Executive Briefings

Customers Increase Focus on Cost Reduction in Face of Soft Economy

In these tough economic times with revenues likely coming up short of expectations, logistics service providers will increasingly be pressured to help lower costs for customers, but not just by squeezing existing rates. Customers need help with lowering network inventories and reducing the total cost to serve by executing demand-driven strategies, enhancing trading partner collaboration, and revisiting the network flows for optimal configuration.

Most every company will be faced with stagnant if not decreasing revenues over the next several quarters as the economic slowdown runs its course.  While we've already seen significant reductions in staffing to reduce costs, companies know they can't cost-cut their way to growth.  Growth is sustained through process innovation and productivity gains-achieving more with less investment.  Recently, and deservedly so, the supply chain has come under the microscope for process refinement, productivity, and reduced total costs.

In order to significantly remove bottom line costs from the balance sheet, we may likely see companies increase layoffs and facility shut-downs, which will bode well for logistics service providers. They will likely be called on to outsource these operations and turn the liabilities into expense items as well as achieve the desired productivity improvements and cost reductions.  Research has shown that while many LSPs have the process capabilities, not all are ready for the challenge, especially when it comes to the technological capabilities required to achieve greater results.  Nevertheless, there are at least three major areas where LSPs can help their customers achieve better supply chain performance and lower total cost to serve:

Employ demand-driven strategies to right-size network inventories to demand-By changing the supply chain orientation from a strict make-and-push model to a better balance of pull-push, companies are seeing dramatic affects across key business performance metrics, such as using less inventory to fill more perfect orders at lower total supply chain costs.  By looking "outside-in" instead of "inside-out", greater demand visibility is improving forecasting errors and the costly negative actions that so frequently follow them.

Improve trading partner collaboration and synchronization-The only way for the corporation to benefit at the next level of productivity and performance is to orchestrate its supply chain on behalf of its own benefit.  The supply chain is such a connected network of customers, goods suppliers, and logistics partners that the ultimate value cannot be achieved without the synchronized coordination of the network parties.  This collaboration takes a high degree of near-instantaneous communication.  True coordination can only take place on top of that connection infrastructure. Multi-party plans, activity execution, events and notifications are all part of what needs to be managed for peak performance.

Model out of date supply networks for optimal total cost to serve-Most supply chain networks are out of balance for the characteristics of today.  Whether it be a change in global manufacturing or sourcing, increased fuel and energy costs, sustainability initiatives, or inventory excess or shortage, it is difficult to get peak performance out of existing networks that were designed with very different assumptions.  Total cost to serve analysis and modeling is fundamental to achieving major supply chain cost reductions and top performance.

The Outlook

Smart logistics service providers will place an added importance on cost reduction in their efforts to serve customers in these tough economic times.  But tactical transactional measures won't achieve the kinds of reductions customers need-now is the time for more advanced supply chain improvement initiatives. Companies that make headway on these kinds of strategic supply chain improvements now will be much better positioned to pull away from competition when the economic tide begins to rise.

Most every company will be faced with stagnant if not decreasing revenues over the next several quarters as the economic slowdown runs its course.  While we've already seen significant reductions in staffing to reduce costs, companies know they can't cost-cut their way to growth.  Growth is sustained through process innovation and productivity gains-achieving more with less investment.  Recently, and deservedly so, the supply chain has come under the microscope for process refinement, productivity, and reduced total costs.

In order to significantly remove bottom line costs from the balance sheet, we may likely see companies increase layoffs and facility shut-downs, which will bode well for logistics service providers. They will likely be called on to outsource these operations and turn the liabilities into expense items as well as achieve the desired productivity improvements and cost reductions.  Research has shown that while many LSPs have the process capabilities, not all are ready for the challenge, especially when it comes to the technological capabilities required to achieve greater results.  Nevertheless, there are at least three major areas where LSPs can help their customers achieve better supply chain performance and lower total cost to serve:

Employ demand-driven strategies to right-size network inventories to demand-By changing the supply chain orientation from a strict make-and-push model to a better balance of pull-push, companies are seeing dramatic affects across key business performance metrics, such as using less inventory to fill more perfect orders at lower total supply chain costs.  By looking "outside-in" instead of "inside-out", greater demand visibility is improving forecasting errors and the costly negative actions that so frequently follow them.

Improve trading partner collaboration and synchronization-The only way for the corporation to benefit at the next level of productivity and performance is to orchestrate its supply chain on behalf of its own benefit.  The supply chain is such a connected network of customers, goods suppliers, and logistics partners that the ultimate value cannot be achieved without the synchronized coordination of the network parties.  This collaboration takes a high degree of near-instantaneous communication.  True coordination can only take place on top of that connection infrastructure. Multi-party plans, activity execution, events and notifications are all part of what needs to be managed for peak performance.

Model out of date supply networks for optimal total cost to serve-Most supply chain networks are out of balance for the characteristics of today.  Whether it be a change in global manufacturing or sourcing, increased fuel and energy costs, sustainability initiatives, or inventory excess or shortage, it is difficult to get peak performance out of existing networks that were designed with very different assumptions.  Total cost to serve analysis and modeling is fundamental to achieving major supply chain cost reductions and top performance.

The Outlook

Smart logistics service providers will place an added importance on cost reduction in their efforts to serve customers in these tough economic times.  But tactical transactional measures won't achieve the kinds of reductions customers need-now is the time for more advanced supply chain improvement initiatives. Companies that make headway on these kinds of strategic supply chain improvements now will be much better positioned to pull away from competition when the economic tide begins to rise.