Supply chain costs are rising and earnings are starting to take a hit as a result.
According to a new report from Bain & Company released Thursday, it’s going to become increasingly challenging for companies to meet their productivity targets.
“Deflation has allowed companies to improve their margins in recent years without significantly cutting costs. But inflation is back, and rising supply chain costs are starting to erode earnings,” according to Bain.
Illustrating the point, Bain said one technology company with supply chain costs around $400 million a year for personnel and freight, was able to cut those costs in half between 2011 and 2017 thanks to a convenient confluence of deflation, efficiency initiatives and lower freight rates. Now, with both logistics costs and other input costs trending upward, the company can hardly keep its costs flat, Bain noted.
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To skirt more detrimental impacts of this inflation, supply chains will have to kick cost cutting into high gear if they hope to hit bottom line targets in 2019.
Cost cutting 101
While companies typically seek cost savings in procurement, manufacturing, transportation and warehousing—doing things like removing unnecessary features in product design, deploying automation and limiting expedited shipping—companies already undertaking those efforts will find it increasingly challenging to continue finding reductions.
“Leadership teams that already have implemented cost initiatives year after year in each silo have to redouble their efforts to generate new productivity gains,” Bain said. “It’s even harder to hit these efficiency targets in the face of rising inflation.”
The approach, in this case, will require companies to uncover new sources of savings in the supply chain.
Savings beyond silos
One thing many companies miss when looking for places to cut back, Bain said, are costs generated by multiple product variations.
“Sales and marketing teams often propose products with slight variations to address a specific market niche. But increasing the number of product models can trigger exponential growth in purchasing, manufacturing and supply chain costs, offsetting the benefits of increased sales,” Bain said.
Fewer variations in styles and SKUs could streamline costs across these functions, and shifting where finished goods are manufactured—particularly in light of current and impending tariffs and how that impacts costs—could also help by lowering inventory costs or decreasing freight.
Finding cost savings between business units, however, won’t be an easy task, Bain warned. And it may require cross-functional teams that are focused on finding—and taking real efforts to curb—costs that are proving a hit to the business.
“Often, cross-functional teams help identify costly practices and processes that erode competitiveness and otherwise wouldn’t come to executives’ attention,” Bain said.
In comparing itself to its competitors, one company found that its rivals were using more common components in their products. Because the company itself was using various versions of a component, it had a lesser benefit from scale in sourcing, slower product development and excess raw material inventory.
“It’s a common problem since research and development (R&D) engineers rarely see the full impact on the supply chain of their decision to select a new component,” Bain said. “The leadership team developed an integrated view of the total costs for components, balancing the costs and benefits of additional products. That approach reduced costs by $30 million, or 80 percent of total in-silo savings.”
To get to cost savings like that, companies will have to learn how to get out of their own way or, at the very least, out of their own silos.
Individual silos lack data and analytics showing how costs flow across the organization and where savings could lie,” Bain said. “Taking an integrated approach to cost management fives leadership teams a new tool to battle rising costs and keep productivity gains on track.”
