Managing the constituents of a supply chain in a business is vital for achieving incremental profits. We usually focus on managing cost reduction in supply chain but never look at it as profit that could be measured at every stage – parts sourcing, conversion, value addition, packaging, logistics, inventory management and distribution. Each component contributes to incremental profit and the business owners of these components need to align with the overall objective of the organisation. If we think cost reduction in supply chain helps in keeping sale price constant to retain customers, then we don’t think of it as a profit. Is cost cut a holier word than profit? Not at all.
In a competitive market, it is an art to keep the sale price of a product constant to hold onto market share but keep increasing the profit as far as possible, in-spite of variations in input and conversion costs. The job of the cost accountant plays an important role in achieving this objective. How many companies have this dedicated role, especially smaller organisation where this responsibility still lies with the promoter. The costing team takes the feedback from sales team, sourcing team and manufacturing / subcontracting team to arrive at the optimum sale price of a product that can be sold in high volumes during both on-season and off-season. The cost accountant also keeps a tab on the operations running costs like energy, fuel, salaries, infra maintenance etc.
Sourcing – every business has more than one vendor for a part or service . Spreading the supply risk among them and helping them to manage their input costs is important to keep the purchase costs within limits. Low cost alternate materials in parts or assemblies help to keep the production cost in check. Making short term and long term forecasts using machine learning algorithms is vital for the business.
Conversion – at the manufacturing plant, parts get converted or assembled to make the final product. Any savings in operational steps or routing or reducing maintenance down time or value additions go a long way to reduce the cost of conversions.
Value addition – a specially made tool or machine at the suppliers’ place can be replaced with an in-house tool modified to do the same operation helps to negotiate better price from the supplier.
Inventory Management- Maximising profits by managing material holding cost, planning for surge in customer orders is an art. How much buffer is necessary for each raw material and each finished product is statistically analysed and planned.
Packaging – since the advent JIT concept, sub– assemblies or parts do not get packed if the supplier and buyer are situated close by. Re-usable packaging or Returnable packaging as in the case of barrels or moulded trays or wooden crates substantially reduce the packaging cost that results in incremental profit.
Logistics – it constitutes a good percentage of final price of the product and it is important to control this cost by deploying a fleet management system ( either own or sourced outside) that offers the lowest transportation cost per piece or tonne or Kg. Again JIT concept helped in increasing the efficiency of logistics. The 3rd party logistics companies are a boon as part loads of parts or final products are shipped at reduced cost.
Distribution – the most horrendous part of supply chain and distribution is making available the products at the retailers’ shelves or meeting JIT deadlines. There needs to be a logical method of distribution based on past consumption history, prior knowledge of principals’ production quantities, planning for weather uncertainties and social disturbances. Demand forecast at the retail end is again done using supply chain planning softwares and analysing volumes of data to know the purchasing pattern and peak demand points in distribution network.
Today we have many softwares that help in integrated business planning, sales & operations planning, demand forecasts, inventory optimisation and response / lead time calculations. Choose a software that fits your business needs for the best supply chain planning and execution strategies.
#sapibp
#netsuite
#oraclescm
#precoro
#anaplan
#sapscm
#netstock
#microsoft365scm
THE PULSE by Sivakumar Gopal 