Although most businesses understand the importance of buying well, the impact of logistics on supply chain costs is often an afterthought. However, assessing several key aspects of your supply chain logistics could help tighten up your cost base.
Savings achieved on sourcing and distributing essential supplies can be redirected to profit, transforming effective supply chain logistics into a vehicle for business growth
Supply Chain & Financial Performance
According to research by professional services network Pricewaterhouse Coopers, businesses with optimal supply chains have 15% lower supply chain costs. As such, tweaking variables within your supply chain can achieve benefits beyond simply ensuring goods are sourced on-time and within budget. Effective supply chain management can lower your cost base – influencing your overall profitability. Indeed, a study by Deloitte found 79% of companies with high-performing supply chains achieve higher growth in turnover than the average for their industries.
Yet when it comes to supply chain costs, many organisations take a short-sighted approach which focuses solely on product costs. Yet, even if you source products at the lowest possible prices, the savings could quickly be eliminated if logistics costs are not kept under control. To avoid this pitfall, organisations must take a holistic approach to their supply chain. This includes assessing whether supply chain logistics are affecting their cost base.
So, where does procurement end and logistics begin? Broadly speaking, supply chain management comprises two interrelated components: procurement and logistics. Procurement primarily focuses on specifying requirements, sourcing goods/services to meet those requirements, then negotiating the best possible price. From here, logistics focuses on the movement, storage, inventory management and delivery of products from their source to the point of consumption. To achieve value within the supply chain, these two areas must work in unison.
Linking Logistics to Business Strategy
The influence logistics has over financial performance is well illustrated by a recent decision from leading supermarket chain, Tesco, whose CEO, Dave Lewis has announced plans to achieve savings of £450m by tightening up the company’s distribution network. In turn, the group expects operating margin to leap from 2.18% to >3.5% by 2020.
Yet, despite the influence logistics can have on overall profitability, a survey by supply chain benchmarking firm Tompkins Consortium found 50% of business leaders considered supply chain to be a standalone business function – divorced from business strategy. This kind of oversight is perhaps the reason why only 12% of companies operate supply chain networks which they have actively designed. The rest have evolved over time, allowing excess costs to go unchecked.
Tesco anticipates savings of £450m by tightening up its distribution network
The Impact of Fuel
Several factors contribute to supply chain logistics costs. These include transport, labour, warehousing and administration. However, studies by Dimension Data and Energy Saving Trust place fuel amongst the lead contributors. Indeed, fuel accounts for 25-35% of the whole-life costs for fleet operators. Yet fuel prices are set to rise. So, what steps can businesses take to minimise these costs?
85% of businesses outsource elements of their supply chain management. Transport ranks highly amongst these. Insight from IT services company Dimension Data indicates organisations outsourcing their logistics:
Immediately assume there’s fat built into logistics costs, when the true expense actually lies in fuel surcharges that are beyond [the provider’s] control.
However, the conversation about cost reduction does not end there. Certainly, as a commodity, the price of fuel is influenced by complex market forces. However, logistics operators have control over how they use their fuel. In a survey of transport managers, respondents acknowledge rising fuel prices were likely to cause logistics costs to rise. Yet, 69% indicated this could be countered by better vehicle utilisation.
Fleet operators can keep costs down by maximising fuel economy and minimising mileage. Sophisticated route-planning and scheduling tools enable providers to plan efficient routes which group the most possible deliveries over the shortest possible distance, in turn maximising vehicle utilisation. This strategy is promoted by the Energy Saving Trust, which advises that fleet running costs are ‘controllable’ through effective van fleet management.
Fuel accounts for 25-35% of the whole-life costs for fleet operators
Shortening Your Goods’ Journey
Given fuel is a leading factor in logistics costs, recall for a moment the role of supply chain logistics: to move goods from their source to the point of consumption. The shorter a product’s journey, the lower the logistics cost. As a result, the geographical dispersal of your logistics network will influence your costs. Goods sourced locally will incur lower logistics costs than those sourced further away, simply in terms of fuel used.
However, the length of your products’ journey from source to point-of use should not only be measured in miles travelled. Award-winning industry magazine Supply Chain Quarterly stresses the importance of minimising product handling. Think of the supply chain network as two ‘bookends’ i.e. the source and the point of consumption. Each additional step between ‘incurs cost and increases the risk of error and damage.’ Consequently, overly complex supply chain networks result in under-utilisation and inefficiency which in turn drive down performance whilst increasing costs.
Complex supply chain networks drive down performance whilst increasing costs
Shrinking Your Cost to Serve
Third party logistics (3PL) providers often operate with tiny margins. For instance, data from trade association Freight Transport Association cites how a historic 6.2% rise in vehicle operating costs was largely absorbed by many providers, who passed on just 2.8% to their customers. So, negotiating cost reductions may be fruitless. However, if you find yourself seeking additional savings despite getting a good deal from your 3PL provider, you still have options. Optimising your ordering and delivery patterns can reveal savings opportunities.
When calculating a pricing model for your logistics, your supplier will seek to establish a ‘cost to serve’ for your business. They will use variables such as distance, number of delivery points, frequency of deliveries and quantity of goods to determine their costs, then add their margin. Altering these variables can bring down the cost to serve, releasing savings. For example, if you consolidate your orders into fewer drops, fewer journeys will be required to serve your business. The impact will be even greater if you reduce the frequency of your deliveries too.
Logistics providers operate at tiny margins, so negotiating may be fruitless
Boosting Your Buying Power
Much like consolidating your deliveries into a smaller number of drops can cut costs, so can placing your requirements with a smaller number of suppliers. Directing your spend through a single channel increases your buying power, which usually gives you access to better pricing.
Martin Murray, a senior supply chain management consultant, acknowledges that for many companies ‘the best negotiated prices can be achieved when they use a single source solution for all their transportation.’ This approach could also eliminate soft costs associated with managing and administering your logistics. Meanwhile, Dimension Data sees additional financial benefits of appointing a single supplier:
It’s not advisable to outsource piecemeal … a fractured supply chain creates complexity, and complexity creates cost.
Confidence & Resilience
When selecting a single source solution, you need confidence in their performance. As Dimension Data warns, ‘the supply chain, as the name suggests, is only as strong as its weakest link.’ Indeed, efficient performance should not be overlooked in favour of simply reducing costs. A key consideration when choosing a supplier is ‘which company will perform best in times of crisis.’ That’s the advice of industry body the Chartered Institute of Procurement and Supply(CIPS). The rationale is that ‘logistics is so susceptible to outside influences such as adverse weather conditions.’
If you decide to appoint a single supplier, consider how resilient its network is. Is there a single point of failure that could prevent you getting your supplies? For instance, what happens if a warehouse is unexpectedly rendered out of action – or if a major transport link is disrupted? You want to avoid having to make costly contingency arrangements or incurring losses associated with disruption to your business. Look for a partner who has a robust network supported by a credible business continuity plan.
The supply chain is only as strong as its weakest link
As well as confidence your supply chain network can withstand a crisis, forecasting is another area where surety is important. Working with a supplier that can give you visibility of inventory levels, stock movement and demand trends will help control your cost base. Poor forecasting could lead to excessive levels of stock, tying up unnecessary capital. Meanwhile inadequate stock levels could hamper your business productivity. Once again, supply chain logistics link directly to the business strategy.
When procuring essential supplies, organisations can benefit by thinking about factors beyond the product price. By considering the whole-life costs associated with the product’s journey from source to point-of-use, organisations can uncover opportunities to drive better financial performance – supporting the wider business strategy.