1. Focus on Your Customers
The key to reducing supply chain costs is to focus on what your customers really want. Many companies make the mistake of designing their supply chains based on internal policies and processes, rather than what their customers need. This can lead to unnecessary costs, like offering delivery options that customers don’t use or stocking products that don’t sell.
For example, a clothing retailer may offer free 2-day shipping, but find that most of their customers are actually willing to wait 5-7 days for delivery. By eliminating the expedited shipping option, the retailer can save a significant amount on transportation costs without impacting customer satisfaction.
2. Optimize Your Inventory
Inventory is one of the biggest costs in any supply chain, often making up 75% of total costs. By carefully managing your inventory levels, you can free up a lot of cash flow and reduce storage and handling expenses.
One effective strategy is to implement a just-in-time (JIT) inventory system. With JIT, you only order raw materials, components, and finished goods as they are needed, rather than maintaining large stockpiles. This eliminates the costs of storing and managing excess inventory.
For example, an electronics manufacturer may switch from keeping 3 months’ worth of components on hand to a JIT system where parts arrive just before they are needed for production. This reduces the amount of warehouse space required and cuts down on the cost of managing all that extra inventory.
3. Leverage Technology
Investing in the right supply chain technology can deliver major cost savings. Tools like supply chain analytics, automation, and digital twins can provide real-time visibility, identify inefficiencies, and optimize processes.
For instance, a food distributor could use predictive analytics to forecast demand more accurately. This allows them to avoid overstocking perishable items that will go to waste. Automated ordering and replenishment systems can then ensure the right inventory levels are maintained without manual intervention.
4. Renegotiate Supplier Contracts
Your supplier relationships have a big impact on your supply chain costs. Take the time to regularly review your contracts and see if you can negotiate better terms.
This could involve getting lower unit prices, longer payment terms, or discounts for higher volume orders. You may also be able to consolidate suppliers and leverage your larger order volumes to secure better deals.
For example, a manufacturer may find that by consolidating their plastic resin suppliers from 5 to 2, they can negotiate a 10% price reduction across the board. The reduced administrative overhead of managing fewer suppliers is an added bonus.
5. Outsource Non-Core Activities
Carefully evaluate which supply chain activities are core to your business and which could be outsourced to third-party logistics (3PL) providers. 3PLs often have greater scale and specialization, allowing them to perform tasks like warehousing and transportation more efficiently and cost-effectively than you can internally.
A good example is a small e-commerce business that decides to outsource their entire fulfillment operation to a 3PL. The 3PL can leverage their high-volume shipping discounts, automated warehousing, and expert staff to process orders much cheaper than the e-commerce company could manage on their own.
