Cost Reduction – Supply Chain

Cost Reduction – Supply Chain

By Eric Johnson

Supply chain is an area where substantial savings can be captured due to the many impacts on production and operations. However, some management teams tend to shy away from large scale projects, only employing them when something breaks or sometimes when it's too late. A key approach here is to be proactive, and start when the first issues appear, which will allow a longer time frame to enact change.
A large manufacturer of agriculture, construction, and forestry equipment had a large and diversified product field, consisting of heavy machinery for the consumer market and industrial equipment, which is made to order. Retail sales are primarily seasonal - the majority of sales are made in the second and third quarter.

The company was replenishing dealers’ inventory on a weekly basis, by direct shipment and cross-docking operations, from source warehouses located locally to their manufacturing facilities. This operation was proving too costly and too slow, due to complexities of travel, poor data and other informatics, and several other variabilities. As such, the company embarked on an initiative to achieve a 15% supply chain cost reduction over a three-year period.

The company undertook a supply chain networking redesign program, resulting in the development of shipment combination centers and optimization of cross-dock terminal locations. It also began consolidating shipments and using multimodal transportation options (e.g. transfers from ship to rail or rail to truck) during the high demand quarters. The company also increased its use of contracting third-party logistics providers and effectively created a network that could be tactically optimized at any given point in time. This level of malleability was critical in responding to demand shifts.

As a result, supply chain cost management achievements included inventory reduction of $750m, a significant reduction in customer delivery time (from twelve days to four or less) and annual cost savings from transportation of around 7%. As in many initiatives, not every single goal was met, but the efforts put in place captured enough savings to justify further initiatives and to satisfy employees who had put a tremendous amount of effort into achieving the results. Often times cost saving initiatives can be the catalyst for future initiatives in and of themselves, especially when shared and managed successfully internally.