An important metric used to measure spend management is purchase price variance (PPV), but what is PPV and why is it important for supply chains?
6 Cost Reduction Strategies in Supply Chains
In these challenging times, many businesses will be looking for strategies to reduce their costs. Even in normal conditions, it is good practice to see where you can save money in your supply chain, so here are six cost reduction strategies that could help.
Create a supply chain strategy
Creating a supply chain strategy should be the first step in your plan to reduce costs. Start by mapping out all the links in your chain, including all suppliers, manufacturers, distributors, and customers, so you have a comprehensive overview.
You need to be flexible in your approach and look at alternatives for each stage of your production before the product reaches the customer to see where procedures can be simplified, where suppliers can be consolidated and if there are any processes that are currently outsourced and could instead be owned.
Manage your excess stock
Whilst there are some benefits to having a full inventory, such as quicker turnaround times on orders, holding excess stock could actually be costing you money because it ties up your cash flow. If the stock you’re holding is surplus to requirements, then you will also be spending unnecessary money on storage costs.
You also run the risk of the products or components in your inventory becoming obsolete if the market, your manufacturing methods, or product specifications change. If this happens you will likely have to sell the stock on at a lower price.
Automate where possible
Many processes within the supply chain can now be automated and doing so can be a very effective cost reduction strategy. Administrative processes like invoicing, payroll, and placing orders are all huge time sinks if they are performed by staff when their time could be more effectively spent elsewhere.
Automation programs increase the speed of these processes, can be run outside of business hours and also reduce the risk of human error, and such mistakes can potentially be very costly to a business.
Inefficiencies in the supply chain cost money, so identifying these problems and rectifying them is crucial if you’re looking to reduce costs. Inefficiencies can take many forms in a supply chain, from manufacturing to admin to ordering and stock control.
To identify these inefficiencies, you need to look at the data – how long is it taking to manufacture your products and how many workers does it take? How many different suppliers do you use for your components, and are you constrained by having to meet minimum orders?
Some of these inefficiencies may require you to spend more money, such as if you need to upgrade your manufacturing equipment or hire more staff, but once your operation is more efficient, it will start to reduce your costs.
Sales forecasting is one of the best cost reduction strategies for supply chains. By looking at your sales data, you can work out at which times your products sell in the highest volumes, and when certain products don’t sell at all. Using this data, and by working with your suppliers, you can manage your stock more effectively, only ordering the components you predict you will need.
This will help curb your spending on unnecessary stock and, as an added bonus, your suppliers will be in a better position to provide the components in the volume you require. This is because they will be aware well in advance and be able to keep the stock aside.
Find a distributor who can source what you need at the best price
Our final cost reduction strategy for your supply chain is to work with a distributor who can source products at the best price. For example, here at Rebound, we are an independent electronic component distributor, and as such are uninhibited by UK franchise agreements which allows us to source components worldwide and at the lowest possible cost.
This global and flexible approach allows us to navigate the volatile market which can often lead to shortages and a slowing of production for many CEMs and OEMs.
Whilst we are currently in unprecedented circumstances, implementing cost reduction strategies in your supply chain will not only help you navigate the pandemic, but thrive and hopefully see higher profits when businesses are once again operating normally.