12 Ways to Reduce Supply Chain Costs

1. Analyze important KPIs

The following KPIs are key to giving supply chain managers and executive leadership the data they need to assess supply chain performance and improve the underlying processes:

• Cost of goods sold
• Inventory turnover ratio
• Order fulfillment cycle time
• Transportation cost per unit
• Order accuracy rate

2. Identify the biggest cost drivers

Cost drivers vary based on the stage of the supply chain, whether it’s materials procurement, inventory management and storage, production, transportation, or administration. These drivers can include overall price inflation, trade embargoes, labor strikes or shortages, pandemics, natural disasters, wars, road closures, prolonged periods of bad weather, and disruptions to rail, ocean shipping, or air freight lines. Any changes among these drivers can have a ripple effect. For example, bad weather conditions can impede transportation and cause warehouse costs to spike in the short term as products must be stored somewhere until they can be shipped.

3. Apply supply chain methodologies

No two supply chains are the same, but there are common methodologies and best practices that companies can apply to help reduce their costs. Here are two examples.

• Lean manufacturing: This methodology is concerned with reducing waste from the production process, a topic covered in greater depth later on. Given that lean manufacturing has its roots in Toyota’s just-in-time model, it makes sense to use the example of car manufacturing. Rather than produce as many vehicles as possible and hope they sell—a push methodology that can result in excess stock—lean manufacturing entails the use of predictive data analytics to assess the potential customer demand for those vehicles and plan accordingly (a pull methodology). As such, more precise amounts of metal, rubber, plastic, and other raw materials are procured, and staff are rostered only as required, reducing wasted materials and time across the entire supply chain.
• Circular supply chain: Circular supply chains focus on using the most ecofriendly elements and following the seven Rs: reduce, reuse, recycle, repair, recover, refurbish, and redesign. Steps include working with suppliers to source or develop materials in a sustainable way; using recycled materials; designing products so they can be broken down easily once they’ve reached their end of life; and setting up and publicizing processes for consumers to return expired products.

4. Optimize shipping

Whether a company handles its own shipping or outsources that function to a professional logistics provider, cost-cutting strategies relate to various factors. These include reducing excess packaging (thus reducing the size and weight), adjusting the number or size of transport vehicles used, picking the most efficient means of transportation (truck, rail, sea, air), streamlining the routes taken, and deciding whether to ship products directly to customers or to a centralized hub (zone skipping).

5. Decrease warehouse costs

As with the in-house versus outsourced decision that comes with transportation, there’s a similar calculation to be made for warehouse costs. Is it more cost-effective for a manufacturer to store the bulk of its products onsite, or are there cost savings to be had by renting space from a specialist provider? There are logistics companies that will deal with both the warehousing and transportation, with possible cost savings attached to using those providers.

If a company decides to keep warehousing in-house, there are further decisions to be made about how to do so as efficiently as possible. One factor is the location of these warehouses. Should they be on the production site or at a hub near transport links and customer clusters? Configuring warehouses with taller racks and narrower aisles enables companies to store more goods, but the inventory still needs to be safely accessible. RFID tagging can help staff pinpoint exactly where a product is at any given time so they can pick it from the shelves without delay, while scanning the tags also provides real-time data on inventory levels. This allows procurement to be amended—via a warehouse management system—to prevent over- or understocking the warehouse.

Depending on the size of an operation, using robots to locate and collect items from shelves may be a cost-effective option. It not only reduces labor costs and other human variables such as theft and general errors, but it can also improve warehouse efficiency.

6. Strengthen partner communication

Building and maintaining strong relationships with partners up and down the supply chain can help companies improve processes and reduce costs. Set regular times to discuss problems and reinforce successes. Establish clear expectations, particularly around KPIs such as on-time delivery, quality, and regulatory compliance.

The stronger the relationships with partners, the stronger the bond of trust, which can lead to longer-term planning, e.g., the purchase of an expensive piece of equipment that can produce items in bulk, thereby bringing down the per-piece cost. Good customers are also better placed to ask for price reductions, since, by consistently paying on time, they provide a steady revenue stream for the partner.

While building personal relationships is important to strengthen partner communications, technology has a role to play, too. Blockchain can make supply chain operations transparent for all involved, as any changes are clear to see for everyone via real-time data within a shared ledger.

