The Benefits of Supply Chain Optimization
How many times have you seen one department identify a cost saving opportunity that ends up having a detrimental effect on other departments? There is almost always a trade-off for cost saving initiatives that may end up negatively affecting other facets of the business, but have you ever had an analysis conducted to determine which initiatives achieve an overall positive effect and which ones are only positive for the department but end up being overall negative?
A holistic view of your supply chain initiatives can help to minimize silos that we so often have, and it can also increase transparency.
For example, let's say you are considering a new source for a component of the widget that you make. Maybe you have many options, such as the US, Mexico, and China. Let's set aside for a minute any assumptions that we might make about the quality of components produced in any of those countries or their ability to produce the volume at the rate that you desire. Let's only consider the other risk factors involved in procuring our component part from one of these countries.
The components may be significantly cheaper to source out of Mexico or China, even if we considered any tariff risk that there may be in the future. But, should we not consider other costs and risks, too?
What about transportation cost? Not only might it cost more to transport ocean freight from China or ground freight from Mexico than from the US, the transit time would be significantly higher. Depending on your freight terms, you may own the components as soon as they ship from the supplier, meaning these are added to your balance sheet before they even arrive at your factory. This means you have more freight in transit with the Chinese or Mexican sourced components than those sourced from America.
Whether this increased transportation cost and increased balance sheet asset of in transit freight is worth the reduced purchase price is up to you to calculate the costs and benefits. Your Purchasing team may be patting themselves on the back for their cost savings while Finance and Transportation may beg to differ.
There are additional risks, as well, such as damaged freight in transit and late freight arrival, both of which can affect your delivery performance to your customer base. There is also the added cost of managing the Customs brokerage side of the operation, whether internal or outsourced.
This is not meant to be a manifesto against foreign sourced products. Quite the opposite, as a matter of fact. I believe that we live in a global economy where the trade barriers will eventually come down, along with transportation costs.
The point is that considering all of our options in our decision-making process is vital, and conducting a full analysis of the existing opportunities available to us is what can help us to really drive supply chain efficiency rather than driving cost savings in one department at the detriment of another.
Titanium Consulting, LLC specializes in end-to-end supply chain analysis and process improvement. If you would like to find out if there are improvements to be had in your supply chain, then contact us to conduct an analysis of your supply chain.
Brad Couvillon, CPIM, CSCP
Lean Six Sigma Black Belt
Founder, Titanium Consulting, LLC