Simple Strategies to Streamline Supply Chain Management
The Proper Supply Chain Approach Mitigates These Costs
To drive this point home, most inventory analysts agree that all these factors above, and some others not mentioned, are the reason why it costs companies anywhere from 25% to 30% annually in inventory support costs. So, if a company had an inventory worth $1 million, it could cost anywhere from $250,000.00 to $300,000.00 to support that inventory! Therefore, for every 3% to 5% reduction in inventory costs, a company saves approximately $30,000.00 to $50,000.00 annually based on a $1 million inventory value.
The Business Value of Supply Chain Management
Continuing on the example above, how much sales would it take the company to generate $30,000.00 to $50,000.00 of profit? Well, in some cases, it can take $8.00 of sales to generate $1.00 of profit. Using this as a reference, it would take $240,000.00 to $400,000.00 of sales to generate the same return. This is the ultimate business value of supply chain management. Reduce these costs and companies will save money and increase profit. However, how is this done?
Vendor consolidation: Consolidating vendors is an excellent way to reduce both hard and soft costs. First, by purchasing larger volumes from fewer vendors, companies use their economies of scale to reduce pricing, as well as lower their per unit freight cost on incoming parts. These savings are hard cost savings. Soft cost savings include fewer bill payments and less time spent managing multiple vendors.
Contractual supply agreements: Want to reduce your monthly holding costs and damage to inventory? Well, the right supply agreement with a company’s vendors can not only reduce monthly inventory holding costs, but dramatically reduce the costs associated with damaged inventory. As long as it remains at the vendor’s facility, the company can’t be liable for any damages.
Stronger inventory/sales forecasting: Sales and inventory management often lose track of each other’s responsibilities and therefore become too centrally focused on their own priorities. This is especially true in large corporations. While it’s much easier said than done, improving visibility between sales forecasting & inventory demand plays a pivotal role in cost reductions. Sometimes the solution really is better communication.
Understanding all the costs of inventory is just one aspect of better supply chain management practices. Concentrating solely on purchase price, while ignoring other factors, will only lead to higher costs in the long run. The business value of supply chain management is that every $1.00 in savings goes directly to the company’s bottom line. Now, that’s a solid return!