Executive Briefings

Breaking Free of the Supply Chain Death Spiral

Slowing growth, intensifying competition and rapidly changing consumer preference are creating rising cost pressures, driving major focus to reduce supply chain costs across industries. However, companies are stuck in an endless death spiral of cost cutting with little impact to the bottom line. Leading companies are breaking this cycle with ZBSC (zero-based supply chain)— a way to drive profitability by looking forward, continually improving bottom line results in a rapidly changing world. –Gary Hanifan, Managing Director, Accenture Strategy, Supply Chain & Operations Strategy

Breaking Free of the Supply Chain Death Spiral

Supply chain executives are stuck in an endless loop. They constantly try to eke out 3 to 4 percent in supply chain cost reductions year after year, but more often they see minimal or no change in COGS-to-revenue ratios over time.

Companies are chasing incremental savings using existing continuous improvement programs to meet historical performance benchmarks. However, by the time a company makes the necessary improvements, those benchmarks have advanced. Additionally, supply chain leaders may be delivering single-digit cost category savings in one area only to find costs ballooning elsewhere, with little noticeable or sustainable change to the bottom line. In fact, just one-third of operations executives strongly agree that they see the results of their cost reduction initiatives in the P&L statement. Complicating the matter further, many organizations work in functional and geographic silos that make it nearly impossible to know who is spending what, where—and why.

ZBSC is a sustainable reset of a company’s cost baseline. It accounts for change and improvements based on forward-looking goals, anticipated industry shifts and new technologies to determine “should costs”— and it develops a path to realize them. Accenture Strategy experience reveals that the ZBSC approach can drive 5 to 10 percent rapid COGS savings and a COGS-to-revenue ratio of up to 600 to 800 basis points over time.

The adaptive nature of ZBSC reflects the fact that it does not rely only on historical performance—or even first quartile benchmarks. Instead, it strives to develop a new “quartile zero” to set and stretch performance targets on an ongoing basis. With ZBSC, companies create visibility and optimize price and performance that break internal, functional, and geographical barriers and apply digital technologies and sustainability practices that drive future shifts in performance.

Breaking free of the supply chain “death spiral” requires making bold changes—across people, process, culture and technology—while embracing continuous improvement and embedding cost-consciousness across the organization. Companies can start with these fundamentals:

Create true visibility. Leverage financial and operational data to achieve complete visibility at a granular level to compare current state spend and performance against internal and external practices.

Focus on the intersections. Encourage collaboration across geographies and functions to identify and target opportunities at intersections of the business where best practices and emerging trends are often hidden.

Stretch past incremental. Think outside the box and embrace technology, analytics and sustainability opportunities to set zero quartile goals and “future-proof” the supply chain.

Embed a change mentality. Establish the right communications, incentives, tools and role modeling to make efforts part of the future fabric of the company, a closed loop, and not a one-time event.

The Outlook

In 2018, the pace of disruption and agile competition will continue to drive pressure to optimize costs for bottom-line impact. Cost intervention strategies stuck in the past can negatively affect a company’s ability to thrive. Companies cannot afford supply chain trade-offs; cost optimization, technology, growth and sustainability are critical to success. ZBSC is a starting point to harmonize these goals, creating a sustainable way to continually improve results and build a competitive advantage going forward.

Supply chain executives are stuck in an endless loop. They constantly try to eke out 3 to 4 percent in supply chain cost reductions year after year, but more often they see minimal or no change in COGS-to-revenue ratios over time.

Companies are chasing incremental savings using existing continuous improvement programs to meet historical performance benchmarks. However, by the time a company makes the necessary improvements, those benchmarks have advanced. Additionally, supply chain leaders may be delivering single-digit cost category savings in one area only to find costs ballooning elsewhere, with little noticeable or sustainable change to the bottom line. In fact, just one-third of operations executives strongly agree that they see the results of their cost reduction initiatives in the P&L statement. Complicating the matter further, many organizations work in functional and geographic silos that make it nearly impossible to know who is spending what, where—and why.

ZBSC is a sustainable reset of a company’s cost baseline. It accounts for change and improvements based on forward-looking goals, anticipated industry shifts and new technologies to determine “should costs”— and it develops a path to realize them. Accenture Strategy experience reveals that the ZBSC approach can drive 5 to 10 percent rapid COGS savings and a COGS-to-revenue ratio of up to 600 to 800 basis points over time.

The adaptive nature of ZBSC reflects the fact that it does not rely only on historical performance—or even first quartile benchmarks. Instead, it strives to develop a new “quartile zero” to set and stretch performance targets on an ongoing basis. With ZBSC, companies create visibility and optimize price and performance that break internal, functional, and geographical barriers and apply digital technologies and sustainability practices that drive future shifts in performance.

Breaking free of the supply chain “death spiral” requires making bold changes—across people, process, culture and technology—while embracing continuous improvement and embedding cost-consciousness across the organization. Companies can start with these fundamentals:

Create true visibility. Leverage financial and operational data to achieve complete visibility at a granular level to compare current state spend and performance against internal and external practices.

Focus on the intersections. Encourage collaboration across geographies and functions to identify and target opportunities at intersections of the business where best practices and emerging trends are often hidden.

Stretch past incremental. Think outside the box and embrace technology, analytics and sustainability opportunities to set zero quartile goals and “future-proof” the supply chain.

Embed a change mentality. Establish the right communications, incentives, tools and role modeling to make efforts part of the future fabric of the company, a closed loop, and not a one-time event.

The Outlook

In 2018, the pace of disruption and agile competition will continue to drive pressure to optimize costs for bottom-line impact. Cost intervention strategies stuck in the past can negatively affect a company’s ability to thrive. Companies cannot afford supply chain trade-offs; cost optimization, technology, growth and sustainability are critical to success. ZBSC is a starting point to harmonize these goals, creating a sustainable way to continually improve results and build a competitive advantage going forward.

Breaking Free of the Supply Chain Death Spiral