April 1, 2007

basic training

winning the war on costs

In an age where cost competitiveness largely determines business success, the pressure to reduce costs has become the supply chain manager's constant companion.

By Art van Bodegraven and Kenneth B. Ackerman

On the athletic field, the race may go to the swiftest. But in business, it's likely to go to the most cost competitive. And in an age where cost competitiveness largely determines business success, the pressure to reduce costs has become the supply chain manager's constant companion.

But cutting costs doesn't require the latest management program or the newest software. Cost reduction opportunities typically abound within today's operations; you just need to know where to look. When it comes to the supply chain, areas to investigate include the following:

• Inventory. Inventories have always offered an easy target for cost reduction efforts because they're visible. And with inventories growing as a result of offshoring, the need for careful management and close attention is greater than ever. But careful inventory management is not to be confused with arbitrarily slashing stocks. Rather, it's a matter of completely rethinking how they are built and maintained—to challenge the math behind them, to reengineer replenishment, to really understand customer demand, to look at deployment alternatives. And to mercilessly clean out the trash—the pain of the write-offs goes away after a while.
  
  All inventories are worth a close look: raw materials, work-in-process, finished goods, supplies, and consumables. The impacts can be enormous—a smaller asset base for improved return on investment, capital expenditures redeployed into productive assets and activities, or cash conservation during tough times.
• Transportation. There's more to cutting transportation costs than beating the lowest rates out of your carriers. In fact, that can be counterproductive. Sometimes, higher nominal cost with greater flexibility and reliability is a better way to go.
  
  When it comes to reducing transportation costs, there are more profitable avenues to take. For example, if you haven't evaluated your company's fundamental transportation structure and mix in years, a total rethinking of carriers, modes, and alternatives can pay big dividends. And while you're at it, take a look at your overnight parcel shipping costs. It's easy to fall into the habit of using premium-priced expedited service to make up time when things go wrong upstream in the supply chain.
  
  Though it's often overlooked, inbound transportation frequently offers a host of cost reduction opportunities. When vendors and suppliers specify carriers, when freight is "free" on over-minimum orders, or when price quotes include freight, inbound freight cost becomes a black hole. If you can get your suppliers to shed some light on those numbers, you may uncover some excellent prospects for cost reduction.
  
  If your freight volumes fluctuate, you may want to consider using third-party logistics service providers, whose leverage and experience can result in great savings and improved execution. Obvious candidates for outsourcing include operations whose fleet is sized for peak volumes, or whose drivers are a fixed-size crew of fulltime employees.
  
  If you're running a private fleet, examine that operation as well. You're likely to uncover ways to save money by boosting productivity and equipment utilization. You may even discover new opportunities to earn revenues from backhauls.
• Facility layout/design. Most distribution centers are intelligently designed for the day they open for business. But over the years, the products handled, customer order profiles, and customer demands tend to change. A fresh look at layout, slotting, putaway, "hot" SKU pick/replenishment, cross-docking, and mechanization (or de-mechanization) alternatives can give new life to a facility.
  
  The secret to success lies in understanding the delicate inter-relationships among inventory levels, material sources and arrival patterns, the material handling systems' capabilities, demand patterns, information and systems support, and the nuts and bolts of work flows, processes, and timing.
• Material handling systems. Time is not usually kind to mechanized systems, but tweaking and fine-tuning can sometimes restore a system's performance to original levels. Removing bottlenecks, finding shortcuts, and elevating both performance and reliability can have profound impacts on both service levels and operating costs. Payback typically requires the most modest of investments.
• Labor. Workforce management can provide both cost and performance opportunities. But your approach should include the application of process redesign, performance standards development, clear work/task assignment, flexible workforce planning and scheduling, hands-on floor supervision, and visible performance reporting—ideally in an environment of high-performance continuous improvement.
• Facility network rationalization. Where your DCs are located, what size they are, and what missions they fulfill within the supply chain can make the difference between failure and success in overall cost and service levels. Even companies that have built networks with elaborate modeling and simulation tools redesign the network every five years or so—or even more often in the case of fast-changing global supply chains.
  
  Understanding that the network needs to include facilities with different missions is a key to the construction of a balanced network. Just as one size does not fit all in evaluating facilities within the network, a single network solution doesn't work for every company. But getting the network right builds the ultimate foundation for managing transportation costs, planning inventory investment, and containing facility/operations costs.
• Sourcing and procurement. As with transportation, the key to reducing sourcing and procurement costs is not to browbeat suppliers into cutting their prices. A better approach is to set up process improvement and cost reduction teams in partnership with key suppliers—and to find suppliers who want to play in this brand-new ball game. There's little limit to what can be accomplished via this approach.
  
  Everything in the relationship is fair game—packaging, ingredients, processes, physical handling, and product development—anything that can raise your quality, improve your manufacturing reliability, and enhance your relationship with your customers.
• Employee retention. What does this have to do with cost reduction? Plenty. High turnover will raise your hiring and training costs. You also have to factor in the lost productivity and the potential for increased errors and customer service failures during the new employees' learning curve. This is a multi-million dollar opportunity in many companies. If you haven't already done so, sit down and calculate the real cost of turnover to your company. The total will almost certainly astonish you.
  
  How do you stop the revolving door? First, invest whatever it takes to find the right people in the first place. Second, create a culture in which leaders lead—and listen—and contributors are recognized and rewarded. Third, weed out the low performers early; this will send the right message to the "keepers." Fourth, make sure your operation is wage competitive. Fifth, set turnover objectives, and track actual turnover regularly. Analyze turnover reasons critically—and honestly—and execute programmatic solutions for the problems you find. Sixth, when you reach your target objectives, set new ones, and go after them.

How much might any of these cost reduction efforts be worth? It's hard to say without knowing the individual situation. Years of experience suggest, though, that double-digit improvements in productivity, in throughput, in transportation cost, in labor cost, and in inventory investment are well within the realm of possibility— even probability.

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