10 tips for reducing supply chain logistics costs

As companies continue to manufacture and source materials from overseas, controlling costs remains a top priority for those involved in international trade. One key factor that should be monitored more closely is logistics management, which covers all activities relating to the procurement, transport, transshipment and storage of goods. Depending on the industry sector, supply chain logistics costs account from 5% to 50% of a product’s total landed cost.

Some issues effecting logistics costs: Fuel prices remain high and ports continue to experience delays, resulting in higher transportation fees. Increasingly complex international trade laws and security measurements threaten to lengthen delivery times and increase warehousing costs. According to a recent report by Technology Evaluation.com, a typical air-freight shipment takes eight to twelve days. Of this, the cargo is en route only 5% of the time. The rest is spent sitting in warehouses waiting for the required documents and compliance checks.

Following are 10 Tips on Reducing Supply Chain Logistics Costs:

1. Understand the true costs of sourcing overseas. Calculate freight, duty, brokerage, and inventory carrying costs to support these lengthened supply chains. Also factor in such items as the costs of engineers flying overseas. Once you understand the true total landed cost and total impact to the business, that domestic buy may look a lot better. Sourcing from Ohio to your U.S. plant, distribution center or customer may, in the long run, be more cost effective than sourcing from China.

2. Focus on eliminating the variability out of transit times. The more variable the transit times are, the more likely it is that the receiving party is using more premium freight, building buffers of inventory, or ordering more often and more quantity than necessary to compensate for the uncertainty. Understanding these dynamics can lead to the conclusion that paying higher freight costs to insure higher variability actually saves your company in total costs.

3. Tariff engineering. Strategically source and manufacture products to take advantage of classification duty rates and eligibility for special trade programs such as NAFTA.

4. Consolidate. If you have multiple suppliers in one country, consolidate their goods into one shipment. In addition, if you always have LCL (less than container load) shipments out of one country, try to find another LCL importer of goods from that country. You may be able to partner and consolidate to a more cost-effective FCL (full container load) shipment.

5. Informed decision-making. Provide to the decision-makers/customers of your logistics network the cost of freight for each service level, the reliability of each lane for each service level, and the true cost of carrying inventory so they can make informed decisions. People generally want to be good corporate citizens and will select the less expensive option that still meets their needs.

6. Sometimes insurance doesn’t pay. Often when a company has a shipment of premium goods they tend to use the Carrier’s Insurance. Carriers Insurance is very expensive. If the company is self-insured, which most companies are, they should check their insurance policy to see if it covers shipment of goods. If it does, then they do not need to add the extra cost of Carrier’s Insurance.

7. Automate compliance processes. Companies that implement software solutions to automate trade compliance are able to speed the cycle times associated with tasks being performed manually, such as document preparation, and eliminate the associated errors. Automated compliance procedures also bring fewer delays at border crossings, resulting in on-time delivery, adequate inventory levels, increased customer satisfaction, and the avoidance of fines.

8. Control your express shipping costs. Typically when a company runs into a supply chain issue, it will have an entire shipment sent on an express/expedited (highest cost) service level basis. Panicking often results in higher costs. If the company would just do a little bit of calculating it can determine the amount of goods that are needed immediately and have that amount sent using express/expedited service level, while the balance of the shipment can be sent using a standard (lower cost) service level.

9. Planes, trains and automobiles. Which is cheapest? In general, rail is more cost-effective than trucking or air. Water is cheaper than air shipment. No matter the mode of delivery, always try to get three quotes for movements.

10. Be aware of non-tariff trade barriers. Companies need to be more aware of the increasing level of non-tariff trade barriers that are in force to reduce sweat shop labor and support human rights and animal welfare issues. These restrictions can bring importers increased liability and compliance costs.

Spend More to Save More in SCM & Logistics

Managers who want to reduce supply chain costs need to spend more on transportation. The key to lower supply chain costs is holding less inventory. Buying more transportation lets you reduce inventory safely.

