Changing Relationships In The Supply Network Might Be Your Answer To Improving Costs

For the traditional supply chain leader, the number one day-to-day imperative is managing cost. Sandwiched in a world of dysfunctional metrics and the growing gaps in organizational alignment, the task is not easy. This was especially true over the last thirty-seven months of disruption. Only one manufacturing industry successfully reduce costs over the past decade.

Costs in the Automotive, Automotive Parts, and the Aerospace & Defense (A&D) sectors grew faster in the period prior to the pandemic than during the pandemic, while the costs in the Beverage, Chemical, and Household Products Industries spiked during the pandemic period. Only the food industry was able to drive down Cost of Goods Sold (COGS) during the past decade. The opportunity is the redesign of flows and trading relationships within supply networks.

What Can We Learn?

The Automotive, A&D, and Automotive Parts rose with the escalating costs of the Semiconductor Industry. While the rising costs in the Beverage, Chemical, Household Products, and Pharmaceutical spiked with the increase in oil prices.

In contrast, Cost of Goods Sold (COGS) decreased for the Food Industry. Advances in agriculture drove down the sourcing costs for the food industry. The takeaway? The management of sourcing strategies and relationships within supplier networks has the biggest promise for the supply chain leader to manage costs.

Comparison of Cost of Goods Sold by Industry Sector

The formula for Cost of Goods Sold (COGS) is Beginning inventory + Inventory costs – Ending inventory = Cost of Goods Sold.

We need to start the journey of managing costs by changing what we measure and control. Most companies manage functional costs not total cost or margin. The lowest functional cost in manufacturing or transportation does not translate to the lowest supply chain costs.

What Can We Do?

The answer lies in redesigning the fundamentals of the supplier network. Traditionally brand leaders push costs into the network and outsource. Sticks are used more frequently than carrots.

No brand owner owns the impact of their forecast data. Few manage complexity. All accept the traditional definitions of trading partners in the network. There is an opportunity for business leaders to redesign network relationships. Here are two examples:

1. Reduce Semiconductor Complexity. Could the downstream brand owners drive down the cost of the semiconductor industry by reducing complexity? Fabs are expensive and the semiconductor industry sits four to five-levels back in the supply chain. Today, the industry is at the whim of its downstream partners: forced to manufacture items with high demand variability and low volumes. The bullwhip impact has major cost implications for downstream industries. Reducing network complexity could improve efficiency by enabling longer manufacturing runs and lower change-over times. Today, there are no cross-company initiatives to consider the impact of current the demand patterns on this important, but fragile industry.
2. Redesign Transportation Optimization. How about the impact of oil prices on transportation-centric industries? Again, an cross-industry redesign to use network data and reduce dead-head miles could help. Transportation optimization needs to be designed from the outside-in. The processes of route guides based on historic lane usage and tenders drives up costs. The low acceptance of first-pass tender is an issue. Major shippers could declare current transportation optimization technology legacy and partner with new forms of transportation tech to drive a redesign from using inside-out (historic enterprise data) to move goods based on dynamic deployment using market data. This type of collaborative market play could improve the resiliency of the industry.

Summary

The traditional approach of a myopic focus on controlling enterprise costs has not reduced Cost of Goods Sold. The opportunity is for brand owners to be better trading partners and redefine relationships based on shifting markets. For most this translates to reducing demand variability and complexity while better using market signals.

Note: This analysis first groups companies into industry segments based on the Supply Chains to Admire definitions and then analyzes the shifts in COGS over six time periods (Pre-Recession period of 2004-2006, Recessionary Period of 2007-2008, Post-Recession period of 2009-2013, Pre-pandemic period of 2014-2019, and Pandemic Disruption of 2020-2022.) The data is collected from Y-charts, a syndicated data feed of public information.