For example, the manufacturing sector has responded to a series of recessions with the adoption of new strategies for improved quality while ‘doing more with less’. These strategies included quality circles in the ‘80s, followed by total quality management (TQM) and total productive management (TPM) in the ‘90s. More complete approaches such as lean manufacturing and Six Sigma were introduced in early 2000. Each new strategy took a holistic view of production costs, and focused on reducing cost while improving the customer’s experience.
While some organizations make cost cutting the prime metric for determining the effectiveness of the supply chain, this is not necessarily what is best for the organization, nor for their customers. The effectiveness of an operation is measured on a per–unit basis and takes into account the strategic process whereby the impact throughout the entire supply chain is considered. Operations must work out a strategic process whereby cost, reliability, customer satisfaction, profitability and product development are in optimal balance.
It is also important to consider the lifecycle context a company is positioned in. The first priority of a company in recession is to stop the bleeding, while a company in full growth focuses on sustaining their ability to grow and to make sure their supply chain is geared towards supporting product output. In both cases, however, it is essential to gain and maintain a customer’s loyalty. It is all about effectiveness and it is all about what customers value.
Maturity of the Supply Chain organization in context of the lifecycle of the organization, as a whole, is another important element to consider. Are your operations geared for the challenges it is facing? To imperove your effectiveness, the single most significant success criteria of are, quite simply, the collective knowledge, commitment and enthusiasm of your key staff. Ensuring the connection and integration of the right level of expertise, while embracing their collective input, will improve efficiency at all levels. For example, numerous companies are still reporting poor visibility of cash flows, often caused by a lack of integration between procurement, operations planning and the finance function.
KPMG member firms have been helping a number of companies review their cost bases across numerous engagements within a number of sectors. Based on this experience we have found a number of pragmatic and effective approaches:
Whether looking at stock turns, IT costs, HR, back office functions, finance or engineering, the ultimate test is not your internal ability to change, but your ability to beat your peers. By using both internal and external databases of cost comparators, you can better determine your real position.
Your aim should not only be cost focused, but improving the overall customer focus of your organization. Sustainability should be the watchword for your activities.
In many instances we use an approach based on the private equity valuations of your business. In effect, this approach asks whether there is unrealized value in the business and focuses on critical areas where specific costs can be reduced. By following the money in a disciplined and realistic way, companies can reduce the prospect/likelihood that valuable resources are being devoted to poor opportunities.
Standard accounts are designed to show costs in ways that make reporting easy rather than cost drivers more transparent. Considering costs from a process viewpoint (cost to serve), a full lifecycle viewpoint (total cost of acquisition) and P&L/balance sheet viewpoints (cost of stock) can often reveal areas for new improvement. For example duty and tax are often seen as assumed costs, although this is a potential area of cost optimization through strategies such as tax efficient supply chain management.
Few companies have ignored cost in the past, and yet conversion rate of projected savings into actual savings typically stands at less than 40%. Think about your ability to deliver cost reductions using combined approaches of accounting and subject matter expertise. If you cannot do it internally, get some external help.
Cost reductions start by ensuring that you do not incur unnecessary costs. With the increased level of business failure, your supply chain has never been more fragile. From a purchaser’s point of view the most important consideration is the impact that the failure of a supplier would have on your own customers. Evaluating your supplier’s financial stability is part of balancing your pursuit of cost optimization with the right level of risk and the right level of customer focus.
“Have a good plan, execute it violently and do it today” – General MacArthur-