The greatest mistake that manufacturers make today is equating transportation cost reductions with total available supply chain savings. In fact, transportation savings do not even correlate with overall supply chain savings. The largest economies come from inventory reductions that often result from buying more transportation.

INVENTORY IS THE ISSUE

Inventory levels, not transportation costs, drive supply chain savings. For most manufactured products, transportation is only two to five percent of total cost. In contrast, raw materials, components, and subassemblies typically constitute 55 to 75 percent of total cost.

This reality helps explain why large cost savings result from complete supply chain solutions that reduce raw material and finished goods inventories.

Actual experience in managing supply chains highlights the strong correlation between total supply chain costs and inventory carrying costs. The 2001 Logistics Cost Surveyconducted by Herbert W. Davis found that "the difference between the 20 percent of companies that reduced cost and the 50 percent that had an increase was almost fully explained by the inventory level performance."

Current economic pressures, however, are causing some companies to buy transportation for the lowest possible price and neglect inventory management.

Mismanagement and mismeasurement are two factors encouraging this dysfunctional behavior. Most companies concentrate on reducing transportation costs because that goal fits how they manage. Even today, most transportation departments are cost centers that are not involved with inventory management. For them, success is defined as negotiating greater discounts from carriers.

Companies that concentrate on optimizing transportation discounts miss out on larger inventory savings. These companies often trade down on service levels. The most common strategies are to ship less often or to switch to slower, less-reliable modes. Each of these actions increases inventory holdings. The costs of this extra inventory more than offset any transportation savings. Thus, cutting transportation costs is a sub-optimization that produces false savings.

Another reason why companies focus on reducing transportation costs is that changes are easily measured. In contrast, measuring amounts of inventory and calculating changes in inventory carrying costs are much more difficult tasks. Companies often fail to go after inventory savings simply because they cannot measure the amount of inventory in their supply chain.

Companies can lower their supply chain costs by using new management strategies to reduce inventory safely.

First, they must stop treating transportation as a management "silo" that is separate from inventory management.

Second, companies should install technologies that provide detailed inventory visibility throughout their supply chain. These are the prerequisites for lowering inventory and achieving supply chain cost reductions.

AVOIDING FALSE SAVINGS

The largest required management change is a willingness to pay higher transportation costs in exchange for lower inventory levels and carrying costs. To succeed, managers must focus on the total cost of the supply chain rather than just transportation costs.

To avoid false savings, managers must measure and manage all costs together. Transportation decisions that do not account for changes in inventory will often result in overall cost increases while delivering apparent savings.

It is imperative that companies broaden their performance measures to include inventory investment and carrying costs so that total expenses are managed. Then, buying fast, reliable transportation will allow managers to operate supply chains with the lowest possible safety stocks.

Wellcome to Stess Logistics & E-Solutions Ltd: Reducing supply chain logistics costs

Wellcome to Stess Logistics & E-Solutions Ltd: Reducing supply chain logistics costs: As companies continue to manufacture and source materials from overseas, controlling costs remains a top priority for those involved in int...

Reducing supply chain logistics costs

As companies continue to manufacture and source materials from overseas, controlling costs remains a top priority for those involved in international trade. One key factor that should be monitored more closely is logistics management, which covers all activities relating to the procurement, transport, transshipment and storage of goods. Depending on the industry sector, supply chain logistics costs account from 5% to 50% of a product’s total landed cost.

Some issues effecting logistics costs: Fuel prices remain high and ports continue to experience delays, resulting in higher transportation fees. Increasingly complex international trade laws and security measurements threaten to lengthen delivery times and increase warehousing costs. According to a recent report by TechnologyEvaluation.com, a typical air-freight shipment takes eight to twelve days. Of this, the cargo is en route only 5% of the time. The rest is spent sitting in warehouses waiting for the required documents and compliance checks.

