Cost efficiency is a main priority for businesses in the supply chain, as it plays a key role in an organization’s ability to sustainably grow and remain profitable. While it’s central to organizational excellence, cost reduction in the supply chain is no small feat. The supply chain is a vast, complex network of interconnected businesses and processes, and businesses are seemingly at the whims of consumer demand, market fluctuations, and unpredictable events. As businesses face increasing pressures to optimize operations, they need to find and leverage effective strategies for cutting costs in a way that doesn’t negatively impact operations or the consumer experience.
To lower costs, inventory-based businesses can deploy certain practical strategies that help them streamline their processes, enhance efficiency, improve resilience, and boost their bottom line overall. From leveraging advanced technologies to updating processes, strategies for cost reduction in the supply chain can lead to tangible changes in profitability for organizations.
Here’s everything you need to know about reducing costs in the supply chain for inventory-based businesses.
Why Does Cost Reduction in the Supply Chain Matter?
It might seem clear why cost reduction in the supply chain matters: like all businesses, those in the supply chain want to reduce their overhead to increase profitability. And sure, these strategies can ultimately lead to better profits across the board, with research showing us that businesses with optimized supply chains have 15% lower costs than their competitors.
But that’s not the only reason why cost reduction matters for inventory-based businesses: these strategies can help insulate them from scenarios that might otherwise be financially catastrophic.
What exactly do we mean? Unlike other types of businesses, those in the supply chain can be particularly vulnerable to volatile situations which can drastically and rapidly impact price and revenue. For example, inventory-based businesses can be impacted by supply chain disruptions, which can quickly lead to delays, shortages, and price spikes. Similarly, changes in consumer demand can lead to vast differences in purchasing habits, making unprepared businesses vulnerable to excessive holding fees and stockouts.
While cost reduction in the supply chain won’t prevent these scenarios from occurring, they can better insulate a business from negative impacts if and when they do happen. In other words, a business that is already reducing unnecessary costs and maximizing profitability will be better prepared to handle real-world scenarios, such as changes in consumer demand and supply chain disruptions. Cost reduction strategies are valuable on their own, but they can also contribute to increased resilience.
What are the Benefits of Cost Reduction?
Here are some of the reasons why strategies for cost reduction in the supply chain can be beneficial for your business (aside from cost savings):
1. Enhanced customer satisfaction
A cost-optimized supply chain requires timely deliveries, reliable inventory levels, and other operational efficiencies, which ultimately lead to an overall good customer experience. Meeting customer expectations in terms of product availability and delivery times is critical in today’s competitive marketplace, and can lead to both higher customer satisfaction and reduced costs. For example, data tells us that when supply chain businesses invest in the customer experience, 57% of them expect to be able to optimize their costs.
2. Agility and adaptability
An efficient supply chain is inherently agile, capable of responding quickly to market changes, demand fluctuations, or unforeseen disruptions. As we touched on, businesses with agile supply chains can smoothly adapt to shifting consumer preferences, industry trends, and global economic shifts.
3. Market differentiation
In an era where speed to market is a critical success factor, a well-optimized supply chain provides a competitive edge. The ability to introduce new products swiftly, adapt to changing market demands, and offer competitive pricing can position a business as a market leader.
5 Strategies for Reducing Costs
With that in mind, here are 5 strategies for cost reduction in the supply chain:
1.Leverage hyper-accurate demand forecasting
Demand forecasting is a powerful tool for cost reduction because it gives inventory-based businesses the most accurate idea possible about how much stock they should keep on hand. Instead of tying up unnecessary revenue in inventory that isn’t moving, or losing business due to stockouts, accurate demand forecasts can help you improve your inventory management and supply chain operations.
2. Improve your transportation and logistics
In general, research shows that the costs associated with logistics account for between 25% and 45% of total operational costs. To keep that number as low as possible, you can take steps to optimize and improve your transportation and logistics. Real-time tracking systems can provide you with visibility into the location and status of shipments throughout your supply chain, enabling proactive decision-making to address potential delays, reroute shipments, and optimize schedules. Additionally, you can collaborate with your suppliers to find ways to improve performance, consolidate shipments, and make other cost-effective decisions.
Also, certain supply chain planning software has built-in features to help with supplier performance management. For example, StockIQ’s tools provide comprehensive ways to help you monitor performance, analyze data, and improve supplier relationships. With the lead time viewer, StockIQ generates an entire order schedule for every item you have, every day. StockIQ also monitors supplier performance and tracks all of the dates on your orders, so you can determine which ones are timely.
3. Tap into inventory analytics
Inventory analytics are a valuable data source, which tells you everything you need to know about your operations. But your analytics shouldn’t just leave you knee-deep in data: instead, they should provide you with succinct answers to your most urgent questions, so you can make tactical, real-time decisions. Certain tools do this better than others.
For example, StockIQ’s warehouse inventory management tools and analytics give you insight into stockouts, so you can always know what you’re out of (and take steps to ensure it doesn’t happen again). StockIQ also seamlessly identifies excess inventory and suggests balancing transfers, while also notifying you about dead inventory.
Ultimately, when you have an inhibited view into your inventory analytics, you can make data-backed decisions to drive profitability and reduce costs.
4. Enhance operational efficiency
Operational efficiency is a broad concept, but it involves streamlining processes, optimizing workflows, and leveraging technology, all of which can ultimately lead to cost reductions and improved performance. Firstly, you can embrace lean manufacturing principles, which encourage eliminating waste, improving productivity, and enhancing efficiency. Research on this strategy has shown that it can lead to better profit margins, more productivity, and a significant reduction in lead time (among other things).
Second, organizations can introduce advanced technologies to their operations, such as supply chain software, to boost efficiency. Today’s supply chain software solutions enhance visibility into your operations, give you real-time updates, and quickly provide you with answers to your most pressing questions, such as what hasn’t sold and what you need to buy.
Additionally, you can use key performance indicators (KPIs) and other metrics to measure success and analyze your business’ performance. Metrics such as on-time delivery rates, order accuracy, and inventory turnover provide insights into the effectiveness of operational processes. These and other insights can help you see where your business is excelling, and help you identify areas for improvement.
5. Supply employees with proper training
Your team members are your “boots on the ground,” and ultimately, they’re the ones who will be executing the strategies that play a role in your organization’s cost reduction. Because of this, it’s ideal to deploy comprehensive, ongoing training for your employees, on all processes and systems, so they know how to work with cost reduction in mind.
For example, if you’re using supply chain software, be sure that all relevant team members are up-to-speed on how to make the most of it, and that they’re kept abreast of any updates or new features. Team members can also be trained on things such as logistics optimization, leveraging and monitoring inventory analytics, and properly utilizing demand forecasting.
Aside from any initial onboarding and training, leaders should also establish continuous learning programs, to ensure all staff stay up-to-date on the latest supply chain industry trends, technologies, and best practices.
Use Insights from StockIQ to Reduce Costs
Cost reduction is essential to an organization’s success, especially in today’s uncertain and unpredictable supply chain ecosystem. The good news is that advanced technologies such as StockIQ make it easy for you to monitor performance, use accurate forecasts, and optimize the way you work with suppliers, by improving your inventory efficiency through enhanced visibility.
What exactly is StockIQ? It’s an advanced supply-chain planning suite that is designed to help your business run efficiently, improve forecast accuracy, and reduce inventory levels, all while providing unmatched service to your customers. To find out how StockIQ can help with your cost reduction strategies contact us today.
