Cost reduction is the most frequently cited reason for investing in supply chain improvement projects. Although such projects can create a significant strategic advantage and improve customer service, managers often perceive these benefits as an add-on rather than a goal. In reality, savings associated with the implementation of supply chain management projects can sometimes be invisible.
This is most often caused by the fact that actions too frequently focus on removing symptoms rather than eliminating the root causes of costs. Why does this happen? This article will point out the most common barriers that prevent reaching the sources of problems. Knowledge of them can be useful in “successfully” managing supply chains.
Basically, every example of additional (unnecessary) costs in the supply chain can be caused by one or more reasons, the sources of which lie in:
2. not sharing information
Accounting methods and a reluctance to share information between partners in the supply chain create difficulties in accurately locating costs, both within the enterprise and at individual levels of the supply chain. This significantly hinders (the “bullwhip effect”), or even makes it impossible to take appropriate cost-reduction actions.
3. poorly defined relationships
Managing relationships in supply chains includes, among other things, “make or buy” decisions, the selection of partners, the type of connections between these partners, etc. In practice, decisions made in this area can be a source of significant costs associated, for example, with choosing the wrong suppliers or using internal resources for non-core activities.
In general, variability concerns everything that causes uncertainty in the functioning of the supply chain – e.g., undelivered shipments, unforeseen demand, or low material quality. Uncertainty entails increased costs associated with additional inventory, overtime, lost orders, returned products, etc. Factors of variability can be divided into two categories: those related to operations (production process) and those resulting from a lack of effective management methods.
Most product costs are shaped at the design stage by making decisions regarding the choice of materials, software design, suppliers, and ease of manufacturing and assembly. It must be remembered that the shorter the product life cycle, the more the share of design costs increases. It is therefore a critical cost factor.
6. unintended consequences of decisions made
Good intentions can lead to bad results. Efforts made to reduce costs in one area of the supply chain can actually increase total costs in that chain. For example, choosing the cheapest but unreliable supplier does not necessarily result in the lowest total cost in the supply chain. Managers must be aware of the adverse “side effects” of decisions made “in good faith”.
Solving problems related to identifying cost sources is the foundation of every supply chain improvement project. Unfortunately, most managers initiating such projects base their work on hunches, blindly believe in proposed solutions, or give in to pressure from customers. Sometimes they also decide to “jump into the deep end” just to show that they are acting – regardless of whether it will bring the expected results or not. Often, such “action” is not a well-thought-out solution to a supply chain problem, but a way to distract demanding superiors. Unlike chaotic attempts at cost reduction, a more effective process is characterized by a thoughtful and disciplined approach. Using such an approach, the status quo (incurred costs, service level) is analyzed first. Then, a design of the target supply chain is created, which guarantees a competitive level in terms of the analyzed factors. This vision includes a description of all important elements of the chain and concerns, among other things, the organization of management processes and the physical structure (facilities, products). Having a precisely defined goal, another analysis is performed in the enterprise, aimed at assessing the differences between the current and desired state. This analysis leads, among other things, to the identification of sources of unjustified costs, and on the other hand, it facilitates project implementation by helping managers set priorities.
The article comes from the magazine “Logistyka” 2/2005.