Following are 10 Tips on Reducing Supply Chain Logistics Costs:

1. Understand the true costs of sourcing overseas. Calculate freight, duty, brokerage, and inventory carrying costs to support these lengthened supply chains. Also factor in such items as the costs of engineers flying overseas. Once you understand the true total landed cost and total impact to the business, that domestic buy may look a lot better. Sourcing from Ohio to your U.S. plant, distribution center or customer may, in the long run, be more cost effective than sourcing from China.

2. Focus on eliminating the variability out of transit times. The more variable the transit times are, the more likely it is that the receiving party is using more premium freight, building buffers of inventory, or ordering more often and more quantity than necessary to compensate for the uncertainty. Understanding these dynamics can lead to the conclusion that paying higher freight costs to insure higher variability actually saves your company in total costs.

3. Tariff engineering. Strategically source and manufacture products to take advantage of classification duty rates and eligibility for special trade programs such as NAFTA.

4. Consolidate. If you have multiple suppliers in one country, consolidate their goods into one shipment. In addition, if you always have LCL (less than container load) shipments out of one country, try to find another LCL importer of goods from that country. You may be able to partner and consolidate to a more cost-effective FCL (full container load) shipment.

5. Informed decision-making. Provide to the decision-makers/customers of your logistics network the cost of freight for each service level, the reliability of each lane for each service level, and the true cost of carrying inventory so they can make informed decisions. People generally want to be good corporate citizens and will select the less expensive option that still meets their needs.

6. Sometimes insurance doesn’t pay. Often when a company has a shipment of premium goods they tend to use the Carrier’s Insurance. Carriers Insurance is very expensive. If the company is self insured, which most companies are, they should check their insurance policy to see if it covers shipment of goods. If it does, then they do not need to add the extra cost of Carrier’s Insurance.

7. Automate compliance processes. Companies that implement software solutions to automate trade compliance are able to speed the cycle times associated with tasks being performed manually, such as document preparation, and eliminate the associated errors. Automated compliance procedures also bring fewer delays at border crossings, resulting in on-time delivery, adequate inventory levels, increased customer satisfaction, and the avoidance of fines.

8. Control your express shipping costs. Typically when a company runs into a supply chain issue, it will have an entire shipment sent on an express/expedited (highest cost) service level basis. Panicking often results in higher costs. If the company would just do a little bit of calculating it can determine the amount of goods that are needed immediately and have that amount sent using express/expedited service level, while the balance of the shipment can be sent using a standard (lower cost) service level.

9. Planes, trains and automobiles. Which is cheapest? In general, rail is more cost-effective than trucking or air. Water is cheaper than air shipment. No matter the mode of delivery, always try to get three quotes for movements.

10. Be aware of non-tariff trade barriers. Companies need to be more aware of the increasing level of non-tariff trade barriers that are in force to reduce sweat shop labor and support human rights and animal welfare issues. These restrictions can bring importers increased liability and compliance costs.

global-logistics News

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Smart Strategies for Logistics Cost Optimization

The graphic illustration of any global logistics operation, with its complex web of vendors, warehouses, distribution centers, service operations, transportation routes and hubs, can reveal an intricate map where individual costs are difficult to separate and understand. In a world where logistical expenses typically comprise up to four to five percent of total costs for a manufacturing firm, the increasing complexity of the global supply chain applies increased pressure on margins.

Enterprises usually implement transformation technology solutions or partner with a third-party provider to manage costs. Yet, many organizations find themselves falling short of their savings goals. Why?

Growth is Good, But...

As supply chains have become more global, the logistics network has been augmented with new routes and locations. Each new link in the supply chain brings its own local complexities regarding the availability of logistics assets, local laws and regulations, and infrastructure, among others.

Other factors offer increased challenges. Finding appropriate service providers, for example, is a more complicated process than it used to be. Plus, manufacturers need to conduct periodic risk assessments to ensure that natural disasters, political developments and other factors beyond their control are not looming as an incipient threat to production and fulfillment.

