Align Operations to Business Requirements for Optimized Supply Chain Costs

Focus on efficient operating outcomes that align with the overall business strategy over cost reductions.

Supply chain cost does not create alignment, so change your focus

As supply constraints have relaxed and demand growth has slowed, chief supply chain officers (CSCOs) have taken the opportunity to focus on cost control. Now, in response to ​​rising resource prices, CSCOs can reframe things in a way that allows the organization to deliver performance breakthroughs.

Top-down cost reduction targets often spark negative sentiment within organizations, because they create concern about quality and service impacts and reduced focus on long-term business value. A more balanced consideration of short-term cash flow with risk and profitable growth drives focus on sustainable network performance that supports the organization’s long-term strategic goals.

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    Supply chain costs are just one part of a broader value story

    Cost reduction targets miss the bigger picture: The top priority for any organization is growth. Focusing on efficient operating outcomes that align with the overall business strategy is what drives optimized performance across the network.

    Optimize network performance and align with business needs

    Cost-optimized network performance is a supply chain vision enabled by aligned design choices and operating decisions to effectively fulfill demand. To bring this vision to life while supporting the desired business balance between cash, margin, risk and growth, focus on three measurable operating outcomes:

    • Reliable, optimized product supply 

    • Effective demand fulfillment to create the desired customer experience

    • Support of growth through discrete events (like a new product launch, new sales contract implementation, new warehouse or factory startup)

    Go beyond supply chain costs to limit conflict

    Focusing on supporting business performance rather than just reducing costs and inventory enables collaboration that can uncover performance opportunities — including cost and inventory reductions.

    Inventory excellence, which contributes to risk mitigation and cash-flow optimization, and supports growth, is positioned as the central enabler of optimized network performance.

    Aim to replace debates and negotiations about spending cuts and budget allocations with alignment on, and clarification of, the standards necessary for optimized network performance that drives business success.

    Focus on outcomes when short-term supply chain cost pressures arise

    To sharpen cost and performance optimization strategies in times of top-down financial pressure, maintain focus on delivering operating outcomes that fulfill business demands. Conduct a thorough root-cause analysis to identify where structural and operational inefficiencies arise instead of implementing blanket cost-cutting measures. 

    Remain clear on what truly drives long-term business success and avoid the pitfalls of short-term financial pressures that do not contribute to sustained value creation by asking:

    • Do customers still demand (and do product and marketing leaders still commit to delivering) the same levels of product quality as before? 

    • Will the business make trade-offs on quality to reduce cost?

    • Are sales and service leaders committed to the same customer service levels?

    • Are sales and service leaders prepared to institute new service rules (for some customer segments) related to minimum order quantity, order placement methods, lead times, cancellations and returns?

    • Are manufacturing and finance leaders prepared to strike a different balance between working capital and manufacturing asset performance? 

    • Are higher inventory levels an option to increase asset efficiency or reduce freight cost?

    Supply chain costs FAQs

    What are supply chain costs?

    Supply chain costs are distributed and embedded within the business income statement. They include product supply costs, such as direct materials, in addition to logistics services, operating expenses and overhead costs for planning, strategy and performance management. Budgeted expenses for the supply chain organization typically include overhead costs, logistics operating costs and logistics services.

    How can supply chain costs be reduced?

    While CSCOs often focus on cutting individual supply chain expenses, such as direct materials or logistics, attempts to reduce individual costs can put quality and service at risk. Instead, supply chain leaders should focus on aligning their networks with business outcomes. Operational alignment results in more cost-effective supply chains while improving performance.

    Drive stronger performance on your mission-critical priorities.