Five ways to cut supply chain costs while boosting customer satisfaction

Thomas Kristensen Supply Chain and Logistics Advisory, Private Company Services, PwC US

The US spent $1.64 trillion on logistics in 2018. That’s 8.0% of the national GDP and an 11.4% increase from 2017, according to the Council of Supply Chain Management Professionals. For many companies, supply chain and logistics are responsible for more than 10% of the overall cost. This also represents one of the greatest opportunities for both cost saving and faster, more reliable delivery to customers. And we all know what customer satisfaction becomes: Revenue.

At PwC, we frequently see the following top five ways to cut costs and boost customer satisfaction when working with clients on supply chain and logistics projects.

1. It’s possible to outgrow your supply chain

What worked well two years ago may not today. As your company grows and evolves, you will gradually outgrow your old supply chain structures and processes. Some of the key signs of this are:

  • Your logistics spending remains stagnant or growing as a percentage of revenue
  • Your annual inventory turnover (COGS/Average inventory) remains flat or decreasing
  • Your customers are complaining about late or incomplete deliveries, and maybe you’re facing chargebacks from those customers with service issues

It might be a good time to give your supply chain a thorough health check from a dedicated team of specialists.

2. One supply chain, two supply chains, three supply chains... more!

For most companies, it’s important to operate with different supply chain structures for different product segments. Fast moving products with higher margins should be managed differently than slower moving products with lower margins. Products with high demand variability should be handled differently than products with predictable demand patterns.

Failure to create a fit-for-purpose supply chain process for each product sub-segment nearly always results in excessive logistics cost and lower inventory turnover.

3. Make your customer happy and cut costs by optimizing your warehouse operations

As your business grows, the demands on your distribution centers usually get more complex. Next-week deliveries are replaced by overnight deliveries. Real-time updates on purchased products become a customer necessity. Specific requirements for packaging, EDI feeds, and labeling are becoming common. At the same time, customers are increasingly leveraging chargebacks in cases of late or incomplete order shipments, or non-conformance to their requirements.

To successfully manage these challenges, it’s essential that warehouse and distribution center processes are regularly revisited and optimized.

4. Don’t let the law of averages govern your warehouse

While most companies regularly review their overall inventory turnover, we’ve found that many are doing so on an aggregated level and falling victim to the law of averages. Even a stable overall inventory turnover can hide serious issues.

Opportunities hidden by the law of averages

PwC’s Private Clients Services advisory team has developed a tool that produces such inventory assessments in a matter of 1-2 days. Here is an example of one of the many successes we’ve had with our clients.

A distributor with annual revenues of $900M and about 15,000 SKUs showed a stable inventory turnover of 6.0 for three years. Management did not consider this a major concern, as other supply chain challenges were receiving higher priority. Meanwhile, a quick assessment performed by PwC’s tool showed a more detailed picture:

  • 65% of all the SKUs yielded a combined 4% of revenue and 2% of margins. These SKUs had an inventory turnover of only about 1 per year.
  • At the same time, 9% of the SKUs accounted for approximately 70% of the revenue and more than 80% of the margins for the company. Yet, many of these SKUs were under-stocked, resulting in stock outs and unfulfilled orders.

Rectifying this situation allowed the client to reduce lost sales by $6M annually while also decreasing overall inventory by more than $25M. It was a classic case of opportunities hidden by the law of averages.

5. Effectively managing freight spending in a tightening trucking market

The US trucking market topped $700 billion in transportation cost in 2018, according to the Council of Supply Chain Management Professionals. This cost has increased on average 5.1% over the past five years, but it doesn’t need to trickle down and become your cost.

At PwC, we recommend that carrier sourcing initiatives are performed at least annually. Carrier contracts should be based on a well-defined selection process where price is matched against service delivery. It’s one of the key ways to minimize freight spending while delivering timely to customers.

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Thomas Kristensen

Supply Chain and Logistics Advisory, Private Company Services, PwC US

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