Cost Reduction Strategies

in
Supply Chain Management
Written by
Eng. Hassan Al Heliel
Believe it or not, your company’s supply chain strategy contributes more to
your normal operating expenses than you might think. Why? Because it’s not
as efficient as it needs to be to help you realize savings every month or
quarter.

You need to implement cost reduction strategies in supply chain management

if you want to see long-lasting results that help you simplify and improve your
budget.

Before we discuss the different techniques that can be used to control cost in
the supply chain, you need to first understand why it’s so important.
What Is Efficient Supply Chain Strategy, and Why Does It Matter?

So, what is efficient supply chain strategy, exactly? It’s the process of eliminating excess
costs associated with your supply chain and its direct impact on your business. This
includes the procurement, storage, packing, and delivery aspects of your business.

There are different cost reduction strategies in the procurement process that you can
implement and the strategies you use largely depend on your business. But they all have
one thing in common: finding ways to save money year after year.

This helps free up additional capital and makes it easier to invest back into your business.
The more money you can invest, the easier it is to grow and improve your operation.
4 Cost Reduction Strategies in Supply Chain Management

• The exact cost reduction strategies in supply chain management that will work best for
your business may be different, and they can change from year to year. But these
methods are proven to help you create a cost-efficient supply chain that you can build on
and develop over time to scale with your business.
 Inventory loss is one of the biggest contributors to high
supply chain management costs. Every item you
misplace or lose due to spoilage or damage is an item
1. Stay on that you can’t use to fulfill orders or meet demand.
Top of By monitoring your inventory and keeping track of
each item you’re storing, you’ll reduce those costs
Inventory significantly. Even better, you’ll be able to identify
trends that are contributing to loss or wasted
inventory, so you can make the necessary changes and
start reducing costs.
 Your employees can either speed up or slow down
your supply chain management efforts. When they’re
2. Hire the efficient and process orders in a timely manner, you’ll
have a more cost-efficient supply chain. The key is to
Right choose personnel who communicate and keep you
aware of any changes and issues as they see them.
Employees When your employees take the time to communicate,
you’ll find it easier to implement and develop new cost
reduction strategies in the supply chain.
 • Getting products to the end user is one of the
biggest and most expensive challenges your
warehouse will face. Trying to figure out how to
reduce transportation costs in the supply chain
3. Manage means taking a long, hard look at how you’re sending
orders currently.
Shipping and • Running everything through internal departments
Transportati will cost more. Instead, consider consolidating
shipments into larger orders, cutting down on
on Costs frequency. If that’s not an option, it might make
sense to outsource to dedicated transportation
companies.
• This will lower your operational costs. Even better,
you’ll spare yourself the frustration and expense of
hiring additional full-time staff to help keep up with
demand.
 • Automation has a questionable reputation. Many
employees see it as a way to replace them, but when
implemented appropriately, it can help you create a
more cost-efficient supply chain.
4. Embrace • Think about the time your employees spend taking
care of tasks that a computer could manage. Things
Automation like inventory monitoring, order prep, and data
interpretation take time. That’s time that your
employees can spend in other parts of your business.
By automating certain processes, you’ll free
employees up to focus on their core duties.
• You don’t have to downsize your operation, but by
automating certain processes, you’ll save money and
can instead focus on retaining the talent you already
have in place.
The Benefits of Cost Effective Supply Chain Management

There are several benefits of cost-effective supply chain management, the most obvious one being the freeing up
of cash to be allocated where it is needed most. Looking at how to reduce these costs also forces you to take a
holistic view of your chain – giving you the chance not to just identify ways of saving money, but also making the
entire process more efficient. This could then lead to even more cost reductions further down the line.

One such example is looking at the diversity of your supply chain. By thoroughly investigating your current supplier
network, and identifying other potential providers, you can unlock several benefits to your company – such as new
business opportunities, better adaptability and an enhanced corporate image.
Supply Chain Cost Reduction Techniques

