May 16, 2019 | Cost Management
Global uncertainties, political upheavals, trade wars and market volatility have made it more challenging than ever for businesses to forecast demand and growth opportunities. Wary, companies are constantly exploring options to keep a check on costs, especially direct costs.
Direct costs, also referred to as cost of goods sold (COGS), include everything a business requires to create its product or offer its services to the customer, and make up a large chunk of the annual spend. They cover raw materials, production labor, and equipment, among other things. Typically, companies that sell products have higher costs associated with direct material sourcing, while service companies have relatively low direct costs.
Cutting direct spend essentially means that the organization has reduced the cost of making its product or service. Reducing COGS means that the company’s net profits will be higher — so it’s generally a strategy that company executives are very interested in pursuing.
Here are five sure-fire cost reduction strategies in the supply chain that can cut your direct spend:
Review, consolidate, renegotiate. Are the contracts to your optimal advantage? How are your top vendors performing? Is there gain in trimming down and consolidating the number of suppliers? Using supplier management tools and improving your supplier master data can go a long way in determining your best vendors. Do should-cost analysis, renegotiate where required — for instance, you can tell your suppliers you are willing to pay more quickly in return for lower rates. Consider long-term supply agreements with reliable vendors that will give you lower prices. Look for new suppliers and see what they have to offer.
Direct procurement teams have to walk a fine line when it comes to inventory — overstocking ties up cash and increases storage expenses; understocking can mean loss of business.
Good inventory management software can help track stock in real time and make the process more efficient. Accurate demand forecasts are just as critical, and demand sensing technology can be very helpful.
Multiple techniques are used for inventory management in supply chain, and different businesses choose to follow different models, from Just-in-Time (JIT; order when you need), ABC Analysis (inventory is divided into three categories in descending value) and Vendor Managed Inventory (VMI; suppliers plan and manage inventory levels) to setting par levels (the minimum quantity of product that must be in stock) and practicing the First-In First-Out (FIFO; oldest stock is sold first) method, to name just a few. But they all serve one purpose: maintaining a tight control over your inventory.
Unified source-to-pay (S2P) software can make a direct and positive impact on the bottom line. Adopting new software does require upfront investment, but in this case, it will make all procurement processes visible; reduce duplication, delays, errors and wastage; improve efficient operation; and cut direct costs significantly.
The unified platform, with real-time reporting tools and dashboards, analyzes spend data and provides accurate spend visibility, which helps organizations understand their direct spend and connect that activity to realized value. It also helps identify additional savings opportunities. Contract management and supplier management tools consolidate relevant data, cut down on delays, improve transparency, and reduce supply chain-related risks.
An S2P platform also give procurement professionals more time to focus on high-value strategic activities by reducing the burden of routine, repetitive, and often manual processes.
Vendors are a large part of your direct spend, so focus on building strong supplier collaboration, especially with the key ones. Develop clear communication channels, strive for a flexible rather than a merely transactional relationship, and you will be able to strengthen the quality of your influence on the supply chain.
Sharing and managing data among all involved parties — suppliers, internal departments, transportation — is critical so that both raw materials and end products are produced, packed, shipped and delivered without delay. For this collaboration to run efficiently, all parties must have access to accurate, real-time data relating to shipment processes, customs clearances and demand forecasts.
Effective transportation planning is another key to managing supply chain costs. A suitable warehouse management system, a centralized logistics/shipment hub, good insurance coverage, and thorough estimates for overseas sourcing will all help reduce costs too.
Cost reduction strategies in supply chain
Five sure-fire ways to reduce direct costs are: