The Key to Strategic Business Decisions: Supply Chain Network Optimization

Supply Chain Network Optimization Can Help You Avoid Cutting Resources You Can’t Get Back

We’ve seen it happen time and time again. When demand drops and the impact starts showing up on the P&L and balance sheet, companies often respond by doing what will decrease costs most sharply and immediately. They cut shifts, lay people off, or even close a plant. While the financial impact of such decisions seems to make sense in the short-term in order to preserve cash and protect margins, it has long-term consequences that can end up doing more harm than good.

Most notably, when demand returns, it’s hard to reverse these actions and ramp back up quickly, particularly when it comes to staffing back up in the increasingly tight labor market in which we all operate today. The costs associated with retraining and hiring people—especially individuals with specialized skill sets—can offset what you saved by laying them off or cutting their hours in the first place. And while you’re scrambling to get people back up to speed, quality, production rates, and lead times will inevitably suffer, leading to dissatisfied customers and missed opportunities.

Ultimately, this puts manufacturers between the proverbial rock and hard place: you can’t afford to lose people, but it appears you can’t afford to keep them, either. The answers to managing through this challenge lie in two areas: understanding your talent profile and optimizing your network for the lowest cost to serve.

Know who you can’t afford to lose.

Before making any cuts, take the time to consider the people who are in the highest demand and the skills that are most costly and difficult to develop internally. These are the people you need to find ways to keep. Can you move them into lower-level jobs temporarily? Can you redeploy them on special projects or continuous improvement initiatives? Paying a premium for specialized skills you don’t need at the moment may feel like a tough pill to swallow, but it’s nothing compared to the opportunities you may miss later on if you don’t have the right people onboard to quickly react to an upswing in demand.

Use supply chain network optimization processes to uncover cost savings in other areas.

One way to justify maintaining your workforce is to find other means of lowering your cost to serve. This is where supply chain network optimization comes in—the art and science of supporting fluctuating customer demand and delivery requirements at the lowest possible cost. It’s ultimately about producing the right product, in the right quantities, at the right cost, in the right location.

The key to supply chain network optimization is understanding and analyzing all your costs and constraints across the network—or your total landed costs per unit handled. About 80% of these costs come from four major areas: production costs, cost of raw materials, freight costs, and inventory and warehousing. The remaining 20% is made up of ancillary plant overhead costs that are specific to your business. Once you have the entire picture, you can begin to model what-if scenarios to see how a change in one area will affect the others and determine the best path for optimizing costs and saving money across the business. By doing the analysis upfront, you ensure informed, strategic decisions. And you avoid making changes to save costs in one area (moving production to a lower cost facility, for example) that will only increase your costs in another (freight costs, inventory, and/or sourcing) and potentially do more harm than good.

We recently helped an international building industry manufacturer of metal products evaluate the costs involved in sourcing raw materials, transporting them to a coating facility, warehousing the coated metal, then shipping the treated material to its main production facility. The company had been sourcing its raw metal from overseas. But when it uncovered quality issues, it switched back to a domestic supplier. After the switch, the company continued to use its same coating supplier, located near the port on the east coast, to coat the metal. Coated materials were then stored in an offsite warehouse until they were needed at the main production facility. By looking at the total costs, we found that the company could save significant freight costs by switching to a coating company located much closer to its production facilities.

In another scenario, one of our technology partners, River Logic, used its robust modeling, analytics, and scenario planning tools to help a major snack foods manufacturer uncover significant savings by changing where it produced certain products. The manufacturer’s philosophy had always been to make all versions of its 56 different flavors and shapes in all of its production facilities. The analysis showed that, based on demand patterns for several of its more unique flavors, the manufacturer could limit production of those flavors to just two of its plants. While freight costs increased—the products now had to be shipped further distances to reach some distributors—the company still realized savings of $320,000 per week.

Optimizing your network will serve you well in any economic climate.

Savings like those demonstrated in the examples above have the potential to transform a business in both goods times and bad, freeing up resources that can help you weather a downturn while improving your ability to respond to an upturn. In other words, the beauty of supply chain network optimization is that it yields insights that will improve your business whether you are scaling back production or building it up. By understanding your true costs to serve and how to position your organization to deliver the best possible service at the lowest cost, you can maintain profits even in down years. And you can be ready to fully capitalize on the opportunity and win big when the economy is at its best.