We have all heard the statement – you can’t cost cut your way to profitability. Too often in business, CxOs and others forget the spirit of this saying. Cost cutting, or more precisely, cost management, is vital to running your business. In many businesses and their associated supply chains, however, this is achieved in disjointed and siloed departments. This disjointed approach to cost cutting can achieve the basic goal of saving money and therefore “improving” the bottom line. But it falls short of long-term benefits for the businesses. Savvy CxOs need to look at cost through a different lens.
- Determine the way costs impact the holistic picture of your business. Yes, I know that companies have to produce balance sheets, cash flow and income statements. But these exercises are driven on a quarterly and annual basis. What about the daily activity? When it comes to your supply chain, decisions about cost are made at a much more rapid pace. And their impacts need to be understood at the speed of business, not an accountant’s timetable. CxOs need to strive to get visibility into their costs at this level – not the level that is asked for by their accountants.
- Understand how becoming more cost-efficient creates opportunities for new business models. Oftentimes when we speak with customers about some of their cost-cutting efforts, they emphasize the savings achieved. A worthy goal indeed, however, most CxOs do not promote or focus on the next level – what are the new business opportunities these efforts have created? Where can assets and resources be shifted because of efficiencies gained? If you can be more efficient in one area, where can you reinvest in others?
- Change the mentality of cost cutting to waste management. I realize that this might appear to be one and the same. The distinction exists around the notion that waste management is a mentality that distinguishes between bad costs and good costs. It’s similar to when you go to your annual physical, and your doctor looks at both the good and bad cholesterol. Both numbers must be evaluated together, not in isolation. Adding cost is part of doing business but it must be done efficiently – cut waste not just blindly cutting spending.
What does this change in mentality look like? Take for example the work SCA Technologies is doing with one of its customers, a fast-food giant. The Pittsburgh-based supply chain software firm has worked with this client to implement technology that provides a level of understanding of costs previously not achievable. The outputs have been to understand the nuances in the fluctuations of commodity cost – poultry, eggs, beef, and cheese, to name a few. As a result, the fast-food giant gains a full view of the impact these costs have on their final product – throughout the end-to-end supply chain. Margin impacts, in turn, drive decisions around new product introduction, pricing and promotions. In a business where margins are constantly under pressure, this insight has deep impacts on the day-to-day business.
For example, the fast-food giant was looking to introduce a limited-time offer into its menu, but after assessing cost upticks for specific commodities required for that product, it became apparent that shifting to a more favorable time of year for those commodities would improve profitability. This level of insight into cost structures, and more important, how they impact the entire supply chain, enabled a smarter—and more financially sound—decision to be made.
We have seen the same in the consumer electronics business. For example, Apple understands the strategic advantage inherent in looking at the cost of items such as flash drives and taking a forward position. When Apple looks forward to new product introductions, it also looks to buy future production and inventory of key items – this is a massive cost creation. However, the assurance of being able to capture market share by having the right inventory on hand is vital. The issue of absorbing and adding costs is not the concern – identifying a possible business opportunity is the priority. They can do this because they have a holistic view of how near-term cost can impact long-term market share.
The bottom line for CxOs is that cost isn’t bad! Of course incurring costs for employee sushi lunches and paying for all your employees’ cell phone bills might not lead to the greatest business outcomes. Unless you are Google when you use these “perks” to ensure your minions are kept in the mothership as many hours as possible. But focus on those areas where waste management can open up avenues otherwise neglected. Look to cost as the basis for short-term and long-term innovation and laying the groundwork for new product introduction and new business processes.
Last week spent the majority it of it in San Diego, enjoying the warm southern California weather and sun. Why was I there? Attending the annual CSCMP conference. The conference was, as usual, well attended by an array of supply chain professionals. As in previous years, the event offered a wide array of break out sessions and interactions with fellow professionals. Three take aways from the event:
- The importance of labor – it’s the people stupid. To borrow a line from James Carville, well at least part of the line. What was interesting and I was glad to hear, was the importance being placed on labor in the supply chain. We have seen this rise in labor importance in the retail world. We are all keenly aware of the growing change in the store front. Retailers, with brick and mortar, are looking to these assets under a different light. They are looking to transform these assets into destinations, think Restoration Hardware or Williams Sonoma. Others, such as Finish Line and Macy’s are looking to fulfill eCommerce orders directly from stores. While these changes to how their supply chain fulfills orders has a direct impact on inventory strategies they also have a secondary effect on labor. Employees both within the store but also in warehouses and logistics will have to add skills and new responsibilities to their daily routines. CxOs will have to ensure they empower this labor with the proper training, incentives and technology to ensure success. Bottom line is labor in the supply chain often is the touch point between
The coffee giant’s greatest assets – the ones in green.
the supply chain and the customer. CxOs cannot afford to ignore this crucial link. As Howard Shultz CEO of Starbucks stated from main stage – the most important asset for Starbucks are the ones wearing the green aprons.
- Mission impossible for logistics – okay that might be an overstatement, but the reality is that our logistics networks, both warehousing and transportation, are being asked to do more. Logistics professionals should not expect this to abate any time soon. Delivery to the home, to lockers, even to the trunk of your car are all pushing last mile delivery capabilities to their limit. What will happen when the FAA loosens up drone regulations? This is driven entirely by the empowered consumer. As role and influence of the consumer continues to force supply chains to react to their demands, logistics will have to shoulder a greater amount of the burden. Supply chains will have to be ever nimble with their logistics to meet these demands. For example, Hostess had to ensure they have the necessary distribution centers (DCs), strategically located to meet exploding demand when they reintroduced their delicious Twinkies and Cupcakes to the market. The challenge became being able to readjust their strategy on the fly as the demand patterns became apparent. The success for Hostess rested in large part to their ability to have the proper levels of inventory in the right DCs. CxOs will need
Can your warehouse and logistics keep up?
to be constantly evaluating all their logistics components of their supply chains to ensure they are in the best position to satisfy their customers’ expectations. They must also be willing to change strategies and tactics as needs evolve. Look for new business services such as the ones offered by Flexe who is using crowd-sourcing to fill excess warehousing space. As well as Amazon who announced the launching of Amazon Flex. Bring the same business model as Lyft, Uber and Airbnb to package delivery. Amazon Flex will open up package delivery to anyone who has a vehicle to become last mile delivery assets.
- Eat your own lunch otherwise someone else will – digital continues to accelerate disruption all across the supply chain. Disruptive technologies such as IoT, robotics and augmented reality were all on display at CSCMP. Smart labels by Johnny Walker were discussed and how they can provide the consumer with additional insight about what they are consuming but also the distributor with regards to the location of inventory and the pace of consumption. Computing giant HP is leveraging connected printers to proactively order ink when the machine detects the level drops below a certain range. Companies such as Lids.com are using robotics from Swisslog to manage their DCs. Distribution companies such as DHL replacing traditional handhelds with augmented reality for their packing professionals, reducing errors and increasing velocity. Manufacturers such as GE are adding connectivity capabilities to their high end refrigerators…not because they have a use case for a connected ice box but to lay down the ground work for possible use cases. More than ever, CxOs must be watching for digital disruptions that are are currently impacting their businesses or those that are just over the horizon. These are also going to impact different parts of their supply chain – just complicating the matter.
After leaving San Diego my believe that we are on the verge of seeing some major changes through out our supply chains was reinforced. While it may sound cliche, the digital supply chain is going to change how we approach this space in ways we have not even imagined. CxOs are in the midst of exciting times. Those that embrace this will flourish, those that cling to their old thinking will be left behind. Quickly.
Looking forward to CSCMP next year back on the East Coast in Orland Florida.