March 24, 2023 | Supply Chain Strategy
As businesses look to adapt to rapidly changing market conditions, their key priorities are building supply chain resilience, gaining competitive advantage and preparing for future disruptions. No longer are they solely focused on monitoring costs alone.
Does this mean cost has become less important and gone out of the picture?
For many businesses, monitoring costs will continue to be a key priority. And it will be closely monitored even as they invest in digital transformation and other initiatives to build agility and resilience.
While cost is no doubt still important, the approach toward cost management, particularly in supply chains, is likely to change. Businesses should assess costs vis-à-vis value delivery. In other words, they should look at costs in relation to the value they bring to the business function. This will allow them to identify value-adding initiatives, justify additional costs if any and channel their budgets in these initiatives.
Here are 4 ways for businesses to effectively manage supply chain costs:
1. Enhance supply chain visibility: Today, a business must have end-to-end visibility of their supply chain. Not only can this help track inventory and material movement at any given time, but it can also aid in spotting potential bottlenecks and disruptions. Real-time supply chain visibility can improve responsiveness and enable a business to quickly respond to market conditions. It also allows different functions to operate more efficiently, thereby bringing down costs.
2. Forecast demand: Accurate demand forecasting has become vital for businesses. This can be done by adopting demand planning technology. Powered by AI and machine learning algorithms, demand planning software can ‘sense’ demand by decoding real-time data and market events. It can also enable what-if scenario planning and prepare your business for possible demand situations.
3. Streamline inventory management: Investing in inventory and warehouse management technology can provide rich dividends. Advanced inventory management software can provide real-time inventory visibility across different locations, reduce carrying and storage costs and monitor stock levels. It can also simplify stock replenishment to maintain optimum inventory at all times. Likewise, technology can be used to automate manual processes in the warehouse and cut down labor costs.
4. Collaborate with suppliers: Work closely with suppliers to negotiate better prices and reduce lead times. Share short- and long-term demand forecasts with them and help them prepare accordingly. Additionally, real-time collaboration with suppliers can help adjust supply according to changes in demand and market conditions.
A GEP white paper emphasizes the need to engage in strategic cost management. Companies should implement a strategic cost management program to effectively manage costs in fast-changing market conditions. Such a program requires them to carefully assess and recalibrate their cost base. The objective here is to align costs with changes in market dynamics.
Strategic cost management requires different business functions to come together and develop an enterprise-wide single source of truth on the actual costs incurred during a period. This will help to establish a clear link between costs and business activities.
It will also help to differentiate between fixed and variable costs as well as those that are discretionary and non-discretionary. Such differentiation can allow a business to eliminate unwanted costs and manage costs more effectively based on short-term and long-term business goals.