How do they differ and what does each approach entail
There are three fundamental approaches to reducing and controlling supply chain costs: avoidance, mitigation and improving performance. Understanding each helps companies to decide which is more likely to deliver the most bang for the buck within their supply chains, and what measures need to be taken to capture the full benefits.
Cost avoidance is achieved through structural change in the organization, explains LeAnne Coulter, vice president of freight management at Penske Logistics. "You might have employees who are focused on, say, transportation management, but the team is not centralized or coordinated, and there is an opportunity to deploy them more effectively," she says.
In such cases, the company must pinpoint the gaps in organizational performance and identify best-in-class solutions. Often, it is easier for the company to explore these options with a third-party logistics provider (3PL) than to undertake an in-depth review internally. Outside eyes can offer a unique perspective that may be difficult for people entrenched in the day-to-day to see and may also offer insight gained from working in other industries.
Another route to cost avoidance is to review and rationalize the enterprise's technical resources. For example, rather than making significant investments in advanced transportation management system (TMS) technology, an enterprise might choose to outsource that function and engage a system managed by a 3PL. When companies work with Penske, "they can take advantage of the investment dollars in our system and the in-house expertise we have to run it," says Coulter. This approach can be especially advantageous when existing solutions are not delivering sufficient value. An example is a software-as-a-service solution that fails to provide the analytics or data visualization features required to support the company's supply chain management goals adequately.
Mitigation measures address issues before they impose an unnecessary cost. "We might provide better network visibility tools that enable the company to track inventory more efficiently and reduce the amount of product it has to handle and store," explains Coulter.
Other cost mitigation strategies might be increasing the reliability of a distribution network, or using predictive analytics to streamline decision-making in the supply chain. Raising the efficiency of a distribution network can translate into improved on-time delivery performance and hence dollar savings in the form of reduced penalties for late deliveries.
Better decision-making delivers cost savings on many fronts. Consider, for example, a company that is preparing for a peak in demand. The ability to make more informed decisions helps the company to secure carrying capacity for the surge in shipments ahead of time "at more competitive rates compared to what they would have paid without the intervention," Coulter says.
3. Performance Improvements
In this approach to cost reduction, companies can focus on the current state of the supply chain and opportunities to improve performance.
Network optimization falls into this category of cost savings. There are several ways to approach this strategy. Evaluating the entire network — including sourcing locations and product demand — drives performance improvements by, for instance, analyzing which warehouses stock which products and which routes are the most efficient.
Another option is to create what-if scenarios to determine how altering certain elements — specific suppliers or cross-docks, for example — impacts costs and transportation. A third possibility is to leverage improved communications to increase visibility and capture efficiencies through, say, better ways to build loads.
Dynamic routing, the load tendering process, and sourcing strategies are other primary areas that are often ripe for improvement in the quest to cut costs.
Penske is often able to employ leading-edge technology to help customers discover cost savings they may be overlooking.
Planning the Road Ahead
Choosing which approach, or combination of methods, to pursue depends on the shipper's goals and the nature of its business and organization.
"Companies that are decentralized can present significant opportunities for cost avoidance," says Coulter. The company's time horizon sometimes impacts which approach to take. One enterprise might aim to capture short-term cost savings; another has mid- to long-term targets that can be realized by relocating distribution centers to meet customer needs better. "In general, we work to deploy all three cost management strategies," Coulter says.
Whichever track companies take, they need to be aware of what's involved in advance if they are to derive maximum value from the exercise.
Mitigation, for instance, is inherently forward-looking, and it helps if companies are "open to change and to viewing how success can be delivered by working with different tools and working through change management challenges," notes Coulter.
In cost avoidance, it's important to "spend time to understand the organization and what people do," she says. It might be necessary to delve into the fundamentals of operating a freight network and what different processes accomplish. "Companies that do this often experience the biggest transformations," Coulter says.
The investment in time and money can be significant — but so are the potential cost savings.