Introduction
The current economic and business environment is now a major challenge for many organisations. Rising input prices and energy costs, higher labour costs and increasing interest rates are impacting on companies’ finances by squeezing margins and reducing customer demand. Until such time as the current challenges start to ease, the prudent course of action, for many organisations, has been to maximise cash reserves by lowering working capital and reducing costs. For many, the supply chain is a good place to start as it often represents a significant proportion of an organisation’s controllable costs and an area where cost reductions can be achieved relatively quickly.
The Davies & Robson team has compiled some practical strategies to support the reduction of costs in the supply chain.
Contents:
Inventory
Inventory of finished goods and raw materials absorbs working capital, and incurs financing charges and direct operational costs which include:
- Storage costs – Rent rates and utilities
- Damage and obsolescence costs
When interest rates were low and in the face of a demand for maximum product availability, it is easy to see the attraction of increasing inventories. With interest and operating costs increasing, the challenge now is to review the balance between inventory purchasing costs, inventory holding costs and sales income to ensure the optimum level of inventory by SKU or product group is achieved. Key questions to ask include:
- Have products been correctly classified with regards to required availability ranging from 100% availability to "order on demand"?
- Could the product range be reduced with minimum impact on sales?
- Have slow movers and obsolete products been cleansed and turned back into cash?
- Is it possible to reduce minimum order quantities placed on suppliers?
- Is it possible to reduce supplier delivery lead times in order to reduce level of safety stocks? This is particularly pertinent for products bought from the Far East.
- Is it possible to take advantage of impressed stock?
Warehousing Costs
A significant amount of unnecessary costs can be absorbed as a result of inefficient warehouse operations. Key focus areas to reduce costs fall into the following categories:
Design
The design of a warehouse will have a major impact on its operating cost. Key principals include:
- Adopting the most appropriate storage systems to make the most effective use of the space within a building. This will typically include the most effective use of wide aisle and narrow raking or the use of mezzanine.
- Adopting the most appropriate picking methods to minimise travelling and product handling times. This can be as simple as correctly position fast and slow movers, to the introduction of conveyor systems or the use of live carton storage to minimise the distance travelled by the picker. Where appropriate batch picking or ‘pick to zero’ may be preferable to single order picking. The fastest way to reduce warehouse operating costs is to improve the efficiency of warehouse labour and product picking and despatch costs represents the greatest proportion of such costs.
Systems & Processes
Today, organisations have a choice of numerous WMS (Warehouse Management Systems) that can be implemented with minimum configuration, and most are designed to operate with a wide range of business software. Key benefits should include:
- Fast and accurate data to avoid double keying from one system to another.
- Ability to direct or control resources in the warehouse to maximise productivity.
- Comprehensive management information.
- Accurate tracking of all products into through and out of the warehouse to maximise customer service and minimise stock losses.
Considerable time can be wasted in a warehouse as a result of unnecessary waiting time or disjointed processes. By process mapping it may be possible to identify opportunities to improve productivity and therefore cost.
Automation & Robotics
As labour costs have risen, the use of automation and robotics has also increased. The most sophisticated systems tend to be found in larger operations but even in smaller to medium sized operations there is still an opportunity to reduce labour costs. The most common systems include:
- Vertical or horizontal carousels or lifts for small item picking.
- Automated pallet putaway and retrieval systems.
- Use of pallet stacking robots.
- Use of conveyors with sortation systems to minimise time spent by staff in perambulation or sorting.
Transport Costs
Increases in fuel and labour costs have significantly impacted transport costs. A situation that can be further exacerbated for own fleet operators if delivery volumes have fallen leading to a reduction in drop size and drop density
For dedicated fleet operations key focus areas to reduce costs include:
- Reviewing order lead times and frequency of delivery particular for more remote areas.
- Reviewing minimum order quantities.
- Remodelling the operation to determine:
- Optimum fleet size – number of vehicles
- Optimum fleet mix – size of vehicles
- Optimum use of subcontractors and network service providers
- Determining opportunities to reduce empty mileage by backloading.
- Reviewing effectiveness of load planning team. Have they adapted to changes in the operation.
- Reviewing use of load planning software.
For carrier operations key focus areas to reduce costs include:
- Avoiding the use of premium services when not necessary.
- Ensuring that services have been charged correctly.
- Ensuring that services are appropriate for the traffic task. g. could several drops be undertaken by a subcontractor as a load rather than a network carrier or would a pallet network carrier be more effective than a parcel carrier for a particular order.
Review Of Infrastructure
For organisations that operate from multiple warehouses, the recent changes in supply chain costs may make it worthwhile to consider whether you have the optimum infrastructure and whether it is being used correctly. In addition to the increased direct operational costs of multiple warehouses, increased sites mean additional inventory and additional stockholding costs.
Depending on the operation, now maybe a good time to review the number of warehouses and consider how they are being used.
Key questions include:
- Would it be more effective to hold stock in fewer warehouses and cross dock to serve specific geographical areas?
- Do you have the optimum number of warehouses and are they the right size in the right locations?
The answer to these questions is likely to be found through computer modelling the operations against a series of different scenarios. The key variables within the modelling process include:
- Service level requirement.
- Infrastructure costs.
- Warehouse operating costs.
- Transport costs.
- Stockholding costs.
Once a model has been built, it can then be used to evaluate different trading scenarios but also in evaluating different service levels, products profitability etc.
Davies & Robson Support
Davies & Robson has spent a lifetime helping companies reduce costs and improve their operations. If you would like to know how we could support your organisation please call us on 01327 349090 or email info@daviesrobson.co.uk.
