7 Mini Case Studies: Successful Supply Chain Cost Reduction and Management
7 Mini Case Studies: Successful Supply Chain Cost Reduction and Management
7 Mini Case Studies: Successful Supply Chain Cost Reduction and Management
If you were to tell me that your company had never looked at its supply chain costs and
sought to deliver reductions, I would be mightily surprised. On the other hand, if you told
me your company hasn’t been able to sustain any progress in supply chain cost
reduction, I wouldn’t be surprised at all.
The company was replenishing dealers’ inventory weekly, using direct shipment and
cross-docking operations from source warehouses located near Deere & Company’s
manufacturing facilities. This operation was proving too costly and too slow, so the
company launched an initiative to achieve a 10% supply chain cost reduction within four
years.
The Path to Cost Reduction: The company undertook a supply chain network-
redesign program, resulting in the commissioning of intermediate “merge centers” and
optimization of cross-dock terminal locations.
Deere & Company also began consolidating shipments and using break-bulk terminals
during the seasonal peak. The company also increased its use of third-party logistics
providers and effectively created a network that could be optimized tactically at any
given point in time.
Supply Chain Cost Management Results: Deere & Company’s supply chain cost-
management achievements included an inventory decrease of $1 billion, a significant
reduction in customer delivery lead times (from ten days to five or less) and annual
transportation cost savings of around 5%.
2. Intel
One of the world’s largest manufacturers of computer chips, Intel needs little
introduction. However, the company needed to reduce supply chain expenditure
significantly after bringing its low-cost “Atom” chip to market. Supply chain costs of
around $5.50 per chip were bearable for units selling for $100, but the price of the new
chip was a fraction of that, at about $20.
The Supply Chain Cost Reduction Challenge: Somehow, Intel had to reduce the
supply chain costs for the Atom chip, but had only one area of leverage—inventory.
The chip had to work, so Intel could make no service trade-offs. With each Atom product
being a single component, there was also no way to reduce duty payments. Intel had
already whittled packaging down to a minimum, and with a high value-to-weight ratio, the
chips’ distribution costs could not be pared down any further.
The only option was to try to reduce levels of inventory, which, up to that point, had been
kept very high to support a nine-week order cycle. The only way Intel could find to make
supply chain cost reductions was to bring this cycle time down and therefore reduce
inventory.
The Path to Cost Reduction: Intel decided to try what was considered an unlikely
supply chain strategy for the semiconductor industry: make to order. The company
began with a pilot operation using a manufacturer in Malaysia. Through a process of
iteration, they gradually sought out and eliminated supply chain inefficiencies to reduce
order cycle time incrementally. Further improvement initiatives included:
Cutting the chip assembly test window from a five-day schedule, to a bi-weekly,
2-day-long process
Introducing a formal S&OP planning process
Moving to a vendor-managed inventory model wherever it was possible to do so
Supply Chain Cost Management Results: Through its incremental approach to cycle
time improvement, Intel eventually drove the order cycle time for the Atom chip down
from nine weeks to just two. As a result, the company achieved a supply chain cost
reduction of more than $4 per unit for the $20 Atom chip—a far more palatable rate than
the original figure of $5.50.
3. Starbucks
Like Intel, Starbucks is pretty much a household name, but like many of the most
successful worldwide brands, the coffee-shop giant has been through its periods of
supply chain pain. In fact, during 2007 and 2008, Starbucks leadership began to have
severe doubts about the company’s ability to supply its 16,700 outlets. As in most
commercial sectors at that time, sales were falling. At the same time, though, supply
chain costs rose by more than $75 million.
Supply Chain Cost Reduction Challenges: When the supply chain executive team
began investigating the rising costs and supply chain performance issues, they found
that service was indeed falling short of expectations. Findings included the following
problems
Fewer than 50% of outlet deliveries were arriving on time
Several poor outsourcing decisions had led to excessive 3PL expenses
The supply chain had, (like those of many global organisations) evolved, rather
than grown by design, and had hence become unnecessarily complex
The Path to Cost Reduction: Starbucks’ leadership had three main objectives in mind
to achieve improved performance and supply chain cost reduction. These were to:
1. Reorganize the supply chain
2. Reduce cost to serve
3. Lay the groundwork for future capability in the supply chain
To meet these objectives, Starbucks divided all its supply chain functions into three main
groups, known as “plan” “make” and “deliver”. It also opened a new production facility,
bringing the total number of U.S. plants to four.
Next, the company set about terminating partnerships with all but its most effective
3PLs. It then began managing the remaining partners via a weekly scorecard system,
aligned with renewed service level agreements.
Supply Chain Cost Management Results: By the time Starbucks had completed its
transformation program, it had saved more than $500 million over the course of 2009
and 2010, of which a large proportion came out of the supply chain, according to Peter
Gibbons, then Executive Vice President of Global Supply Chain Operations.
