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6 ways to generate cost saving in the food supply chain

Six areas in the supply chain that consistently offer costs savings opportunities for food business of all sizes

It is not unusual for supply chain costs to represent up to 20% of the total cost in agriculture and other food commodities. With such figure in mind, even a small percentage of saving in the supply chain cost can skyrocket your company’s profitability. To make such savings, it is important to know where to look. There are 6 areas that consistently offer opportunities for supply chain costs savings for business of all sizes. Before looking at cost saving opportunities, it is crucial to understand the “cost to serve” for the different types of customers and channels. Here are some examples of how the supply chain cost to serve customers varies depending on the type of business:

• Home delivery: Due to the size and value of the delivery, this is the most complex and costly type of distribution.
• Supermarkets: Accuracy of delivery is of paramount importance. An error of delivery vs order can create delays in payments, fines and other costly implications.
• Importers and distributors: At first sight, these seem to be the easiest to serve however they also present challenges on time slots for delivery, documentation as well as restrictions on the size, shape, weight and high of pallets their forklifts can handle.

Due to such variability, it is critical that you first understand the dynamics of your customer base so you can design your service offering to meet their needs. Failing to do so, you will supply the wrong service at the wrong cost.

Now let’s take a look at the six areas that offer opportunities for cost savings:

1. Customer service

Your supply chain strategy and structure should mirror your customer’s requirements. It is simple, provide your customers with that they need and do not add costs for anything they do not see value in it. If in your customer’s eye a service, or an aspect of a service doesn’t add value, it just adds costs. Below a few examples where companies can over-serve their customers vs their actual needs:

• Offering a flat “Next day delivery guaranteed” to all customers when some do not actually require it or do not require it for all deliveries.
• Delivering orders by the box when customers accept rounded up numbers to take full pallets.
• One single delivery per order when customers accept part-deliveries throughout the day/week.
• Supplying in specific packaging when customer requirements allow generic packaging.

Understand what your customers value, and service them to meet those requirements. No more, no less.

2. Supply chain strategy

Customer’s needs understood, you can now design and implement the right Supply Chain strategy which should:

• Be clearly defined in maximum three sentences.
• Support the business strategy and goals. Regardless of whether your supply chain function is a source of competitive advantage for your business or not, it should be aligned to the overall strategy. If your core competency is quality, your customers will expect quality throughout not only from the product itself but from the service provided including supply chain. If your Unique Selling Point is price, the supply chain strategy should reflect that ensuring it serves customers at the lowest price possible.
• Be well understood and supported by all key business functions.
• Have a clear focus on the required outcomes and be tracked and adjusted to achieve targeted Key Performance Indicators (KPIs). The old saying “you cannot control what you cannot measure” is totally valid in this situation. Have clear KPIs (perfect orders, minimum and maximum stock holding, inventory to sales ratio, forecast accuracy, rate of return, units per transaction, labour utilization, asset utilization rate, supply chain costs and total cost of goods sold), monitor performance regularly and take action to correct under-performance. Different organizations will have different KPIs. What works well for one may not be relevant for another, so resist the temptation to copy what another company uses. Go through the process of setting your own objectives and targets, and then defining KPIs that give you the right measurement of your own performance.
• Be aligned to customer’s requirements. Focus your efforts on what your customers want and value. Be mindful that customer needs can change over time so your strategy should be flexible enough to adapt to those changes. Some of these changes can be temporary to accommodate seasonal peaks in demand such as Christmas, and others can be permanent due to new locations, regulation or processes. Be ready to adapt for both types of changes.

When your strategic imperatives are correctly defined and your tactics and operations fit these imperatives, then you avoid wasting money on actions that do not make a relevant contribution to your bottom line.

3. Sales and operations planning (S&OP)

The American Production and Inventory Control Society (APICS) defines S&OP as the process of setting the overall level of manufacturing output (production plan) and other activities to best satisfy the current planned levels of sales (sales plan and/or forecasts), while meeting general business objectives as expressed in the overall business plan.

The goals of S&OP include:

• Determining the balance between supply and demand.
• Avoiding wasteful production.
• Improving top line revenues.
• Optimizing resources for production.

S&OP is a straightforward concept but it is not an easy one to carry out. Signs that you might have a problem with your S&OP process include:

• High levels of obsolete stock.
• Frequent changes to your demand plan and master production schedule.
• Poor forecast accuracy—or no forecasting at all.
• Excessive stockouts.

