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A Framework for Finding Cost Control Opportunities

A Framework for Finding Cost Control Opportunities

February 2, 2012
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Distributors have to balance many things to maintain profitability, as George Schwartz, who leads Capgemini’s Distribution Practice, outlined at the National Association of Wholesaler-Distributors meeting this week in Washington D.C.

Pressures include economic uncertainty (though this feeling is turning around as shown in the results of the fourth quarter 2011 MDM-Baird survey); rising transportation costs inside and outside the firm; and price erosion and leakage. Schwartz also noted inefficiencies in warehousing and distribution networks; the need for better inventory planning, management and control; and rising sourcing, supply and procurement costs.

Schwartz provided attendees with a framework for finding cost control opportunities. Here are the categories:

Transportation
The first area, where Schwartz said savings can be significant, was transportation. Categories to analyze include linehaul; infrastructure, mode shifting, freight payment, shipment planning; administration; shipment management; and communication. Some of the tactics for saving in these areas included route planning and optimization;  going paperless; order consolidation; restructuring payment terms; incentives for on-time and early payment; and more. “It’s not just rates” you have to consider, Schwartz said. Take a big picture approach to this category.

Warehousing
Schwartz claimed potential savings he has seen in distribution companies who have improved efficiencies in warehousing ranged from 15 to 20 percent on headcount, 20 percent to 35 percent on space utilization improvements, and 10 percent to 15 percent on operating cost reductions. Ask yourself: How can I extend the useful life of my distribution centers? Step back to see how efficiently you can use the space. Tactics include using the smallest space for the product type; creating shorter paths/times and fewer product touches before shipment; slotting by volume and velocity; using technology where it can help (but not over-engineering because that can add expense as well); dedicating receiving and shipping spaces; and more. Focus first on inexpensive tactics.

Distribution Networks
Expand your view from warehouses to the overall network. Don’t look at just the number of warehouses and where they are, but also at what their role is in the overall network, Schwartz said. The shift over the past decade to multichannel selling (online, offline, phone, etc.) has complicated this somewhat, which is why Schwartz says it’s worth taking a close look at your network every year or two. Consider the number of facilities you need to support current and future volumes; inventory stocking policies and requirements for each facility; total logistics costs; and planned growth.

Inventory
Inventory is one of a distributor’s largest assets, so clearly this is an area distributors need to constantly watch to control and reduce costs for the long haul. Inventory right-sizing, Schwartz said, can reduce investment from 10 percent to 40 percent. “It’s a hard thing to do – to make the tough decision,” he said, “because it’s all about service.” (Related resource from MDM: Achieving Effective Inventory Management.)

Price Realization
Pricing has been a hot area for distribution in the past several years. While it doesn’t fit as neatly under the “cost control” header, it is still a place where distributors can capture money left on the table through price leaks. Price leaks can come in many forms and may erode margins if not managed properly. Schwartz named trade promotions or allowances; volume discounts; cash discounts; off-invoice promos; returns; restocking fees; web order discounts; and year-end rebates as some of the factors that contribute to price leakage.  To fix this? Schwartz discussed moving toward a value-based pricing approach, driven by data to identify pricing outliers from historical pricing data.

Sourcing and Procurement
Potential sources of savings in sourcing and procurement include price, usage and administrative and process costs. He said that most procurement professionals target price, but there are other leverage points to enhance negotiation of the final transaction price. On process, focus on reducing waste in all aspects of the supply chain including purchase order receiving, invoicing, performance reporting, payables, quality control and eProcurement. On the usage front, focus on how the materials and services are being used; look at extended-life products; functional equivalents; customer end-product variation and service disaggregation.

None of these recommendations are new to most executives, and they certainly aren’t rocket science, but taking a careful category-by-category look at areas in your operations where you can save without compromising service can be a valuable regular exercise that can build on the efforts that distributors have made over the past several years to grow more efficient.

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