A Three-Pronged Weapon Against Complexity

Most organizations try to tame complex supply chains by deploying expensive technology tools, hiring consultants for business process re-engineering, or, more recently, deploying exotic analytics frameworks.

Alone, none of these solutions can produce the type of savings needed to outcompete in this new, more complex and more competitive economy. What is required is a smart mix of process, analytics and technology to simplify the logistics networks, mitigate logistics risk and optimize the associated costs. We call this a three-pronged holistic approach

1. Process Design and Development

“Smarter” processes are the key to more cost-effective operations. This means that organizations serious about creating more streamlined and more effective networks need to look at their operations in detail before beginning any redesign of logistics processes. This involves deep analysis to:

·         Develop a granular view of the process activities (carrier identification, logistics spend analysis, etc.);

·         Define key performance indicators such as asset utilization and median loading time and then link them to the business outcome of particular costs;

·         Identify the drivers of outstanding cost performance; for instance, building multiple “what if” scenarios for networks to estimate impact on costs;

·         Benchmark against industry standards for cost management in order to understand current performance gaps;

·         Implement best practices to improve costs and sustain process performance.

Businesses that take the time to do a detailed and thorough analysis of operations from end-to-end and across the global footprint can yield deep insights that will support a new, more effective—and less costly—logistics network. By analyzing current processes, organizations can identify process steps where cost leakages occur. Some process steps may add little or no value; others may need enabling technology tools in order to maximize efficiency and increase cost effectiveness.

Here are a few real-world examples from deep analysis:

·         After a pharmaceutical major conducted a thorough analysis of logistics processes for an acquired company and standardized processes, it was able to identify cost optimization opportunities of 25 percent.

·         A chemicals leader achieved five to seven percent cost savings through revisiting processes related to shipping frequency, reassignment of supplier-warehouse combinations and set up of ‘milk-runs.’

·         A life sciences major identified 13 percent potential baseline freight cost savings by analyzing logistics management processes and finding opportunities to increase consolidation of shipments.

2. Analytics

Leveraging analytics frameworks for analyzing cost performance is a powerful driver for lowering overall costs. Network design analysis, route/mode selection, and logistics spend analysis are a few of the areas where analytics can be leveraged. For businesses to be most effective, they should use tools that can simulate different scenarios of various parameters such as lanes, routes, infrastructure constraints, customs clearance practices, logistics modes and asset utilization. With this data in hand, the logistics organization can better understand the impact of costs from various combinations and design their networks accordingly.

A number of tools are currently available to analyze costs, including network optimization, carrier sourcing and freight lane analysis. Selection of a logistics analytics tool should be based on: 1) its ability to rapidly study various “what if” scenarios in order to make processes more effective in achieving the business outcomes of cost, and 2) its ability to identify risks and assess the cost impact of such risks on logistics networks.

For instance, one chemical manufacturer created and analyzed multiple scenarios for distribution centers, an optimization effort that generated savings of 17 percent. Another manufacturer leveraged analysis to identify recoverable costs from suppliers, then set up detailed reports and dashboards to increase visibility into various logistics costs components.

3. Enabling Technology

Technology in the absence of deep understanding of processes may not be effective in optimizing logistics costs. Simply upgrading the software, without better processes, may actually make the problem worse as employees try to make old processes work with new tools rather than using the tools to support more effective standardized global processes. The selection of technology therefore must be driven by the tool’s potential to:

·         Simplify processes (reduce hand-offs, approvals, automate process steps);

·         Expedite exception handling (reduce the number of exceptions, auto-resolve commonly occurring exceptions);

·         Reduce systems/applications complexity (standard interface, fewer middleware applications required, better workflows).

New Challenges, New Approach

Global logistics networks are an integrated, evolving creation. If a business wants to create a best-in-class network, it needs to develop a deep understanding of the risks and costs associated with multiple logistics partners, geographies, products and technology tools. At the same time, an organization cannot depend on process or technology alone to provide the end-to-end improvements that drive true cost savings.

