Five key aspects of going beyond costs in supply chain network optimization
Author: Nathan Goldstein
Companies consistently explore avenues to trim costs and improve operational efficiency in an era of constant change. One such avenue is network optimization. However, companies must go beyond conventional cost-cutting strategies and embrace a modern approach to supply chain network optimization to gain true competitive advantage in an era of constant change and disruption. Below, we discuss five key aspects of companies should consider expanding the focus of their traditional network optimization programs:
Aspect 1: Expand the Scope of Costs Being Optimized
Traditional network design tools don’t consider the full spectrum of costs across your end-to-end value chain. Expanding the scope of costs included in the analysis is key to effectively reducing total delivered costs through supply chain network optimization. This involves considering:
- Fixed and Variable (per unit and hour) manufacturing costs
- Price volume discount agreements with vendors and customers
- Tax and duty costs
- CO2 penalties and credits
Aspect 2: Rethink Costing Methods for Enhanced Decision-Making
In traditional network design initiatives, standard costs based on average costs and quantities are used to drive forward-looking decisions, with a limited understanding of how costs behave under varying business realities. As a result, potential optimization opportunities are often masked, and the best-thought-out plans continually deliver less-than-expected outcomes.
Conversely, River Logic’s Costing approach redefines how companies view and manage costs, transitioning from static expected numbers to a dynamic, scenario-based analysis. This method strongly emphasizes marginal costs over average costs, incorporating a broader spectrum of variables driven by specific activities and constraints within the supply chain. It acknowledges variable and fixed costs as they are incurred, thus allowing for a more granular and accurate reflection of current and future business operations.
Aspect 3: Address Total Profitability
A common limitation in supply chain network optimization is excluding product, customer, and market mix decisions. By incorporating these decisions, companies can address and improve total profitability, not just margins. This means:
- Dynamic Demand Shaping: Companies should consider which demand to satisfy for maximum profitability rather than merely minimizing costs to meet fixed demand.
- Portfolio Optimization: Selling more profitable products to more profitable customers in more profitable markets can lead to higher overall profits, even if it means selling less in some cases.
Aspect 4: Support Resiliency-Based Supply Chain Strategies
Evaluating strategies ensuring supply chain resiliency is an absolute necessity in today’s highly volatile world. Resiliency often requires accepting higher costs to reduce risk. This necessitates a thorough understanding of costs and the ability to balance cost, service, and risk optimally.
Aspect 5: Account for Sustainability Costs and Objectives
Sustainability costs and objectives must be incorporated into your network design decisions. Not only do they represent real costs not likely captured in your standard cost calculations, but they represent an entirely new set of corporate objectives for which supply chain executives must support. It is no longer sufficient to suggest the placement of a new DC or plant based solely on cost and growth impact, and unfortunately, traditional tools simply aren’t designed to support this critical need.
Conclusion
As the famous quote says, “Insanity is doing the same thing repeatedly and expecting different results.” This sentiment perfectly encapsulates the futility of relying on traditional network design software that overlooks the complexities of modern business by focusing exclusively on cost reduction using rigid templates and averages. Companies must move beyond conventional cost-reduction strategies to truly transform business and embrace a more dynamic supply chain network optimization approach. Companies can achieve comprehensive and enduring improvements by expanding the scope of cost analysis, addressing total profitability, supporting resiliency-based strategies, and accounting for sustainability costs and objectives. This holistic approach reduces costs, improves profitability, and positions companies for long-term success in an ever-changing market.
Supply Chain leaders have a unique opportunity to go beyond cost optimization through network optimization. Click here to discover how River Logic’s Value Chain Optimization is the only comprehensive solution capable of meeting these modern-day challenges.
