As a supply chain director, supply chain cost optimization is a crucial responsibility. It is about finding the most effective and inexpensive ways to procure and store goods and transport them through your supply chain, while ensuring customer satisfaction and achieving the desired profits for your company. 

While this makes perfect sense in theory, the reality is that balancing operational efficiency and cost-effectiveness in each stage of the supply chain process is a challenging task. 

We are writing this article, to help you understand what the main drivers for supply chain cost are. We also included 4 proven methods to reduce those costs.  

Curious about the best logistics action plan for your business? Get a free consultation now!  

What is Supply Chain Cost? 

Supply chain cost is the total cost of goods and services that are purchased or acquired before and after the product or the service is delivered.  

It is defined by the manufacturers as the total cost of ownership, and it contributes significantly to the sales price of the final product or service.  

Supply Chain Cost Drivers 

“A cost that is not understood is a cost that is hard to manage!” 

As a supply chain director, you must understand the different sources of supply chain cost. It is important to assess their effect on your company’s profit margin.  

You need to consider the interrelationship of the different stages of your supply chain, and how cash flows through your company and your supply chain process. 

Let’s have a look at the main supply chain cost drivers: 

Investment Cost 

Supply chains have become more complex than ever. Suppliers, manufacturers, distributors, and retailers have extended their presence around the globe.  

Hence, it has become a business necessity for companies to look forward and make the right strategic decisions for the long term.  

As a supply chain manager, you have to make the right investment decisions about outsourcing or owning logistics facilities in the long term, such as warehouses, new trucks, factories, etc.., and allocate the suitable resources -Investment Cost- to meet the strategic objectives for you company. 

Transportation Cost 

Transportation is another main cost driver; it accounts for a massive portion of a company’s supply chain cost. 

It is the cost of moving the product from one place to another throughout the supply chain stages until it reaches the end customer. 

Procurement Cost 

The third cost driver on our list is the procurement process. Procurement cost could be defined as the investment allocated for acquiring raw materials and product components from suppliers. 

Production Cost 

For the manufacturing sector, the production cost is a considerable driver for higher supply chain cost! 

Inefficient utilization of manufacturing assets like unproductive workforce management, long machine set-up times, and manufacturing overheads such as electricity and water could increase supply chain cost dramatically. 

Inventory Costs 

The last key driver for supply chain cost is inventory cost. Managing inventory costs money!  

While a large inventory seems like a safety factor against production shortages, it is also a financial burden.  

This financial burden is due to the costs of warehousing, transportation, and workers. In addition to the cost of expired goods if they are stored for a long time.  

4 Ways for Supply Chain Cost Saving

Supply chain cost optimization is about achieving maximum ROI (Return on Investment) while maintaining the supply chain effectiveness.   

As mentioned above, the supply chain stages in today’s world are complex and interrelated. Due to this interconnection, “cost-minimizing” in one stage of the supply chain may cause a “cost spike” in another one.  

That doesn’t mean you shouldn’t seek cost-saving approaches! But you need to understand how the interconnection between different stages of your supply chain works, so you can achieve the desired supply chain cost optimization. 

In the following lines, we provide you with 4 approaches that could help you. 

1. Outsource Your Logistics 

Outsourcing is one of the most effective approaches to reduce supply chain cost.  

Starting from inventory management and goods transportation to order fulfilment and last-mile delivery, each step in your logistics is a strategic point that could help you achieve cost-effectiveness.  

logistics partners could help you in your objectives, but first, you need to be sure that they can represent your brand adequately and provide the required productivity and efficiency.  

By applying it the right way, outsourcing can lead to considerable supply chain savings. 

Find out more about how to choose your right logistics partner 3PL. 

2. Use Multi-modal Transportation  

Which transportation mode works best for your cost optimization objectives? Trucks? Ships? Or airplanes?  

Generally, ships and trains are cheaper than airplanes and trucks when shipping bulky products. Also, sea freight is cheaper than air freight . But the price is not the only factor for cost optimization!  

Transportation speed has a big effect on cost efficiency. For instance, if you use an expensive but fast transportation mode, it could end up saving cost! It will increase the shipping rate per day, in return, it reduces the amount of inventory that you could have in transit, which saves your working capital invested in managing inventory, and vice versa!

Keep in mind that alternating between multiple modes of transportation for moving the same product through the supply chain process could be a good choice for cost-effectiveness, but the route needs to be planned well. 

3. Automate your supply chain 

Automating your supply chain will help you optimize supply chain cost. 

Companies that know how to utilize technology to automate routine tasks will speed up their supply chain process four times as much as companies that depend on manual work.

Think about tasks such as monitoring your inventory and preparing orders, they take time, right? Your employees could use this time to focus on their core duties if you automate your supply chain, which will boost productivity, and help you reach your cost optimization objectives.

4. Use JIT Inventory Management

For achieving better cost-effectiveness, you can implement the JIT (Just-in-Time) inventory management system.

JIT inventory system helps you increase efficiency and decrease wasted cost through ordering and receiving inventory only when you need to – based on demand. This will lower the cost of inventory. But don’t forget that you need to forecast your requirements accurately.  

Another advantage of implementing the JIT inventory management system is ensuring that goods needed for manufacturing or delivery are always available.  

Thus, you will be ready to satisfy your customers’ demands at any time, while lowering the cost of your supply chain process.

In the end, minimizing supply chain costs is a challenging task to accomplish. You must think about the right tactics several times before starting your action plan to avoid any problems or losses.  

You need to conduct a cost-to-serve analysis to be aware of the costs that are related to your company’s overhead, customer experience, and, for sure, logistics.  

This information will help you forecast demand, plan the logistics process, plan investments, and detect the ineffective parts in your supply chain to achieve the desired cost optimization.