Improving the situation can sometimes be surprisingly simple. Some examples:

• The root of the S&OP under-performance could be lack of alignment between the commercial and operational teams. This should be addressed by the leadership team to reinforce the joint collaboration and communication between both functions. Sometimes the metrics and incentives of the different functions can be in conflict. For instance, the commercial team is assessed on sales whilst the operational team is evaluated on service levels. In that case, aligning incentives across the different functions is key to improving performance.
• In other cases, the under-performance could be driven by a high proliferation of SKUs, in such case a study should be carried out to assess the necessity of all such items. Applying the 80/20 could be a feasible option (20% of the SKUs deliver 80% of the sales/profit).
• Lack or incomplete information from customers (retailers, distributors) could also be a source of S&OP under-performance. In this case, it can be addressed by implementing new ways and frequency of communication, particularly on promotional activities which creates peaks and drops in demand.

4. Supply chain network design

One of the most important requirements to achieve an efficient and cost-effective distribution network is to minimise the links in the chain. Each link adds cost and increases the risk of error and damage. Inadequate network design can lead to excessive handling, too many stock locations and poor utilization of your distribution centres resulting in high costs and poor customer service.

The blueprint for achieving a design that minimizes the links while meeting your service commitments can be outlined this way:

• Establish customer service offers.
  • Customer locations and lead time.
  • Service expectations.
• Establish supply points/lead times.
• Identify current network performance
  • Facility costs.
  • Inventory costs.
  • Transport costs (inbound and outbound).
  • Service performance.
• Test and quantify alternatives for least-cost networks.
• Consider network transformation, if the benefit will be large enough.

To achieve even the simplest revision of a supply chain network requires network modelling software and careful analysis. Appropriate analytical tools will allow you to test a wide range of cost and service options to ensure that you use optimal networks and that sensitivities such as demand increases, fuel cost increases, or changes to the customer service offer are checked.

5. Outsourcing

85% percent or more of businesses outsource some part of their supply chain operation or management. The two functions that are outsourced most often are warehousing and transport. Large corporate enterprises and small business all have good reasons to outsource although not necessarily the same reasons. Where a small business may use supply chain outsourcing to gain access to manufacturing facilities it does not have, a multinational might want to outsource to put new logistics models in place, such as omni-channel distribution.

In general, the reasons for companies to decide to outsource part (or the whole) of their supply chain are:

• Reduced operating costs.
• Quickly access to technology, space or other resources that the company would not get otherwise.
• Flexibility: ability to expand or downsize quickly.
• Efficiency: most companies are not experts in IT management, HR services or accounting functions. Companies can spend weeks, sometimes months, just finding people for a particular in-house department. By simply outsourcing basic business services, companies are able to jump right to the finish line when building a department.
• Improve service levels: Having an outside company handle non-core business activities usually leads to better service.
• Risk management: this is particularly the case when opening up new markets or new channels the company does not need fixed overheads till business is well established.
• Tax breaks: Countries like Ireland, Hong Kong, Singapore and Taiwan have very low corporate tax rates, which can have a dramatic impact on a company’s bottom line should they outsource certain services there.
• Improve company focus, freeing resources to concentrate in core business functions.

Any claim that supply chain outsourcing is automatically successful would be wrong. It has its failures like any other area of business. The reasons for such failures are varied and some include:

• Failure to understand the your business needs (look beyond cost reduction).
• Selecting unsuitable outsourcing providers.
• Ignoring expectations of your outsourcing service provider.
• Allocating insufficient time to managing outsourcing relationships, unclear definition of roles and responsibilities, or insufficient preparations for handover of activities or processes.
• Lack of appropriate KPIs.

6. Asset utilization

The aim is to get more productivity out of fewer assets. Underutilized assets, such as vehicle fleets, facilities, or inventory, mean inefficiency and poor return on investment. Changing the way assets are used or whether they are owned or leased can resolve these issues, as the following examples show:

• Instead of making early-morning deliveries and leaving truck fleets idle for the rest of the day, spread the deliveries out during the course of the day. Supermarkets get periodic “top-ups,” food-service businesses can get deliveries later in the day, and some customers even accept deliveries in the evening. Alternatively, you can offer delivery services to other business to utilize trucks after mid-day.
• Peak demand during Christmas is challenging for most food companies but it is particularly for specific sectors such as bakery, confectionary, produce, meat and drinks. Sufficient resources (warehouse) to accommodate this peak within own network would mean very low space utilization at other times of the year. Instead, during the build-up to Christmas, it is best to rent additional warehouse capacity to handle the seasonal peak. On the other hand, if your demand drops at specific times of the year, rent out your unutilized space to other companies in need of your resources.

In Summary

When companies go through the above areas of supply chain management, they very frequently uncover significant cost savings. Not all areas will need fixing and by looking one by one with an open mind a few will stand out as potential for improvement. Regardless of which area your business will focus on, the most basic principles of effective supply chain management still apply: understand your customers’ needs, define the right strategy and goals, measure results against KPIs and seek for continuous improvement.

By Luciana Vecco