4. AGCO
Like Deere & Company, AGCO is a leading global force in the manufacture and supply
of agricultural machinery. The company grew substantially over the course of two
decades, achieving a considerable portion of that growth by way of acquisitions.
As commonly happens when enterprises grow in this way, AGCO experienced
increasing degrees of supply chain complexity, along with associated increases in cost,
but for many years, did little to address the issue directly, primarily due to the
decentralized and fragmented nature of its global network.
In 2012, AGCO’s leaders recognised that this state of affairs could not continue and
decided to establish a long-term program of strategic optimisation.
Supply Chain Cost Reduction Challenges: With five separate brands under its
umbrella, AGCO’s product portfolio is vast. At the point when optimisation planning
began, sourcing and inbound logistics were managed by teams in various countries,
each with different levels of SCM maturity, and using different tools and systems.
As a result of the decentralised environment, in which inbound logistics and transport
management were separate operational fields, there was insufficient transparency in the
supply chain. The enterprise as a whole was not taking advantage of synergies and
economies of scale (and the benefits of the same). These issues existed against a
backdrop of a volatile, seasonal market.
The Path to Cost Reduction: Following a SCOR supply chain benchmarking exercise,
AGCO decided to approach its cost reduction and efficiency goals by blending new
technology—in the form of a globally integrated transport management system (TMS)—
with a commitment to form a partnership with a suitably capable 3PL provider.
As North and South American divisions of the company were already working with a
recently implemented TMS, leaders decided to introduce the blended approach in
Europe, with commitments to replicate the model, if successful, in its other operating
regions.
With the technology and partnership in place, a logistics control tower was developed,
which integrates and coordinates all daily inbound supply activities within Europe, from
the negotiation of carrier freight rates, through inbound shipment scheduling and
transport plan optimisation to self-billing for carrier payment.
Supply Chain Cost Management Results: Within a year and a half of their European
logistics solution’s go-live, AGCO achieved freight cost reductions of some 18%, and
has continued to save between three and five percent on freight expenditure, year-on-
year, ever since. Having since rolled the new operating model out in China and North
America, the company has reduced inbound logistics costs by 28%, increased network
performance by 25% and cut inventory levels by a quarter.
5. Terex
Headquartered in Westport Connecticut, Terex Corporation may not be such a well-
known name, but if your company has ever rented an aerial working platform (a scissor-
lift or similar), there is a good chance it was manufactured by Terex and dispatched to
the rental company from its transfer center in North Bend, Washington.
The North Bend facility is always full of lifting equipment. The company makes most
pieces to order and customizes them to meet customers’ unique preferences. Terex
maintained a manual system for yard management at the transfer centre, which
generated excessive costs for what should have been a relatively simple process of
locating customers’ units to prepare them for delivery.
The Supply Chain Cost Reduction Challenge: A wallboard and sticker system was a
low-tech solution for identifying equipment items in the yard at Terex. While inexpensive
in itself, the solution cost around six minutes every time an employee had to locate a unit
in the yard. It also required a considerable number of hours to be spent each month
taking physical inventories and updating the company’s ERP platform.
The Path to Cost Reduction: Terex decided to replace the outdated manual yard
management process with a new, digital solution using RFID tracking. Terex decided to
replace the outdated manual yard management process with a new, digital solution
using RFID tracking. Decision-makers chose a yard management software (YMS)
product, and then had the transfer centre surveyed before initiating a pilot project
covering a small portion of the yard.
After a successful pilot, the company approved the solution for full-scale implementation,
replacing stickers, yard maps, and wallboard with electronic tracking and digital
inventory management. As of December 2017, Terex was planning to integrate the yard
management solution with its ERP platform to enable even greater functionality.
Supply Chain Cost Management Results: While the YMS cannot reconcile inventory
automatically with the Terex ERP application, it does at least provide a daily inventory
count via its business intelligence module. That alone has saved the labour costs
previously incurred in carrying out manual counts.
More importantly, though, the RFID-based unit identification and location processes
have saved the company around 70 weeks per year in labour costs, by cutting the
process-time down from six minutes, to a mere 30 seconds per unit.
6. Avaya
Avaya is a global force in business collaboration and communications technology, and
not so many years ago, was operating what, by its own executives’ admission, was a
worst-in-class supply chain. That situation arose as the result of multiple corporate
acquisitions over a short space of time. The company was suffering from a range of
supply chain maladies, including a long cash-to-cash cycle, an imbalance in supplier
terms and conditions, excess inventory, and supply chain processes that were inefficient
and wholly manual.
The Supply Chain Cost Reduction Challenge: After Avaya purchased Nortel
Enterprise Solutions in 2009, the freshly merged company found itself but loosely in
control of an unstable and ineffective supply chain operation. Aside from having too
many disparate and redundant processes, the company had multiple IT solutions, none
of which provided a holistic view of the supply chain or supported focused analysis.
