Supply Chain Optimization
Identifying the Opportunities
A multi-billion dollar manufacturer of consumer electronics products was having a profitability issue and needed to reduce its cost of goods sold. As a result, Establish was engaged to benchmark the company’s supply chain costs by product category and function (transportation, warehousing, inventory carrying and administration) to those of similar/competitive companies so that cost reduction opportunities could be identified and prioritized.
Establish found, using a benchmark comparison group that represented over an 80 percent market share for each product category, that generally all functional costs were high and that transportation costs, which was the largest component of the supply chain spend, were unusually high and presented greatest cost reduction opportunity.
The initial project originating from the benchmarking initiative was to identify the underlying reasons for the high transportation spend and then to specify the actions required to reduce the spend while maintaining or improving carrier delivery performance. Extensive data was gathered, analyzed and evaluated on the shipment modes, lanes (origins and destinations), customer delivery requirements and carrier performance levels, the tendering processes including release values, carrier handling processes, carrier claims, etc.
These evaluations, coupled with our observations and functional expertise, enabled us to specify changes in most of the areas evaluated. Since claims have a significant impact on carrier rates, we were particularly attentive to the areas that had an impact on them. The changes not only improved customer service performance levels, but also ultimately facilitated the subsequent carrier rate negotiations that followed.
With the specified changes in place we then established carrier negotiation targets by mode for contract modifications and related rates and surcharges. Candidate carriers were selected and negotiations commenced.
Of course, the potential reduction in claims became a critical negotiation factor and this, along with our negotiation methodologies and our expertise/experience in negotiations, enabled us to realize a reduction in our client’s overall annual transportation spend of 10 to 12 percent.
Once the new transportation agreements were in place we were ready to address the configuration of our client’s logistics network to achieve further savings. Our initial review of the network indicated that there were location consolidation opportunities that not only reduced costs but also improved the product flows through the network.
We prepared and validated a model of the existing network and tested the consolidation opportunities. The consolidation strategy we ultimately developed enabled our client to further reduce its overall supply chain (transportation, warehousing, inventory carrying and administration) spend by an additional 15 to 20 percent.
Our client implemented the reduction improvements as they were identified and the reductions in the spend were immediately realized.
Note: Establish was held accountable for achieving the reductions identified.