Now that we have discussed the types of costs companies will face in
their supply chains, we can move on to identifying several important
supply chain cost reduction techniques that can really help you improve
your firm’s financial health. It is important to note that this is not an
exhaustive list, and there are many other ways to make savings.
 • The first of our supply chain cost reduction
techniques is to make your ordering processes as
Streamline efficient as possible. Using a single software
package to make your requisitions, for example,
Ordering will eliminate the risk of employees using different
applications and causing confusion. This could
Processes lead to too many of a particular product being
ordered, which in itself would be a waste of
money. It is also a good idea to implement an
approvals process, where only designated
individuals can sign off on purchases, further
reducing the risk of things being ordered
unnecessarily.
 • For more manufactured products, inventory levels
can make up to 75% of your total costs. This
relates to everything from components and raw
Manage materials to subassemblies. It is possible to
achieve a large reduction in inventory costs by
Inventory swapping to something like a just-in-time (JIT)
system of inventory management.
• A JIT system will enable you to order and receive
inventory as and when it is needed, rather than
having to store lots of unused stock. This will not
only eliminate any overheads caused by excess
inventory, but also reduces your carrying fees as
well.
 • The third of our supply chain cost reduction
techniques is to take note of your customers and
Monitor their demands. By regularly monitoring ordering
patterns, you can spot trends that will enable you
Customer to identify areas of your current supply chain that
need to be tweaked.
Demands • For example, you may find that patterns will
change from month to month, or season to
season, and then use this information to make
more data-driven ordering decisions.
 • As you will no doubt be aware, storing inventory
and supplies in a warehouse comes at a cost. You
should therefore carry out an assessment of your
Make Use of current practices to see if you are making the
most of the space you have. If you are then able
Space to reorganize your inventory, you may find there is
a better, more cost-effective way of utilizing your
space. In more extreme circumstances, you could
ascertain that you are simply paying for a space
that is too large for your needs and choose to
downsize – thereby saving you a lot of cash.
 • This is probably one of the most overlooked of the
supply chain cost reduction techniques. This is
because many companies will spend a lot of time,
effort, and money into amending their supply chains
– and then never checking back to see if these
Track changes yielded positive results. What is worse,
some companies may not even be tracking their
current supply chain models, meaning they have no
Performance real idea about what is performing and what is not.
• You should instead set up key performance
indicators (KPIs) that consist of realistic targets. The
next step is to produce trackable steps to help you
reach these goals. Tracking your performance can
also help with accurately forecasting things such as
stock renewals, logistics and base supply.
 • It may seem a bit left-field, but using automation can
help you reduce your supply chain costs. Having a
professional visit your premises and assess your
current operations can provide you with helpful and
insightful advice about how to atomize your supply
Consider chain and make things much more efficient.

Automation
 • To put it bluntly, you can't solve today’s challenges
with yesterday’s tools. Planning software can't tell
you what's happening in your supply chain in real
time. And fragmented data and systems leave your
teams with limited insights into your upstream and
downstream operations.
Embrace • However, you have the digital revolution at your
fingertips — thanks to technologies like AI, machine
technology. learning, intelligent automation, digital twins, and
process mining — and now is the perfect time to
start taking advantage. Companies that embrace
these technologies can increase visibility, agility, and
predictability across their supply chain, driving cost-
savings in the long run.
• Look for solutions that offer both transparency and
action, and that connect to the systems and
processes you already use.
 • Now that you have the right technology in place, the
next challenge is figuring out how to use it wisely.

Understand • Are you using all the discounts? Do you buy too
much safety stock? Are you always working with the
best suppliers? These are all potential cost-saving
your biggest opportunities. But are they the right opportunities
for you? That’s hard to tell when you don’t have end-
to-end visibility of your supply chain.
money • With a real-time 360° view of your supply chain you
can identify the biggest cost drivers, analyze the root
drainers. causes of high costs, and prioritize your cost-saving
initiatives based on their potential impact and effort.
This means finding levers to achieve quick wins and
drive long-term outcomes. You’d be surprised by the
impact you can achieve in a short time once you
know where to start.
 • Supply chains are one mega-process made up of lots of
connected micro-processes, all happening in different systems,
handled by different people, in different departments. And
they all impact each other. That means drip-down effects
whenever something goes wrong.
Adopt a • If you only focus on isolated KPIs, you’ll never be able to catch
these chain reactions that cost you money. Instead, you need

process- to look at the very thing supply chains are made of: processes.
• Optimizing your individual processes will have a huge impact
on your performance – and your costs.
centric view. • For example: if you’re solving order blocks faster, you can
utilize more discounts. With better insights into your inventory,
you can adapt stock levels in line with actual demand to
prevent excess purchases. By improving supplier reliability,
you’re less likely to spend money on express shipping for
alternative material sources.
• By thinking process-first, you break down information silos and
establish a single source of truth for all your teams. Which
brings us to the next strategy…
 • Without end-to-end transparency, problems like delays,
missed discounts, or stock mismatches can cause a lot of
finger pointing between your teams and departments. It's not
anyone's fault in particular. It's just that your teams — and the
systems they use — speak totally different languages.
Break the • Once you give your teams a single source of truth and
prioritize action, they can start speaking the same language
blame chain. and work together to drive cost savings. Simply because they
understand the interdependencies and knock-on effects across
your processes.
 THE END

If you have any questions or consultations regarding supply chains and

development. [email protected]
eng-hassan-al-heliel-950398276/Mobile:+966504813276