Supply chain cost optimization: what you need to know

Июль 13, 2022 Anastasiya Malinovskaya

Supply chain cost optimization: what you need to know

EY forecasts that supply chain challenges could be even tougher in the upcoming years. As increased commodity and energy prices are fueling inflation and the geopolitical shift has caused supply disruptions, supply chain managers must plan for volatility and uncertainty.

If we’ve learned anything from the past two years, it’s how quickly unexpected events can cause problems that pile up and hamper supply chain operations. To deal with changes, a supply chain manager should build disruption resilience and agility as well as ensure efficiency and long-term profitability.

However, managers are sometimes so focused on revenue generation that they overlook the expenses. Simply reducing costs can expose your supply chain to risks, but there’s a better approach.

Integrating cost optimization into supply chain operations will help determine the optimal combination of cost, resilience, and quality that best contributes to business growth.

What is supply chain cost optimization?

Supply chain cost optimization is about managing costs in a way that helps achieve the best possible return on investment while ensuring a steady supply. For that you’ll need to analyze how each component of your supply chain performs.

Almost everything from supplying the raw material to delivering the finished product to the customer could be considered a part of a supply chain and a target for cost optimization strategies.

How to do cost optimization?

In its essence, supply chain cost optimization helps you reveal the hidden expenses by improving your supply chain performance. There’s an ideal world where everything operates as planned and then there’s the reality where:

  • Deliveries could be late
  • Manufacturing facilities wouldn’t outbound the product on time
  • Demand planning could be inaccurate
  • Costs could exceed forecasts
  • Warehouses could keep excessively high inventory levels.

If there are any underperforming supply chain components the costs rise. So, what should you focus on for cost optimization?

What makes your supply chain costs grow?

To improve supply chain processes and reduce costs, analysts recommend focusing on logistics optimization first as it is essential for supply chain performance. There is an array of costs associated with logistics.

Inventory costs

Inventory acts as a buffer against supply and demand volatility so that a company always has products available. Being prepared for changes is quite comforting but excessive inventory can also be a source of additional costs.

The goal here is not to simply eliminate your inventory, but rather find the optimal inventory level, be it only for a group of warehouses or across the whole multi-echelon supply chain. Several techniques could help you estimate and maintain a reasonable amount of stock.

Transportation and distribution costs

From raw materials to manufacturers, finished products to warehouses, and warehouses to consumers – transportation is the required link between them all.

There are many behind-the-scenes transportation coordinating processes, including planning, routing, and deployment. Any error slowing down your transportation can cost you considerably.

To minimize these costs, it’s necessary to work on a supply chain design. This ensures the locations of suppliers, manufacturers, and distributors are the best possible in terms of profit and efficiency. Additionally, it’s important to know the available vehicles’ capacity to use as much truck space as possible and adjust load size accordingly.

Simulation in anyLogistix software, on the contrary, captures supply chain operations over time, helping analysts study gradual step-by-step changes in a system and examine inventory levels at any given moment. It can dynamically represent the operations within echelons and account for:

  • Varying lead times within and between echelons
  • Service and inventory levels
  • Different replenishment strategies. 

Procurement and sourcing costs

Finding a balanced combination of suppliers is key to improving cost-effectiveness and mitigating risks.

To minimize procurement costs, you should use historical and real-time data to evaluate and compare different suppliers' pricing and policies. With this information, choose the most reliable suppliers with the lowest prices and ensure they can deliver the right products at the right time.

As you optimize this process, you will make the best possible procurement decisions while reducing costs and improving performance.

Investment costs

A manager needs to make decisions about when and where to invest to ensure the company’s growth. An investment can affect any step of the supply chain, so they’re going to need an end-to-end view of their operations. However, such visibility is impossible without transparent and accurate supply chain analytics.

In the end, the manager should be able to calculate these investment costs in advance by exploring "what-if" scenarios to prepare for any possible losses. Handling investment costs will ensure that your decisions will not compromise your supply chain with unexpected expenses.

See an example of how supply chain analytics software supports investment decision-making.

Analytics for supply chain cost optimization

Companies seeking to reduce supply chain costs effectively need to gather, measure, and evaluate historical, present, and forecasted performance using supply chain analytics. There’s no other effective way around it.

Predictive and prescriptive analytics combined is a powerful tool for cost optimization.

Predictive analytics gives insight into what will happen in the future and helps identify risks and opportunities. While it alerts to potential problems, it doesn’t suggest what actions one should take. Adding prescriptive analytics to supply chain management offers guidance as to which scenarios best optimize supply chain costs.

Recent global events have only further increased supply chain complexity. While preparing for future disruptions, managers need to ensure the efficiency of the entire network as well as keep an eye on associated costs.

Implement cost optimization into your supply chain strategy and combine it with the right tools, such as supply chain analytics, high-level or detailed network optimization, and simulation. This approach will help you run your business smoothly and achieve growing profits.