Supply chain challenges - cost reduction remains a high priority

The challenges manufacturers face in the short term are often very different from those they expect to face in the longer term. The key is to balance these immediate challenges against the longer term strategies of the business, and the prioritisation of both.

Finding the balance

We recently surveyed companies who advised that in both the current time frame and the five-year outlook, the key focus is cost reduction. Other longer term strategic priorities include changing the company operating model, transforming R&D and product innovation, and investing in improved IT systems. In contrast, short term priorities included improved customer experience, sales force effectiveness, and innovations to the customer proposition rank as immediate priorities. For those companies on the direct-to-consumer journey (or considering the DTC channel), this is particularly important, as crucial capabilities such as brand management, customer experience and customer proposition are absent or weak.

Cost reduction dominates

It’s no surprise – cost reduction pressures dominate in both the current and five-year strategies. Consider the current market dynamics:

• Weakened consumer confidence impacts retail margins
• Discount retailers encroach as they aggressively seek to build market share
• Increased commoditisation negates differentiation, drives down price, and shaves margins
• Online access allows consumers to price-compare across internet-based retailers and wholesalers
• Increased raw material costs squeeze the top part of the supply chain – even before Brexit
• Higher labour costs throughout the world reflect improved standards of living, while in western countries, state-mandated minimum wages increase

The supply chain has a disproportionate influence on product profitability, since sourcing options, handling characteristics and customer behaviours all build to erode gross margin, yielding a far lower net margin than expected. Often the real drivers of cost in the supply chain are not really visible, and true costs not considered within commercial pricing decisions.

A successful implementation of Cost-to-Serve® will identify the real cost drivers and enable a focus on net profit. It will deliver a clear, repeatable and agreed cost position for a business, an essential requirement for benchmarking performance and delivering operational improvement.