Supply chains are a dramatic way to double, triple, even increase your profit margins tenfold.
Unfortunately many supply chain professionals look at the wrong side of the equation. When targeting cost reduction one must look at service, not at costs to improve the business situation. Below is an explanation of the reason why.
Businesses globalize and technology spreads. Nothing new. New suppliers from low-cost countries invade new markets as patents expire and cheaper versions can be offered to the customers. Whole markets became commodities and once loyal customers jump to cheaper options.
Many would have a spontaneous reaction to cut costs.
What if I would tell you a much better solution is to do exactly opposite? Instead of trying to analyze cost-base and try to match the competitors costs, my advise is companies should completely review their service offer. Supply chains are a balance of service and costs but the larger chunk of these costs are hidden in the term 'service'.
My message today for you is that' The fastest way to cut costs is by understanding the services you offer'!
By challenging the service offer, new opportunities to reduce costs but also to generate extra revenue quickly emerge. The battle for service in many companies still has many unwritten rules, and unless you talk with customers you are doomed to work on your cost-base only and miss these enormous opportunities. There is indeed a much better option than Poor Service @ Lowest Cost ... and that is Right Service @ Right Cost!
And the great news is that the more competitive your market is the more it pays off to review your service offer. The maths are very simple. Service reviews typically lead to 10 to 15% cost savings or extra revenue.
If you still enjoy a 40 percent profit margin, a service review will increase this margin to 49%. You only make 20% margin? No problem, I make it 39%. If you say 10% margin, I double it to 19%. A 5% margin triples to 14.5%. If you would only have a 1% margin, even better. You would get a tenfold increase of your margin: 10.9% after the review of your service offer.
The business case for a herbicide my previous employer sells in large volumes in Brazil is exemplary. We could have implemented a traditional cost saving programme and we would have succeeded to cut costs with 1 or 2%. Nothing spectacular.
Instead we started a cross-functional customer-driven initiative. And in 3 years time we made 15% cost savings a reality, or 5 to 7 million each year depending on the sold volumes! Because Supply Chain engaged with the Business we started to understand what customers value and what they don't, and as a result, we saw ways to save 24 USD cents per litre in different areas like packaging, duties, logistics and pricing. When you know each cent cost reduction we implemented gave the business 300,000 USD saving per year, then you can easily trace back how a review of the service offer led to millions USD savings per year.
Are we really able to separate the needs and wants for each customer and product?
That is what Customer-driven approaches are about. Unless your business understands how to eliminate lots of hidden service costs (Over-availability, Over-quality, Over-flexibility, Over-reliability and Over-delivery), your company will be doomed to scratch the surface of potentially huge cost savings. And why would we not explore all extra fee opportunities of generating new sources of revenue thanks to your supply chains!!!
Hope I made a point why success will come from your supply chain!
