Supply Chain

Why Supply Chain Cost-Cutting Isn’t Impacting the Bottom Line

While companies try to remove 3% to 4% in supply chain cost reductions each year they see minimal or no impact to the bottom line.

Companies across industries are stuck in a supply chain cost-reduction death spiral, according to Accenture.

A new Accenture Strategy report, released Nov 14, found that while companies try to eke out 3% to 4% in supply chain cost reductions each year, more often, they see minimal or no impact to the bottom line.

This is because they “chase incremental savings when they could be radically shifting cost curves, boosting performance across the supply chain and creating new value to fuel sustained growth,” the report said.

In fact, only 33% of operations executives strongly agree that they see the results of their supply chain cost reduction initiatives in the P&L statement.

As a solution the report recommends the zero-based supply chain (ZBSC) – or a mindset shift that draws principles from zero-based budgeting – as way to reset the company’s cost baseline. Unlike old methods, ZBSC continually strives to develop a new “quartile zero” to set and stretch performance targets.

Continuous renewal makes ZBSC different from traditional supply chain cost optimization. It accounts for change and improvements of top performers and technology to determine “should costs” and develops a path to realize them. The adaptive nature of ZBSC reflects the fact that it does not rely on past performance or even first quartile benchmarks from the past. It continually strives to develop a new “quartile zero” to set and stretch performance targets. Compare this to existing continuous improvement programs. By the time a company makes the necessary improvements to meet historical benchmarks, those benchmarks have advanced. With ZBSC, companies apply digital technologies and sustainability practices that optimize price and performance across global operations and enable richer data insight and value.

The report recommends that companies take the following steps to embracing continuous improvement and embedding cost-consciousness across the organization.

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 should costs, and prioritize focus to unleash value.

Focus on the intersections. Develop organizational 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 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 modeling to make efforts part of the future fabric of the company, a closed loop, and not a one-time event.

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