supply chain cost management

Strategic Supply Chain Cost Management

Track and field competitions are dominating the summer edition of the Olympic Games this week, and as I was watching the 4×100 relay, it dawned on me how much a relay race explains supply chain cost management.

Think about it: In a four-person relay race, the most critical part of that race is handing over the baton. You have one runner reaching his hand out to the runner behind him, trying to place that baton in the other runner’s hand. He can’t let go of the baton unless he feels that there’s a direct connection, and only when he knows the other runner has firmly grasped the baton can he release it as the other runner continues to run the next leg of the race.

That handoff is when runners lose the most seconds in the race. And in supply chain cost management, it’s the same thing: You have to identify the waste in the stream. And most of the waste usually happens during those handovers. That is also when you have the greatest opportunity to continually improve your supply chain process.

Direct Spend: The Heart of Supply Chain Cost Management

Direct spend is often the largest part of the cost of goods in any industry. Whether for discrete or product manufacturing, the process of acquiring materials, adding value, and then selling the finished product is fundamental. Understanding the impact of direct materials on overall costs is crucial, especially in the face of black swan events like the pandemic or supply disruptions caused by geopolitical conflicts. Supply chain resiliency hinges on supply continuity, which cannot be achieved without close, strategic relationships with suppliers.

For instance, consider the impact of the avian flu on the egg supply in the United States. Eggs, a key ingredient in mayonnaise, have seen prices double due to the outbreak, highlighting the importance of securing essential materials through strong supplier relationships. Similarly, a refinery fire in Houston could disrupt the supply of plastic bottles, illustrating the ripple effect of external factors on the supply chain.

In supply chain cost management, the key to success lies in the collaborative efforts of R&D, procurement teams, and suppliers. This trio, often seen as the triumvirate of supply chain magic, plays a crucial role in designing for value and ensuring continuity in the face of global disruptions.

This is why it’s so important to work on continuous process improvement and supply chain cost management with your supply base and R&D – to make progress together. Now, that can seem overwhelming to some organizations. Value stream mapping from start to finish for every touch point in every key point in the supply chain can be a lot of work. How do you know where to start? How do you prioritize? What if you don’t have a value stream mapping process in place? What if you have a small team with limited resources?  

Prioritizing Your Supply Chain Cost Management Efforts

For small and medium-sized manufacturers, the idea of mapping out the entire supply chain can certainly be daunting. The key is to prioritize. Start with the top 10 most critical direct materials – those that are essential for keeping your business running. This approach, whether for a small assembly shop or a large chemicals company, can cover 60-80% of your spend. It’s not just about the biggest spend; it’s about the materials that, if disrupted, would bring production to a standstill.

The Critical Role of Value Stream Mapping

Value stream mapping is essential for understanding and optimizing the flow of materials and information in the supply chain. Many companies make the mistake of simply cutting purchase orders without fully mapping out their supply chain. This approach often leads to inefficiencies and disruptions, as suppliers struggle to meet sudden, unforecasted demands.

By breaking down a product into its individual components – whether it’s mayonnaise, ice cream, or laundry soap – and mapping that product through the supply chain, companies can identify risks, waste, and opportunities for improvement. For example, a single, seemingly insignificant ingredient can halt production if not properly managed. This is why it’s vital to trace each component back to its source.

Building Strong Supplier Relationships

The foundation of successful value stream mapping is strong supplier relationships. It’s not enough to have a transactional relationship where purchase orders are handed off without consideration. Instead, companies need to develop deep, trust-based relationships with their key suppliers. This allows for collaborative problem solving and continuous improvement, creating win-win opportunities for both parties.

Working together in this way, suppliers and customers can identify areas of waste and inefficiency that are often caused by the customer’s own processes. By becoming a “customer of choice,” companies can ensure that their suppliers are motivated to provide the best possible service, which in turn leads to greater efficiency, cost savings, and overall value creation.

The Power of Should-Cost Modeling

Should-cost modeling is a strategic approach that goes beyond traditional procurement methods. Instead of simply sourcing based on price, companies break down a product into its component parts; estimate the cost of materials, conversion, and added services; and then assess the supplier’s margin. This allows for more informed negotiations and a deeper understanding of the true cost of goods.

This process requires a strong relationship with suppliers, who must be willing to share their cost structures openly. Transparency and trust are essential to ensuring that the supplier remains profitable while providing the customer with the best possible value.

Addressing the Biggest Risks in 2024 and Beyond

As we set our sights on 2024 and beyond, two major challenges stand out: the need for greater supply chain visibility and the talent gap in the industry. Companies must invest in technology and tools that provide real-time visibility into their supply chains, allowing them to react quickly to disruptions. Additionally, there is a pressing need for upskilling the workforce to meet the demands of modern supply chain management.

The old approach of static supply chain planning is no longer sufficient. Instead, companies must focus on agility, responsiveness, and continuous improvement. Working directly with suppliers to improve supply chain cost management will allow manufacturers can build resilient, efficient supply chains that are prepared for whatever challenges the future may bring.

At Pondview Consulting, we recognize the multifaceted nature of cost management, extensive inventory control, and the ongoing debate between globalization and localization. Our Integrated Business Planning (IBP) and Sales & Operations Planning (S&OP) services are designed to help businesses streamline their operations, optimize costs, and make informed strategic decisions. Get in touch!

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