Strategic Cost Reduction for Supply Chain Success – Reduce Spend, Risks & Cost

The are many avenues to realizing cost reduction, including the traditional areas of price, delivery, quality, warranty, and payment terms. In this blog, we will explore many other avenues for cost reduction realization. We will examine the methodology and benefits of a big picture, strategic systems thinking the approach to cost reduction. This dynamic approach requires the application of a number of tools, cross function acumen, and thought processes. The required thought processes are anchored in understanding or at least striving to comprehend one’s business and operational landscapes. Yet the underpinning is the convergence of vision, purpose, technical, interpersonal, and strategic alignment.

A relentless focus on value and value creation should be the focal point of all operational, supply chain, and procurement philosophies. In the Body of Knowledge of this blog, 5 critical domains of Cost Reduction are mentioned and 4 will be the points of reference.

The Critical Domains of Strategic Cost Reduction for Supply Chain Success are:

  1. Rationalization of Customers | Supply Chains

Making future decisions to continue to serve particular customer segments or not is a huge opportunity for cost reduction. Similarly, decisions around choosing one supply chain methodology versus another can provide significant cost reduction opportunities. Measuring the Total Cost to Serve Customers of Supply Chain types provides an impetus for such analysis. Total Cost to Serve is the assessment of the cost of servicing customers at the product and customer levels.

Table 1, Total Cost to Serve Matrix, for Customer Rationalization

Strategic Cost Reduction

from the above Total Cost to Serve Matrix we notice that Customer A contributes less revenue but is more profitable because of lower planned and unplanned cost. Each of the planned and unplanned items are cost reduction opportunities. The same framework can be leveraged to determine the Total Cost to Serve by Supply Chain Type. We are assuming that both are customers in a C2C environment.

The key objective is for organizations to configure their systems to deliver the appropriate service levels for their customers and to determine the degree of value customers represent

2. Product Analysis

This is the assessment of the profile of products and services to identify areas for improvement. Quality Function Deployment is a methodology that can be leveraged to probe for cost reduction opportunities in existing products and to build new products with profitable cost structures. Quality Function Deployment (QFD) also known as House of Quality is a methodology to translate Prioritized Customer Requirements (the “What’s”) into Prioritized Design, and Production Parameters (the “How’s”). QFD aides in the organization and documentation of product and service design thought processes to ensure no critical elements are left out.

Some notable benefits of QFD are up to a 50% Reduction in Time to Market, a significant reduction in costly late-stage re-design and re-engineering, and reduction of the 6 Big Losses in business.

Table 2, QFD, House of Quality Matrix

Cost Reduction Opportunities

The above House of Quality Matrix was constructed by a team which comprised of a Continuous Improvement Engineer, General Manager, Procurement Manager, and Production Manager. The matrix prioritizing product design based on critical customer requirements and the actions that must be taken to realize these requirements. The matrix also facilitates benchmarking against competitor products

The idea is not to over or under engineer products and services. If current product designs focus on features that are not required by customers, they should be eliminated. Also, QFD enables the effective allocation of design budgets and prevents overspending. Another methodology for Strategic Cost Reduction is Product Portfolio Management. In this methodology, existing and new products are assessed against critical business and customer criteria referred to as Strategic Buckets. Decisions are then made to eliminate or continue existing products and launch or not launch new products. This can be a major source of cost avoidance and cost and risk reduction.

Table 3, Product Portfolio Management Matrix

Cost Reduction Strategies

Products B, L, H, and E should never be launched, and this action will result in cost avoidance. Products Scoring less than 90 should be put on hold and re-engineered until they score 90 or above, before being launched

3. Process Analysis and Improvement

This is the study of process elements to identify cost reduction opportunities. In this activity, steps that do not add value are quantified and documented. These non-value add elements are usually from the domains of what is known as the 8 Deadly Wastes in Business, which are captured in the Total Cost to Serve Matrix or the Hidden Factory. Value Stream Process Mapping is one of the most effective ways to detect 7 of the Deadly Wastes

Table 4, Cost Reduction and Process Improvement Opportunities from Waste Reduction

Cost Reduction Strategies for Supply Chain

The above table is a framework of Cost Reduction via the Hidden Factory or 8 Daly Wastes.

NLPA has identified 29 areas for Cost Reduction via the Hidden Factory

Processes must be improved to increase:

  • Upside Supply Chain adaptability, which Is the maximum sustainable % increase in delivered quantities of products and services that can be realized within 30 days.
  • Downside Supply Chain adaptability, which is the reduction in ordered quantities sustainable at 30 days before delivery with zero cost or inventory penalties.
  • Flexibility or Upside Flexibility, which is the measurement of the number of days needed to accomplish an unplanned and sustainable 20% increase in quantities delivered to customers.
  • Order Fulfillment, which is the measurement of the ability to deliver products and services as required, contracted, and promised. It is the % of orders delivered in-full, undamaged and defects free, on-time, as a percentage of the total orders delivered
  • Return on Working Capital, which is a metric which determines the magnitude of an investment relative to an organization’s working capital position vs the revenues generated from its supply chain activities. Components include inventory, accounts payables, accounts receivables, supply chain revenues, cost of goods sold and supply chain management costs.
  • Return on Supply Chain Fixed Assets, which measures the return an organization receives from its investments on capital in supply chain fixed assets. This includes the fixed assets used in Return, Plan, Source, Make, and Deliver activities.

Table 5, Value Stream Process Mapping for realizing Cost Reduction Opportunities

Cost Reduction in Supply Chain

In the above Value Stream areas for cost reduction are highlighted in the red bursts. This methodology is a powerful tool to identify and quantify savings opportunities.

4. People | Skills Assessment

The realization of Cost Reduction through Skills is a critical element of Strategic Procurement Function initiatives. It is important to ensure that all procurement personnel are aligned to corporate and procurement function mandates. Alignment must be matched with the skills to realize their mandates. Procurement Function Leaders must articulate a Shared Vision for their departments and create a culture for innovation, accountability, effective compensation, respect, and Strategic Transformation.

NLPAs PASS or Purchasing’s Assessment of Skills for Success (PASS) Program is a powerful methodology to gauge the current skills set of a procurement team and its readiness to execute its mandate. The buyers’ competencies are benchmarked against 9 critical procurement and industry competencies. Areas for improvement are highlighted, and a performance improvement plan is drafted. This performance improvement plan enables procurement professionals to improve their capabilities to manage and reduce spend, cost-effectively support operations, and reduce risks and the cost associated with risks. It is important to not only to ensure cost reduction skills sets but to ensure process capability, robust technology, and effective, efficient supply chain networks.

NLPA Library: Looking for authoritative procurement templates, tools, webinars, and more?  Stop trying to create resources from scratch and start taking advantage of having exactly what you need right at your fingertips in the NLPA Library.

David Millington

David Millington M.Sc.QSM, NPDP, CL6σBB, SPP, SPSM3®, CM® Director of Education (Next Level Purchasing Association) A Certified Strategic Planning Professional, David Millington brings over 18+ years experience in the Strategy Execution, Product / Service Development, Organizational and Supply Chain Excellence Arenas. He is a Certified Supply Chain Professional, Certified New Product Development Professional, Certified Strategic Planning Professional, and a Certified Lean Six Sigma Black Belt. David holds a master’s degree in Quality Systems Management, from The National Graduate School of Quality Management, Falmouth MA, USA. This equips him with mastery of vast bodies of knowledge and best practices. David Millington brings hands-on experience at VP, Director, and Manager Levels, guiding and facilitating the development of strategic and tactical solutions to intricate organizational, product, and service challenges.

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