Cost savings is a top priority for most businesses in the supply chain. In a volatile market where consumer preferences change on a dime and inflation leads to price fluctuations, saving money helps businesses at every stage of the supply chain boost their revenue, improve their resilience, and assert market dominance. While there are many ways to achieve cost savings, one way is through supply chain optimization, which is the process of streamlining and improving the flow of goods. Organizations can achieve substantial cost savings by optimizing their supply chain and correcting inefficiencies by implementing strategic approaches to things like inventory management, transportation, procurement, and production.
Here’s everything you need to know about supply chain optimization, and how you can use it to achieve substantial cost savings in your organization.
The State of Supply Chain Costs
Supply chains have many significant sources of costs, and understanding the key cost drivers is crucial for identifying areas where savings can be made. First, here are some of the primary costs associated with supply chain operations:
- Transportation and logistics: The cost of moving goods between suppliers, producers, and consumers, which includes freight charges, fuel costs, and warehousing expenses. Logistics costs typically account for between 25% and 45% of a business’ total costs.
- Inventory: The cost of holding inventory, including storage fees, insurance, and obsolescence.
- Warehousing: The cost of storing and moving inventory through warehouses, including rent, utilities, labor, and equipment costs/maintenance.
- Procurement: The cost of purchasing materials, components, and finished goods.
- Production: The cost of manufacturing products, including labor and materials.
Understanding the sources of supply chain costs is one thing. But it’s also important to consider what factors influence these costs. For example, different market conditions can lead to rapid price fluctuations, as can supply chain disruptions and shortages. Research shows that more than 60% of companies have experienced a significant increase in supply chain disruptions over the past three years and that supply chain disruptions cost businesses around the world hundreds of millions of dollars per year.
In the face of high costs, uncertain economic conditions, and the need for resiliency and operational efficiency, businesses can turn to supply chain optimization.
Understanding Supply Chain Optimization
Supply chain optimization involves identifying inefficiencies, reducing waste, and enhancing the overall efficiency of the supply chain. By optimizing their supply chains, businesses can achieve several key benefits, including:
- Reduced costs: Decision-makers can identify inefficiencies, and deploy strategies to eliminate them, leading to cost savings. Data shows us that businesses with optimized supply chains have, on average, 15% lower supply chain costs.
- Improved customer satisfaction: A well-optimized supply chain can result in faster delivery times, fewer stockouts, and better product quality, leading to higher customer satisfaction.
- Enhanced competitiveness: By reducing costs and improving efficiency, businesses can position themselves as market leaders.
- Increased agility and resilience: An optimized supply chain is flexible and responsive, which can help businesses adapt to changing market conditions, and insulate themselves from risks and challenges.
Supply chain optimization is a complex process that requires a holistic approach because it involves analyzing and enhancing all of the different aspects of a supply chain. Depending on the specific type of supply chain business, this might encompass demand forecasting, inventory management, transportation, procurement, and/or production. After determining which areas you need to optimize for cost savings, you then need to audit them for their efficiency, determine where improvements should be made, and execute those changes.
Supply Chain Optimization Strategies for Cost Savings
If you’re eager to use supply chain optimization to save on costs in your organization, here are tips and strategies you can keep in mind.
1. Improve your demand forecasting
Demand forecasting is a powerful tool for optimizing supply chains and reducing costs. Demand forecasting is the process of predicting how much inventory you’re expecting to sell, based on the analysis of historical data, market trends, and customer demand patterns.
Effective, accurate demand forecasting can help reduce excessive costs in several ways. Firstly, by accurately predicting demand, businesses can avoid buying and holding excess inventory, therefore reducing unnecessary inventory costs. Conversely, demand forecasting can also help you avoid stockouts, which can lead to excessive costs from rushed deliveries, as well as lost revenue from customer orders. Demand forecasting also helps businesses better align production schedules with expected demand, which reduces the risk of overproduction or underproduction.
2. Better execute demand planning
Demand planning takes your demand forecasts a step further, and is the process of creating a detailed plan for executing the quantity and timing of future demand. Specifically, it involves using demand forecasts to develop production schedules, inventory plans, and to make other operational decisions. When you’re better executing effective demand planning, you can optimize your supply chain and meet customer needs, all while minimizing costs.
Think of it like this: while demand forecasts give you data about anticipated demand, demand planning is the actualization of that data.
3. Analyze your inventory
Effective inventory analysis and management are essential for optimizing your supply chain and minimizing costs. By analyzing your inventory, you can calculate things such as your turnover rate, to determine how efficiently you’re selling your inventory. You can also easily identify slow-moving items and make smart decisions about how to proceed and adjust stock levels to reduce excess inventory. You can also identify obsolete items (which might be taking up valuable storage space), address discrepancies between your physical inventory and your records, and holistically identify areas for improvement across your inventory.
4. Audit your transportation and logistics
Transportation and logistics are substantial cost drivers in supply chains. By optimizing transportation operations, businesses can not only reduce costs but also improve delivery times and enhance customer satisfaction.
First, look for ways to optimize routes. You can utilize software to analyze and improve transportation routes and seek to reduce fuel consumption, mileage, and delivery times. You can also evaluate the cost-effectiveness of different modes of transportation, and consider consolidating shipments together to reduce the number of deliveries.
5. Ensure procurement efficiency
Procurement is another area where businesses can achieve significant cost savings. For example, you can strategically source your goods, and choose suppliers which offer the best value proposition, considering factors such as price, quality, delivery time, and service. Also, work to build strong relationships with suppliers to foster trust and effective communication, which can help with things such as negotiating favorable pricing terms.
6. Monitor supplier performance
Speaking of suppliers, you can use supplier performance monitoring tools to get a clear picture of how your suppliers are doing and make smarter business choices. For example, with the right software, you can easily see different lead times, monitor the timeliness of orders and deliveries, and see how your suppliers are performing overall. Then, you can make decisions about your vendors based on these results.
By understanding the drivers of supply chain costs and deploying strategies to optimize your operations, you can not only reduce excessive costs but also improve your supply chain and achieve optimal business outcomes.
StockIQ: Your Partner in Supply Chain Optimization
If you’re eager to unlock maximum cost savings by optimizing your supply chain, StockIQ is here to help. StockIQ is user-friendly supply chain management software that allows you to control inventory, simplify ordering, and improve forecasting. With StockIQ’s intelligent insights and advanced analytics, you’ll be able to quickly spot areas for improvement, and optimize your supply chain with ease.
Find out how StockIQ can help you optimize your supply chain and reduce costs by contacting us today or requesting a StockIQ demo.
