Optimizing Your Supply Chain Costing

Supply chain costing is the collection, expense assignment, and analysis of cost information across all the work activities comprising a supply chain for the purpose of identifying opportunities to obtain a competitive advantage through a combination of reduced costs or improved performance. Understanding the supply chain’s role in the profitability of your company, and how you can use that knowledge to your company’s advantage, can be your best weapon in the economic battles ahead.

We use such an approach in our global vested relationship with our strategic clients. The three main studies we utilized while doing our research were from the Council of Supply Chain Management Professionals (CSCMP) and Gartner:

  • CSCMP: The Handbook of Supply Chain Costing, T.L.Pohlen, T.P.Klammer, G.Cokins – 2009
  • Gartner: Top Supply Chain Cost-Optimization Opportunities in Logistics and Fulfillment by Greg Aimi – 2019
  • Gartner: Taking a Comprehensive Approach to Supply Chain Cost Reduction by Paul Lord and Kamala Raman – 2016

While researching primarily supply chain costing methodologies and different cost optimization initiatives, we clearly were able to decide that cost optimization is more than cost reduction alone. Additionally, we were able to decipher a few key topics which model this concept:

  1. Why you need to embark on the supply chain costing journey
  2. What costs optimization options you have
  3. What costs reduction and optimization opportunities a 4PL can provide

Why you need to embark on the supply chain costing journey 

According to the authors of the studies, it is critical to expand your visibility and management of costs information. To achieve the full potential of supply chain management, executives require a much broader view of costs than is currently available through their firms’ cost management systems. Involving the trading partners’ costs is important, since many costs incurred within a firm are driven by the business practices of external trading partners. Additionally, numerous challenges confront executives. Implementation of supply chain costing was, over the last 5 years, one of the major breakthroughs in supply chain management, propelling firms to greater value creation.

What costs optimization options you have

You have two main options for cost optimization initiatives: short term cost reduction and supply chain cost optimization.

  1. Short Term Cost Reduction:
    • Driven by expedience and urgency
    • Informed by financial analysis
    • Directionally calibrated with risk and value
    • Prioritized based on feasibility
  2. Supply Chain Cost Optimization
    • Long term focus on cost competitiveness
    • Aligned to support defined outcomes
    • Includes productivity-oriented investments
    • Continuous improvement informed by measurement

We believe companies should prioritize cost reduction and optimization initiatives as below:

  1. Short Term: Operate Better
    • Weeks/months
    • Initiatives reduce hard costs and waste
  2. Medium Term: Reconfigure
    • Quarters
    • Align better; initiatives attack structural cost and operating inefficiencies
  3. Long Term: Transform
    • Quarters/years
    • Investments change operating capabilities, significantly improving cost competitiveness

What costs reduction and optimization a 4PL can provide

4PL models can support your supply chain costing approach and initiatives. They can bring significant savings in the areas below:

Structural Cost: Value of resources required based on strategy and design choices

  1. Fixed cost: Asset financing (leases, maintenance)
  2. Fixed cost: Management overhead
  3. Variable cost: Baseload operating labor
  4. Variable cost: Transport costs across network distances
  5. Imputed: Inventory carrying cost (opportunity cost)

Pricing Waste: Unit input costs above “reference level” tied to outcomes

  1. Infrequent competitive bidding/loyalty to incumbent suppliers
  2. Incomplete leverage of global contracts/local uncontrolled spend
  3. Local buying versus leverage of global contracts

Operational Inefficiency: Excess resource use due to conscious choice, execution error or undeveloped capabilities

  1. Excess freight costs (expediting and suboptimal mode)
  2. Yield and capacity losses due to production schedule change
  3. Inefficiencies due to poor asset maintenance practices
  4. Cost of product quality, delivery and invoice defects (COPQ)
  5. Cost of deliveries missed (Opportunity losses)
  6. Inventory obsolescence (Balance sheet write-offs)

François Xavier Lanne has been in the industry for 12 years working in several countries becoming fluent in 3 languages (English, French, Spanish). He graduated with his Masters in Supply Chain & Project Management from Sorbonne University in Paris. He joins the Supply Chain Optimization line of business with expertise of industry trends and GEODIS’ services. Francois is the Business Development Director with over 4 years of experience in sales. Francois specializes in supply chain solution design, implementation, global supply chain operations, optimization and decision support tools and the 4PL/LLP business models.