Durable goods
Durable goods, like household appliances, are heavy, and they need to last a long time. They’re also expensive, so they consume capital when they’re sitting in inventory. Making durable goods takes a long time, however, and customers usually don’t want to wait a long time for them. (If your refrigerator goes out, you want to have a new one delivered right away.) Durable goods can also face tough competition for pricing, and shipping big, heavy items can get expensive. Supply chains for durable goods need to balance the cost of keeping inventory available close to where the customers will want it with the cost of transporting the products and keeping them in inventory.
Technology
Technology products — such as computers, television sets, and electronics equipment — tend to be light and expensive. They also tend to become obsolete quickly. Technology products are sensitive to moisture damage and are vulnerable to theft. Supply chains for technology products need to be fast, flexible, and secure.
Looking at Cost Drivers
Most supply chain managers spend a lot of their time looking for ways to reduce costs. But one of the big challenges with supply chains is that things are often interconnected, so making a change in one area to lower costs can cause a change somewhere else that actually increases the cost. That’s not to say that you shouldn’t look for cost-savings opportunities, but you need to understand how the system works to ensure that you aren’t creating new problems in the process.
Four decision areas drive most of the costs in any supply chain, and I describe them in the following sections. Thinking about all these items together can help you find true opportunities for savings.
Procurement costs
One of the most obvious costs for any supply chain is the amount that you pay for the products and services you buy. Some common ways to reduce procurement costs are to negotiate better prices from your suppliers, agree to buy larger quantities over a longer period, or switch to a supplier that agrees to accept lower prices. Also, each supplier that you maintain a relationship with costs you money, because someone has to find the supplier, sign all the contracts, keep track of the supplier’s performance, and make sure the supplier gets paid. So the cost for procurement also includes the salaries and overhead for your procurement team and the information systems that they use. Reducing the number of suppliers and streamlining your procurement processes can often reduce procurement costs.
Transportation costs
Moving a product from one place to another costs money, and different modes of transportation have different costs. These modes have different speeds, which can be just as important as transportation cost. A faster and more expensive transportation mode might actually save you money by decreasing the amount of inventory that you have in transit, for example. It’s also common to use more than one mode of transportation to move a single product through a supply chain. Changing from one mode to another by using multimodal transportation can optimize transportation costs. Another common way to reduce transportation costs is to pack more products into each load, thereby improving capacity utilization. The important thing to remember is that choosing a transportation mode that is slower and less reliable may reduce transportation costs, but it will increase your inventory and consume working capital.
Inventory costs
Keeping products in inventory costs money. If you’re borrowing money from the bank to pay for that inventory (which is often the case), your inventory costs you whatever interest rate you’re paying to the bank. Other costs include paying for a building to keep the inventory safe and paying people to move the inventory around inside the building. You also run the risk that products could be lost, damaged, or stolen. This problem, often called shrinkage, also creates a cost to your company. Finally, products can expire, deteriorate, evaporate, or become obsolete if they sit in a warehouse or a retail store for too long.
Quality costs
Any time you buy a product, you expect it to meet a certain level of quality. In some cases, you may need to have formal inspection and quality assurance processes in place to make sure that the products you receive from suppliers and the products you send to your customers meet these requirements. Any product that doesn’t meet these standards costs you money, and the more closely you have to look for quality problems, the more money you spend. Reducing the variation in manufacturing and distribution processes through techniques such as Lean and Six Sigma, which are discussed in Chapter 4, can reduce the quality costs in a supply chain.
Figure 3-2 shows that the four supply chain cost drivers are interdependent; changes in any of the buckets can affect the others.
FIGURE 3-2: Supply chain cost drivers.
Dealing with Trade-Offs
Supply chain management involves making choices and trade-offs that help you maximize your profits over the long term. When you get right down to it, conflicts occur between any two functions in a business, as well as between any two businesses that work together as a part of a supply chain. Six conflicts, or trade-offs, are so common that every supply chain management professional needs to understand them and know how to manage them effectively (see Table 3-2). I discuss these trade-offs separately in the following sections.
Sales versus operations
Salespeople often say that you can’t sell a product you don’t have, and if you ask them how much product the company should make, the number is high. In other words, the salespeople want to make sure that you have enough product to meet all the customer demand that they can possibly generate, plus a little bit more. That scenario is seldom realistic.
TABLE 3-2 Common Supply Chain Management Trade-Offs and Solutions
| Conflicts and Trade-Offs | Solutions |
|---|---|
| Sales versus operations | Sales and operations planning (S&OP) |
| Customer versus supplier | Collaborative planning, forecasting, and replenishment (CPFR) |
| Engineering versus procurement | Cross-functional teams |
| Inventory versus customer service (wholesale/retail) | Forecasting |