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Optimizing vs. Reducing Costs: Is Your Supply Chain Getting It Right?

Posted by Tom Rhoads on Aug 17, 2020 3:20:27 PM

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Practically every business is – in one way or another – working to reduce supply chain costs. Be it operating costs, freight and logistics spend, buffer stock, or the countless other revenue leaks.

In the grand scheme of things, revenue growth and cost efficiency are quite complicated and a balancing act to master. The cheapest options are not always the best options; beneficial actions in one business unit may harm another; and optimizing within silos and is not really optimization.

As supply chain leaders work to recover revenues and drive customer loyalty, business growth, and competitive differentiation, it will be vital to invest in systems and processes that break down silos, better balance priorities, and optimize the supply chain end-to-end.

Silos May Be Hurting Your Business

supply chain business silosMost organizations don’t realize the extent to which they operate in silos and to what degree this impacts their bottom line. Complex supply chains are siloed on multiple levels, by geography, business units, and fragmented systems and processes.

Each silo is incentivized differently and operates to meet the narrow focus of its own objectives – often to the detriment of another sector or region.

Logistics professionals often focus on getting orders from point A to Point B at the cheapest cost, while e-commerce professionals push for the highest margins on their products. Manufacturing and procurement silos are driven by cost and availability, whereas the reverse supply chain is not cost-driven and will potentially sacrifice millions of dollars each year in returns just to retain customers and build loyalty.

Even simple supply chains, such as those spanning from a manufacturer to a distribution center (DC) or a DC to a customer involve multiple parties (possibly also an LSP or 4PL) and multiple flows: inbound, outbound, and the intermediate warehouse flow.

supply chain cost silosEach party monitors its own silo’s benefits, rather than the what is ultimately more cost-effective. Choosing to bypass a DC might increase transportation spend but lower the full cost-to-serve figure. Opting to pick items in parcels rather than by pallet might decrease productivity in the warehouse but reduce transport costs enough to make it more profitable and worthwhile.

Without global visibility, there’s no way to gain such insight into the bigger picture.

The Cheapest Option Isn’t Always the Optimal One

The difference between cost optimization and cost reduction bears heavily on the bottom line. Cost reduction refers to a narrow focus on spend, whereas cost optimization encourages a more holistic factoring of all requirements and constraints.

Supply Chain Cost v OptimizationAccording to Gartner, “Cost optimization seeks to balance service delivery with the best customer experience, at the right level of cost.” Supply chain leaders who focus on optimization consider priorities other than cost, especially as they occur across the supply chain.

To institute radical improvement, executives must reframe success and KPIs across business units, motivating efforts toward a common holistic goal instead of a single silo. Such an effort will also require unifying supply chain systems that otherwise reinforce and perpetuate silos.

Siloed systems – no matter how state-of-the-art, are incapable of factoring all costs and constraints and prevent process convergence.

Support for the Full Order Lifecycle

Full order lifecycleMost technology strategies revolve around a point solution. To orchestrate effectively across a complex supply chain, you need visibility, various logistics capabilities, order management, reverse management, and omni-channel fulfillment capabilities.

What ends up happening is businesses accrue as many systems as the capabilities they lack – in addition to multi-modal add-ons and integration layers. Considering the perennial cost and labor of upgrades, this method is neither cost-effective nor ideal for optimizing end-to-end operations.

Siloed systems also can’t optimize across the entire value chain. An order management system (OMS) might select the “best” inventory and location to fulfill from, but without end-to-end visibility over both order and logistics management, the data it leverages is limited and therefor suboptimal. Without proper TMS integration, the OMS will estimate costs – which is not really optimizing.

A supply chain solution that supports the full order lifecycle is a gamechanger. Such a technology doesn’t optimize within silos, but across silos.

Supply-Chain-Orchestration-graphicA Supply Chain Orchestration Platform offers global Control Tower capabilities that unify fragmented systems on a single platform, exposing the deleterious processes and behaviors that occur in silos. The technology also holistically supports and optimizes all inbound, outbound, and reverse flows, offering TMS, OMS, reverse logistics, and omni-channel fulfillment capabilities all on one platform.

The Cost Benefits of a Holistic Platform

A single platform supporting end-to-end functions will be about 1/4th the total cost of ownership than that of acquiring a separate system for each function. The technology also simplifies operations, eliminating integration fees and upgrade costs.

It’s also important for a supply chain orchestration platform to capture cost at every touch point, so businesses benefit from a kind of embedded cost management that spans the full order lifecycle. With a complete cost-to-serve picture, supply chain leaders can optimize global operations, across silos and even offer customers dynamic options that improve customer service levels.

 

According to a PwC survey, optimized supply chains usually see 15% lower overall costs, less than 50% inventory holdings, and about a 3x faster cash-to-cash cycle. Achieving those results require a shift in perspective. Especially in today’s disruptive, competitive, and highly demanding climate, businesses can no longer afford to optimize within silos. While it may seem that certain sectors are reducing costs, it’s often to the detriment of other factions.

Real-time, continuous optimization across the full order lifecycle has never been easier. It’s also never been more accessible and cost-effective.

 

MPO's cloud platform for supply chain orchestration supports the full order lifecycle, connecting fragmented systems and optimizing across silos. The platform  enables agile implementation, so solutions can typically begin going live in a couple of months, allowing our customers to drive break-even value in under a year.

For more information on our solutions and capabilities, please browse our solution briefs and solution toolkits, or reach out to discuss your business initiative and how we can provide fast time-to-value.

You can also download a complimentary copy of the white paper below for more on optimizing across silos.

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Topics: Supply Chain Orchestration, Supply Chain Visibility, Supply Chain Optimization, cost management, Supply Chain Costs

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