Consultants in Logistics

Back to Business: Cost Control

Back to Business: Cost Control

Supply chain operations are feeling the pressure of, and adjusting to the unprecedented change brought about by the worldwide response to COVID-19: implementing alterations to the work environment and processes to accommodate social distancing, dealing with interrupted or unpredictable inbound supply of goods or materials, looking for ways to respond to vastly increased or decreased demand.  These challenges or opportunities are unlikely to be the only ones we will face.  Although, with limited previous experience of disruption on this scale – and details of the future trading relationship with the EU yet to be determined – there is no reliable prediction for the next 6, 12, or even 18 months.

All organisations facing this ongoing uncertainty – whether fully operational, partially operating or preparing re-start operations – must be mindful of the true cost to serve.

Ryanair gave a timely illustration of this last week when Michael O’Leary stated their planes would not fly with middle seats empty because “we can’t make money on 66% load factors”.  The ‘no frills’ approach of Ryanair and the discount retailers may be the philosophy to follow when devising medium- to long-term strategies to adapt to the uncertainties posed by a future with COVID-19.

Right now, some short- and medium-term tactics are needed to identify, monitor, manage or reduce operational costs while these strategies are being developed.  The Davies & Robson consultants outline three tactical tips to get you started:

Rationalise Service & Supply

Rationalisation is an effective approach, for organisations facing changed or unpredictable demand and reduced efficiency due to social distancing measures, to simplify operations and improve profitability.  The Pareto principle – focus on the 20% of products, services and customers that generate 80% of the income – is an effective approach that can also be tailored to your needs.

Have your demand data analysed to identify the ranking of products and customers to be prioritised and to determine the optimal stock levels needed. Use this analysis for the basis of your rationalised service offering, and to re-configure the warehouse to maximise service levels and cost-effectiveness.

In the short-term these straightforward rationalisation steps can be taken:

  • Reduce product range: limit availability to ‘essential’ or high demand products, or those with ample stock on hand or reliable inbound supply. Incrementally increase the range as operations stabilise.
  • Restrict order quantities: stipulate minimum order quantities such as full case or pallet quantity.
  • Require minimum order values: ensure order values warrant the fulfilment costs, if not apply a surcharge.
  • Reduce delivery frequency: switch from next-day to named-day deliveries to ease workload and transport planning.
  • Enforce strict order cut-off times: create the time to optimise picking activity and load planning.
  • Prioritise top-tier customers: temporarily suspend supply to low-value / low-volume customers to protect product availability and service delivery.
  • Regulate internal customer orders: allocate centrally rather than allowing free order and switch from ‘push’ to ‘pull’ to better manage product availability throughout the supply chain.

Understand, Evaluate & Tackle Waste

Lean identifies 8 wastes: motion, waiting, transport, over-processing, over-production, inventory, defects and under-utilisation of people.  With inventory, motion and transport being the fundamentals of distribution operations, it would be easy to reject the principle of waste identification and reduction or elimination!  However, the most efficient and cost-effective distribution operations are those that apply Lean thinking to the design of their processes and layouts.

Tackle obvious wastes such as the following examples:

  • MOTION – minimise movement in your warehouse operations: pick, replenish and putaway in smaller work zones; place commonly ordered product together; locate bulk stock near to the pick-face; position fast-moving product closest to dispatch; use dedicated ‘runners’ or conveyors for movements between processes.
  • INVENTORY – avoid holding surplus: optimise order triggers using ‘pull’ principles; rationalise product ranges; restrict safety stock to the fastest moving products or where supply is notoriously unreliable; act on very slow-moving and obsolete stock, get it out of the way.
  • TRANSPORT – prioritise load-fill: use a range of transport solutions, e.g. parcel or pallet carriers until drop densities grow; set named-day deliveries by region and/or customer; facilitate effective pallet-building for transport optimisation; deliver bulk orders direct from supplier.

Be Agile; Learn & Adapt Quickly

There has been limited forward-planning information released by the UK government to date; their guidance and that from the WHO is being updated daily.  Current restrictions are expected to be lifted gradually – with possible pause or even roll-back – as the incidence and effect of coronavirus is monitored both in the UK and around the world. 

Organisations will need to identify and respond to change arising at each stage as restrictions are eased.  We recommend the management team conducts a daily review of the current status and any new intelligence to frequently adjust tactics in quick response to any changes:

  • SET UP A WAR ROOM:
    • Have a daily review with key personnel to view current operations, demand and supply issues.
    • Implement key drivers for rapid insight into outbound order demand and fulfilment; inbound supply and shortages; space utilisation and availability; staffing levels and productivity; vehicle and driver utilisation.
    • Capture lessons learned from current operations for use alongside key driver information to revise capacity and capability: revise operating procedures; adjust shifts, resources and supervisory plans; expand or reduce supply and/or service rationalisation; delay, cancel or expedite inbound orders; increase or decrease vehicle utilisation, adjust transport plans.
    • Hold daily supply chain reviews with key suppliers, partners and customers to understand supply chain interdependencies. Share demand data and other intelligence with suppliers to inform their production or shipping schedules.  Support customers with direct communication, be honest, ensure promises can be met before being given. Provide insight to transport partners and any other third parties to assist their planning and ability to support.
  • BE SMART:
    • Phase re-opening of multi warehouse operations, relocate product groups for supply from fewer sites whilst furlough options remain available.
    • Phase return of staff from furlough only when they are needed and will be fully utilised.
    • Likewise, keep dedicated fleet mothballed, use couriers for smaller loads.
    • If floor space is compromised by social distancing measures erect a temporary building or even a marquee in the yard.
    • Consider options to support key suppliers or customers, if they are struggling, to avoid the knock-on consequences should they go into administration.

 

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