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Uncovering Hidden Supply Chain Costs (and How to Reduce Them)

Michael Wilson | Nov 15, 2018

Economic growth is occurring at a dizzying rate across a wide variety of industries. As consumers shift from shopping in-store to shopping online, e-commerce is more significant ...

Economic growth is occurring at a dizzying rate across a wide variety of industries. As consumers shift from shopping in-store to shopping online, e-commerce is more significant than it has ever been. This change is affecting warehouses everywhere, both nationally and internationally. Without proper supply chain management techniques, it's impossible for warehouses to keep up with the increased demand. Here are some ways you can discover hidden supply chain costs and reduce them, streamlining your supply chain and saving you money.

Start by Identifying Your Supply Chain Cost Drivers

To reduce supply chain costs effectively, you need to start with the big picture. Your supply chain cost drivers are the primary "sectors" of your supply chain where money going out the door is a significant factor.

The primary five supply chain cost drivers include:

  • Transactions
  • Time
  • Management
  • Mistakes
  • Specialization

Here's a quick look at each and how they drive costs.

Transactions

Transactions are a direct expense, and when your transactions fluctuate, your per-transaction price also increases or decreases proportionally. The internal cost of transactions can go up irrespective of an increase in transactions. Automate procurement, order in bulk, and streamline your vendors to reduce the overall expense of operations.

Time

Time is one of the biggest cost drivers in a supply chain because the more time each task takes, the more you're paying in direct and indirect labor costs. Automating processes and reducing or eliminating activities that don't add value to the end user can reduce labor costs and increase efficiency, even during periods of growth. 

Management

Management can also be a source of increased supply chain expenses. Simplify this by ensuring managers provide efficiency and eliminate productivity-reducing controls.

Mistakes

Mistakes are clearly another example of additional money spent within the supply chain and there's really no upside. Mistakes are always costly, but keep in mind that some efforts, such as causing a process to become complex versus straightforward, can end up affecting your bottom line. You can keep things simple and reduce mistakes by automating processes wherever possible.

Specialization

Specialization sounds like it could be a good idea, but looking at it in the big picture, it's often not. When you specialize processes, you add complexity and create new areas that must be managed and tracked. This doesn't mean you can never create new products beyond what you already do. Get creative and envision new offerings that utilize existing processes.

Why to Use Different Methods to Reduce Supply Chain Costs

It's never enough to look at only one area of your supply chain and reduce costs there. There are many different ways your supply chain is costing you more money than it could be; there's usually more than one weakest link. Utilizing different methods like supply chain visibility and inventory optimization to reduce or even eliminate unnecessary costs can ensure you're not missing any of those links.

Use these actionable tips to reduce the cost drivers identified above.

  1. Be More Efficient with Personnel

A mistake that many companies make is reducing their workforce to cut expenses. It's the easiest way to see immediate results, but it almost always backfires in the long run. Instead, take a long-term approach by investing in your personnel. Provide employees with training and increase communication so they become more efficient. Automate processes so they can focus their efforts elsewhere.

  1. Streamline Inventory Management

Inventory management affects two primary cost drivers: time and mistakes. When multiple people are responsible for managing different parts of your inventory, things can quickly get confusing, and this is where mistakes are made. Not enough or too much product is ordered from multiple vendors, all of which drive up costs unnecessarily. Find ways to streamline your inventory management, such as ordering in bulk from a single vendor to get price breaks and have all purchase orders go through a single department or even employee.

  1. Outsource Where Possible

Trying to complete everything in-house can be a challenge and there are significant benefits to outsourcing. You can outsource everything from certain parts of your production to an entire human resources department. Utilizing third-party services where it makes sense can reduce your labor costs and time spent by your current personnel on certain activities, addressing two major cost drivers at the same time.

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