Consistently reducing and optimizing costs without increasing logistics risk can only be achieved by intelligently combining industry-specific analytics frameworks, the right technology tools and logistics processes engineered for effectiveness as well as greater efficiency.

Improving Cost & Efficiency in the Energy Supply Chain

Maintenance, logistics, and materials management professionals in upstream and downstream production are facing challenging times. Price volatility and increasing operating costs are causing energy companies to scrutinize sourcing strategies and the costs associated with vendor managed inventory (VMI), consignment, and integrated supplier programs. Additionally, more difficult oil and gas extraction methods — such as tar sands extraction and hydraulic fracturing — require large capital investments in order to maintain adequate reserves and meet the increasing need for energy. On top of these added complexities and expenses, safety regulations have become more stringent, driving up production and personnel costs. Energy companies have responded to the escalating cost of doing business by looking for savings in the indirect material supply chain. Unfortunately, cutting costs can defeat efforts to develop a more efficient indirect material supply chain that meets changing marketplace requirements. As a result, companies are struggling to optimize maintenance, repair, and operations (MRO) functions. In order to achieve performance goals, improve productivity, and make sound business decisions, it is critical that companies have robust and timely information. In the MRO industry, three trends address the increased pressure to gather this vital information: Critical KPIs for materials management. Today, few organizations have robust visibility into the components of their materials management performance and MRO spend. Because discreet supply chain nodes are not fully controlled and measured by product, it is challenging to isolate end-to-end cost management and performance improvements. To truly understand how efficiently or inefficiently an indirect supply chain is working, companies need a big-picture view of its processes and costs. Having the right metrics in place can track and provide the depth and breadth of data needed to manage the indirect materials supply chain. Comprehensive key performance indicators (KPIs) serve to establish cost-effectiveness and identify areas for improvement in productivity. For a more robust tracking and panoramic supply chain view, a 3PL can provide Level 1 KPIs (such as total inventory value and inventory accuracy), plus those that demonstrate a more integrated supply chain management perspective (such as warehouse productivity, stock outs, and receiving/shipping accuracy). C-level focus on supply chain. MRO has great potential to contribute to business goals. Since significant cost savings can typically be found in the indirect material supply chain, C-level awareness and focus on this part of the business is growing. In order to pave the way for that success, the need to identify and eliminate waste, improve supply chain productivity and standardize effective processes across sites has become vital. Drive for external expertise. Projects in the energy industry now involve cross-border supply chains, work in remote sites, and the use of unconventional extraction methods. As a result of the evolving business environment in the gas and oil sector, many companies are realizing they do not have adequate MRO expertise to accommodate the increased expectations. One approach to address these challenges involves hiring people with extensive MRO oversight skills, or investing the time in training current employees in a range of specific disciplines. BE READY FOR WHAT'S NEXT Capital projects such as well completions, small and large construction, pipeline expansions, and other projects involve significant amounts of high-value materials being direct-charged in a non-stock status. Energy companies are recognizing that material stewardship and preservation in these environments can significantly reduce over-buying, expedited transportation, and wasted downtime at the job site. Having a partner that can help manage the paperwork and materials process, allows companies to eliminate the need to reorder lost materials that can delay projects. Many companies will compensate for lost parts by overbuying by as much as 20 percent to ensure they have the inventory when they are ready for the part. Particularly in emerging markets, it is critical to have a partner that can take control of the paperwork, manage material effectively to new sites, and understand the local environment. Dealing with the ever-increasing internal and external pressures to meet both business goals and regulations, many oil and gas professionals are choosing to outsource areas of the supply chain to third-party logistics providers that have the expertise to offer custom solutions based on best practices. As the energy industry moves into its next phase of development, a company needs full confidence that its partner will be able to provide the support and expertise in indirect material supply chain management.