7. Reduce waste

Supply chain participants can cut waste, and the associated costs, in a number of ways. One way is for manufacturers to reduce product packaging—after all, who hasn’t received a relatively small item from a retailer in packaging that’s far too large for it? Inventory wastage—particularly of perishable goods—can be reduced by precise demand forecasting and inventory tracking. As mentioned above, lean manufacturing aims to cut down on waste by forecasting demand and producing only the amounts required to fulfill it, while circular supply chains focus on developing, sourcing, using, and reusing sustainable materials.

8. Consider sustainable or local sourcing

Sourcing locally can cut costs by reducing the time and expense of transportation. As an alternative to importing materials, local sourcing also avoids tariffs, customs inspections, and other costly bottlenecks. And it’s easier for companies to pivot if something goes wrong.

Reduced transport also means fewer carbon miles, which can have an immediate impact on the bottom line if local authorities tax excess emissions. In addition, implementing recycling programs can help manufacturers lower costs as they spend less on new materials. (Read 16 Ways to Improve Supply Chain Sustainability for a deeper dive.)

9. Audit and monitor performance

“You can’t improve what you don’t measure,” goes the old expression. Earlier in this article, we mentioned several KPIs, including cost of goods sold and turnover ratio, that can help companies measure and improve their supply chain cost-effectiveness based on data, not just anecdotal issues. As well as highlighting concerns, regular audits may reveal specific strengths, such as high-performing suppliers that you may want to work with even more closely.

10. Consider continuous improvement

Empowering Incremental Changes

Continuous improvement involves giving supply chain managers and workers license to make small changes that can add up to meaningful results. As the term suggests, these changes aren’t just one-offs. Each time the altered processes are repeated, there’s an opportunity to tweak them to further enhance results.

Ground-Up Innovation

In theory, such changes don’t have to be top-down ideas. In many cases, it’s the people on the floor who are best placed to make informed decisions about supply chain processes. For example, an organization’s warehouse manager might notice that the zone for discarded palettes falls right in between two sections with high traffic. Identifying this simple problem, creating a new process, and recording how effective it is—in this case, moving the palettes to somewhere less trafficked and seeing how much quicker people can get around—is continuous improvement in action.

Cumulative Impact of Marginal Gains

These marginal improvements may seem small on the surface—a few minutes here, a bit less packaging waste there—but they add up. And when companies empower people on the ground to suggest and actually implement process changes, those employees become even more willing to propose other improvements across the supply chain.

11. Streamline operations

The phrase “streamline operations” can instill fear in workers, as it’s often corporate speak for layoffs, but that doesn’t have to be the case. Indeed, the strategies outlined earlier this article are examples of how companies can streamline their supply chain operations to improve cost efficiency and output without shedding jobs.

12. Leverage AI and other technologies

AI in Inventory Management

AI can help companies reduce supply chain costs in several ways. At the inventory level, it can help them complete repetitive tasks such as counting, tracking, and documenting items with greater precision and less labor. AI models can make that inventory easier to access by suggesting optimal floor layouts to improve warehouse efficiency.

Demand Forecasting and Predictive Maintenance

AI-based demand forecasting systems can help manufacturers balance inventory against carrying costs to optimize warehouse capacity. Meanwhile, AI-based predictive maintenance systems can help manufacturers and distributors meet that demand and save money by reducing the downtime of vital machinery.

Optimized Delivery Routes

AI can plot the best delivery routes and react almost instantaneously to changes caused by adverse weather and closures, cutting costs by reducing fuel consumption and avoiding late-delivery charges. AI can also cut down on costly waste by rooting out employee errors and product defects faster than people can. The possibilities are almost endless for supply chain optimization and will only expand as AI capabilities mature.

Other Cost-Saving Technologies

Blockchain: Helps cut costs by keeping supply chain participants on the same page, avoiding expenses linked to over- and under-supply and late deliveries.

RFID tags: Decrease the number of paid hours that employees spend searching for items while also cutting spoilage costs for perishable goods. They can also help reduce the costs associated with stockouts and overstocks.

Emerging Tools

Supply chain managers have a wealth of other technologies at their disposal that could help them save money for their organizations. For example, data analytics programs can help companies pick the most cost-effective suppliers, robotics and self-driving vehicles can make warehouses more efficient, and digital twins can provide a sandbox for exploring “what if?” scenarios to cut supply chain costs.