time insight into cost of goods sold (COGS), while providing you with additional contextual data (like stratification, usage patterns, and margin) so you can clearly see the value of your inventory.
- Optimal economic order quantity: AI-powered EOQ shows you the optimal order size you should place to remain as cost-effective as possible, while factoring in multiple fluctuating factors in real-time. This can help you avoid ordering small quantities too frequently, which typically causes costs to rise.
- One-stop-shop executive dashboards: These hubs for financial insights are designed for CFOs and other leaders who need to spot trends (and problems) at-a-glance. While every dashboard functions differently, StockIQ’s AI-powered executive dashboard combines ERP data (such as stock on-hand) with StockIQ metrics (excess, slow/dead, service levels) to give you clear insights into things like future inventory projections and burn down rate.
By choosing the right AI-powered tools, you can cut out uncertainty and make wise ordering decisions – without lowering service targets.
Cut Waste, Improve Your Margins with StockIQ
Reducing your supply chain costs is not some far-fetched idea: it’s something that’s well within reach. By tightening demand planning, segmenting inventory, improving safety stock practices, and leveraging the power of artificial intelligence, you can improve your margins and trim costs, while maintaining an efficient, optimized business.
If you’re ready to spot and eliminate supply chain waste and improve profitability, StockIQ is here to help. We’re a supply chain planning suite built for businesses like yours that uses advanced technologies to help enhance the way you reduce costs.
Are you interested in learning how StockIQs supply chain planning suite can help your organization? Contact us today or request a StockIQ demo.