In 2003 Boeing began development of the 787 Dreamliner, an innovative aircraft that became the fastest-selling plane in aviation history due to its composite design and next-generation jet engines. With the number of orders far exceeding expectations, Boeing turned to extensive outsourcing, both locally and internationally, as a way to cut costs from $10 to $6 billion and reduce the 787′s development time from six to four years.
The result, however, was far from what was intended: The project was billions of dollars over budget and years behind schedule; the first planes were delivered more than three years late. “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home,” Jim Albaugh, chief of commercial airplanes at Boeing, explained eight years later.
Boeing was hardly the first organization to make flawed decisions about its supply chain operations and it probably won’t be the last. Given the size, variation and complexity of supply chains, companies often look to this area of their business to reduce spend, and it’s an area rife with opportunities. The supply chain – which includes all the inputs and outputs associated with a business – typically accounts for an average of 85 percent of external spend and 60 to 85 percent of an organization’s environmental footprint, according to Supply Chain Management.
While the supply chain is a great place to look for cost reductions, understanding common misconceptions about where to look will help your organization develop a systematic approach to capturing potential savings.
MISCONCEPTION #1: REDUCE COSTS AT ALL COSTS
Many companies make cost reduction a strategic goal, particularly in lean times, and reducing costs at all costs has historically been a popular strategy for supply chain professionals regardless of the industry involved. This strategy, however, violates many supply-chain and operations principles and makes it hard for an organization to balance the desire to reduce costs with the need to maintain a viable and competitive business. At times, this may mean investing in new infrastructure and technology or spending more in order to manage business risks such as a limited supply of materials due to constrained resources or an inflexible supplier. According to a 2015 study by the Material Handling Institute, “many companies have already slashed substantial costs from their supply chains. Continuing to rely on cost-cutting measures is likely to provide diminishing returns and cause supply chain organizations to fall short of financial and competitive expectations.”
Many supply chain executives are recognizing the value of investing now to realize savings down the road. Organizations throughout the healthcare, retail and transportation industries, to name a few, have invested in automatic identification technologies, such as barcodes, RFIDs and point-of-sale systems, to collect supply chain data to improve product tracking and traceability as well as operations. While these technologies require a heavy upfront cost, the investment leads to opportunities to innovate and save in the long term. Organizations in other industries are investing in cloud-based logistics systems to support order collaboration, communication and network-wide transportation management efforts -- spending that can also provide significant opportunities for efficiency and cost savings.
MISCONCEPTION #2: TRANSPORTATION IS THE BEST WAY TO REDUCE COSTS
The greatest mistake manufacturers make today is equating transportation cost reductions with total available supply chain savings.
For most manufactured products, transportation accounts for just 2 to 5 percent of total costs, so while changes to your supply chain’s transportation system may provide some quick, “low-hanging fruit” reduction opportunities, these changes will likely only make a small dent in overall operational expenses.
What many companies discover the hard way is that changes in transit can result in higher costs in the long run. The most common strategies are to ship less often or to switch to slower, less-reliable modes. In reality, these strategies can end up increasing inventory holdings, which can more than offset any transportation savings.
As Urban wrote in Inbound Logistics, “cutting transportation costs is a sub-optimization that produces false savings.” In the end, the math proves the point – even a 50 percent reduction in transportation costs offers at most a 2.5 percent saving in your overall costs.
Instead, organizations should consider evaluating and managing performance in their inventory management practices. For instance, is there an opportunity to review and tweak your safety stock policies to regularly evaluate demand and variability?
MISCONCEPTION #3: SUSTAINABILITY IS A WASTE OF TIME AND MONEY
Gone are the days when a sustainability program simply meant that a company’s employees volunteered their time in the community. Sustainability today is also about managing resources more efficiently to reduce the company’s environmental footprint and serve as an innovative way to reduce costs.
Walmart, for example, attributed more than $100 million of revenue in 2009 to a decision to switch to a recyclable variety of cardboard in shipments to its 4,300-plus stores in the United States – cardboard that it could then sell to a recycler rather than paying to ship to a landfill. Another example involves a global fast-food retailer that worked with its supply chain in 2012 to reduce the overall environmental impact of its products. With a major packaging material overhaul, along with transportation and energy-efficiency initiatives, the company was able to reduce its resource consumptions and account for $55 million worth of savings shared amongst its suppliers.
Finding cost-saving opportunities within a complex and broad supply chain can be challenging. In order to get the most out of your supply chain improvements, it’s critical that your team take the time to develop the right approach.
As with any change initiative, it’s important to collect data, test various scenarios to assess the impact on customers, suppliers and your business, and track performance over time. As you gain clarity on your strategy, challenge misconceptions that encourage chasing false opportunities and instead develop a plan that is agile, allowing you to move quickly as you address current business needs as well as future uncertainties.