Is your supply chain in a death spiral?
While growth slows in consumer markets, competition is intensifying and product life cycles are speeding up. There is now added pressure on companies to boost their budgets and target growth through a combination of acquisitions, product innovation and digital technologies.
According to a recent report by Accenture, with half of a company’s costs in the supply chain or cost of goods and services (COGS), reducing supply chain costs has become a major focus. However, Accenture warns companies are not realising cost savings for competitive agility. “They eke out three to four percent in category reductions year after year,” notes the report. “But most never make a sustainable bottom line impact on COGS, with most companies seeing no or minimal change in COGS-to-revenue ratios over time.” Confidence in the perceived ability to transform is clearly lacking. For example, Accenture’s report found that just 33% of operations executive see their cost intervention initiatives as durable, while only 18% think leadership has the right initiatives for cost reduction targets.
Executives have not turned a blind eye to systemic supply chain issues, but most are simply not achieving sustainable results. “An analysis of 20 leading products and consumer companies shows that since 2010, most have seen COGS as a percent of sales remain stable or increase, even though almost all have continuous improvement and COGS-focused reduction programs,” states the report. The top companies have seen only two to three percent improvement says Accenture, which found that because “many organisations work in functional and geographical silos”, it’s often impossible to know who is spending what, where and why.
The challenge of targeting this problem is already being addressed with the zero-based budget (ZBB) – which means going back to the drawing board with your budget on a regular basis to justify every expense. It’s an approach companies with huge supply chains, like Coca-Cola and Kraft-Heinz, have embraced to save money through the axing of thousands of unnecessary jobs, the closure of inefficient factories, the sale of corporate jets – and even going as far as requiring workers to ask permission before making colour photocopies. This might appear extreme but it’s catching - last autumn, telco giant Verizon revealed plans to cut $10bn in costs by 2021 through the implementation of ZBB.
“The reason this has become sexy again, in terms of corporations, is because everything needs to be approved,” says budgeting expert Neale Godfrey, head of educational organisation the Children’s Financial Network and former President of The First Women’s Bank. “Because zero-sum budgeting really makes you examine your expenses, you can see where you’re spending your money. So, budget items aren’t just automatically pushed through anymore.”
This forensic approach is being applied to the supply chain at Unilever to accelerate improvement in its operating margin. "We will continue to improve the mix of our business with margin-accretive innovation,” says Unilever CFO Graeme Pitkethly. “With the extension to logistics and the roll-out to smaller countries, we expect savings from ZBB and the organisational changes to be greater than €1bn [$1.22bn] by 2019. We expect to be able to take more of our savings to margin, increasing our retention rate, while still investing sufficiently for competitive growth.”
So, how can businesses further respond to this ongoing challenge of beating the budget? “Leading companies are breaking this cycle with ZBSC (zero-based supply chain) – part of ZBx (zero-based mindset) – a way to drive profitability that emphasises the future over the past,” says Accenture. “ZBSC can help companies capture supply chain value in a rapidly changing world.” Accenture Strategy Experience research reveals ZBSC approaches can drive 5-10% rapid COGS savings and a COGS-to-revenue ratio of up to 600 to 800 basis points over time. With only 24% of operations executives affirming they have an agile operating model fit for purpose, it’s time to consider the building blocks towards a ZBSC solution which offers an end to endless loops…
A closed-loop approach using forensic analytics and insight from company and industry best practices addresses true, not perceived, gaps and enables continuous renewal.
A single granular view of all cost elements and overall performance with an integrated set of optimisation levers lowers variable manufacturing and logistics costs as well as fixed costs.
Hunting for isolated savings gives way to incorporating cost-cuts into the budget and establishes accountability and transparency to create a cost-conscious culture.
Instead of reducing costs by an arbitrary percentage based on historical data, companies start at a zero base, asking what costs should be based on market realities and future needs.
By creating benchmarks using digital technologies and sustainability strategies, companies can stretch organisational performance and targets aligned with growth goals.
So, if your supply chain is in a death spiral there is a way out, but as the report identifies, “breaking free requires making bold people, process, culture, and technology changes while embracing continuous improvement and embedding cost-consciousness across the organisation”. Accenture recommends starting with these fundamentals:
Create true visibility
Leverage financial and operational data to achieve complete visibility at a granular level to understand the current state against internal and external practices. This is key to open the gap, define the costs, and prioritise focus to unleash value.
Focus on the intersections
Develop organisational incentives that encourage collaboration across geographies and functions to identify and target opportunities at intersections of the business where best practices and emerging trends are often hidden.
Stretch past incremental
Think outside the box and embrace technology, analytics and sustainability opportunities to set zero quartile goals and thus future-proof the supply chain.
Embed a change mentality
Drive support from the top all the way through the organization. Establish the right communications, incentives, tools and role modelling to make efforts part of the future fabric of the company – a closed loop – and not a one-time event.
As customers demand a diverse range of ways to buy their products the gauntlet is being thrown down to current supply chain models. Many companies have taken Apple’s lead but this approach necessitates lean processes to create stability and standardisation. Charles Kunkel, CFO at Harris & Ford LLC, a major chemical distributor in the US, works to improve the firm’s global distribution and logistics services to leading Fortune 500 companies in the food, pharmaceutical and industrial sectors. He notes the trend in distribution of a shift towards ZBB. “Starting from a ‘zero base’, every function within an organisation is analysed for its needs and costs,” he says. “Last year’s results aren’t as relevant. It applies to people, facilities and supplies. Basically, you're ‘cutting the crap’ out of the cost. Companies are not only practicing it for materials, but they are challenging all of the non-core competent services and functions that it performs. They're asking, ‘Should we be doing this function?’ Supply chain is usually one of these functions.”
Kunkel notes the short-term gains from stripping back your supply chain could lead to long-term risks, so advises caution when outsourcing supply chain needs. “The third-party provider should fit into the client's existing core process. The client shouldn't deviate from its existing process due to the investment and infrastructure behind it.” He believes there are two types of improvements companies will see when applying a zero-based approach: a superficial improvement that may look good on paper, but not remove waste and the more desirable “functional improvement towards reducing inventory and lead time to deliver a tangible benefit”.
Ultimately, it’s important to remember there is no magic wand, problems don’t simply go away. But by moving towards a new approach such as ZBSC you can manage them more efficiently. Accenture’s report concludes: “Companies cannot afford supply chain trade-offs. For too many, cost optimisation, technology, growth and sustainability are mutually exclusive. ZBSC is a starting point to harmonise these goals. Finally, there is a new way to deliver superior supply chain performance at the right cost - while fuelling growth and increasing competitiveness.”