The Path to Cost Reduction: Avaya’s senior management team realized that its
technology solutions, which varied from being inadequate to inappropriate, were causing
many of its problems. The various acquisitions and mergers had transformed Avaya into
a different kind of enterprise, and what it needed, rather than a replacement for all the
discrete systems, was one solution to tie them all together.
To that end, the company put its trust in cloud technology, which was relatively immature
at the time, and migrated all processes onto one platform, which was designed to
automate non-value-added activities and integrate those critical to proactive supply
chain management, namely:
Point of sale analysis
Procurement analysis
Supplier communication
Supply and demand planning
Inventory planning
Inbound and outbound logistics planning
Of course, the technology was merely an enabler, and to transform its supply chain
operation, Avaya embarked on a long-term, phased program to standardize processes,
initiate a culture change, invest in top talent, and implement a system of
rigorous benchmarking and KPI tracking.
Supply Chain Cost Management Results: Avaya’s program of transformation took
place over a period of three to four years, between 2010 and 2014. The path to cost
reduction was a long one, but ultimately successful.
By making a conscious effort to lead the enterprise into a new way of thinking, change
business culture, and unify technology under a single platform, Avaya has improved
inventory turns by more than 200%, reduced cash tied-up in stock by 94%, and cut its
overall supply chain expenditure in half.
This dramatic turnaround also required the company to switch from a preoccupation with
improving what it was doing, to a process of questioning what it was doing and why.
7. Sunsweet Growers
This final mini-case study in our collection, highlights how sometimes, excess supply
chain costs are not about warehousing and transportation, but can be attributable to
inefficiencies in manufacturing or production and—often at the root of it all—forecasting
and planning.
Sunsweet Growers is the world’s biggest producer of dried fruits and a little over a
decade ago, found that while it was managing distribution operations well, high
production costs were inflating end-to-end supply chain expenditure.
The Supply Chain Cost Reduction Challenge: When the leadership at Sunsweet
looked into the company’s production cost issues, recognition soon dawned that the
distribution network was at least partly behind the problems. As a result, the company
looked at how it could redesign the network to take out some of the production costs.
Later, it became apparent that although a redesign would yield some benefits, one of the
most significant issues was in the approach to demand forecasting. Sunsweet was using
a manual forecasting approach, with spreadsheets being the only technology involved.
The inefficiencies of this approach proved not only to hamper effective forecasting and
production planning, but the knock-effect was an excess of warehouses in the network—
so forecasting proved to be both a driver of production cost, and a key to improving the
distribution network.
The Path to Cost Reduction: As in a number of the studies we’ve explored here,
technology played a large part in solving Sunsweet’s problems. After evaluating some 30
different software solutions, the company finally settled on a supply chain planning suite,
and planned its improvement program to make use of each of the solution’s modules in
sequence, allowing ROI to be realized in phases as each module was implemented and
leveraged.
At the same time, Sunsweet implemented a sales and operations planning
program (S&OP) that once established, enabled plant resource requirements to be
anticipated months—rather than weeks—in advance. As the overall improvement plan
passed through its five phases, positive results accumulated and as hoped, software
ROI reached 100% even before the company completed its full implementation.
Supply Chain Cost Management Results: Of course, the objective of Sunsweet’s
improvement program was not merely to achieve a 100% return on investment in its
supply chain planning platform. The aim was to reduce production costs, and although
the company hasn’t published hard figures to quantify the total financial gain, it has
claimed the following wins:
A 15 to 20% increase in forecasting accuracy
A reduction in overtime from 25% to 8% in production facilities
A 30% reduction in finished-goods spoilage
Number of warehouses in the United States cut from 28 to just eight
A transportation cost-per-unit that remained static for two years despite increased
utilization of costly refrigerated transport and rising fuel costs
From the achievements documented above, and highlighted in several industry
publications and articles, you don’t need to be too much of a mathematician to deduce
that cost savings would have been considerable.
Making Supply Chain Cost Reductions Stick
Of course, the above case studies are merely summaries of the changes these high-
profile brands made to their supply chains. What can be seen from these brief accounts,
though, is that for an enterprise to make significant and sustainable cost improvements,
substantial change must take place.
Deere & Company had to overhaul its network completely.
Intel had to shift an entire supply chain to a new and previously unheard of
strategy in its sector.
Starbucks had to shake up its third-party relationships and increase production
capacity.
AGCO had to invest in technology and collaborative partnerships with external
service providers.
Terex had to implement costly (but effective) RFID tracking capabilities.
Sunsweet Growers needed a best-of-breed software solution, and an S&OP
program to improve forecasting and planning.
Avaya needed to change company culture, implement cloud technology, rethink
processes completely, and invest in the best supply chain talent it could find.
At the same time, none of the changes took place overnight. Each of the companies
tackled issues in phases, effectively learning more as they went along.