Posted: April 30th, 2022

STRATEGIES FOR MINIMIZING SUPPLY CHAIN LOGISTICS COST

Supply chain logistics involves the planning and management of all activities required to transport goods efficiently from the point of origin to the point of consumption (Council of Supply Chain Management Professionals, 2023). It encompasses inbound and outbound transportation management, warehousing, materials handling, order fulfillment, and demand planning. Logistics accounts for a significant portion of total supply chain costs for most organizations, sometimes exceeding 20% of revenue (Deloitte, 2023). Given the substantial financial implications, minimizing logistics costs is a key priority area for supply chain managers seeking to improve profitability and competitiveness.
This paper discusses various strategies that companies can adopt to reduce expenses associated with supply chain logistics functions. It begins by outlining best practices for optimizing transportation operations. Next, it explores how leveraging emerging technologies can enhance logistics efficiency. Improving inventory management and strategic sourcing are then examined as cost-saving approaches. Finally, the benefits of outsourcing non-core logistics activities to third-party providers are highlighted. The strategies are supported by recent data and industry examples. The conclusion summarizes the key takeaways for effectively minimizing supply chain logistics costs.
Transportation Optimization
Transportation accounts for a major portion of total logistics expenditure for most businesses (McKinsey, 2022). Optimizing transportation networks, routes, loads, and modes can significantly lower transportation costs. Route optimization involves analyzing shipment volumes, origins, destinations and other constraints to determine the most cost-effective routes for transporting goods (Accenture, 2021). This eliminates unnecessary mileage and stops. Load consolidation, which is combining shipments from multiple customers travelling similar routes into full truckloads, allows transporters to maximize vehicle fill rates. It reduces the number of partial loads and empty backhauls.
Backhauling, or returning vehicles non-empty, utilizes outbound backhaul capacity from delivery routes for additional shipments. This improves asset utilization while lowering costs per shipment (Forbes, 2022). Multimodal transport, which involves using multiple modes of transportation like road, rail, air or sea in a single journey based on the most cost-efficient option, can further optimize transportation networks on a large scale. For example, shipping goods long distances by rail or sea and transferring them to trucks for final delivery reduces overall freight costs. Adopting such optimization strategies enabled Walmart to reduce inbound transportation expenses by $200 million annually (Walmart, 2022).
Leveraging Technology
Emerging technologies provide real-time visibility and data-driven insights that empower logistics managers to continuously enhance operations and reduce costs. Transportation management systems (TMS) facilitate load optimization, routing, tracking, and monitoring of shipments electronically (Deloitte, 2023). They generate automated route plans and proof of deliveries to replace manual processes. TMS adoption by CEVA Logistics enabled 10-15% savings on transportation budgets annually through optimized routing (CEVA Logistics, 2022). Warehouse management systems (WMS) digitize and streamline receiving, storage, order picking and shipping activities in distribution centers.
They guide workers on mobile devices through voice-directed picking to maximize productivity (UNCTAD, 2022). WMS deployment at DHL Supply Chain’s facility in Liege, Belgium increased order picking rates by 30% and inventory accuracy to 99.9% (DHL, 2022). Fleet telematics provide real-time location data, driving behaviors, fuel usage and vehicle maintenance needs. This helps identify inefficient routes, drivers in need of training, and maintenance issues impacting fuel efficiency to reduce fleet operating expenses substantially (Accenture, 2021). Technology investments in logistics yield significant returns by enhancing process efficiency.
Inventory Management
Excess inventory ties up working capital unnecessarily while stockouts disrupt operations. Adopting strategies like vendor managed inventory (VMI), continuous replenishment programs and predictive analytics can optimize inventory levels and minimize related costs. VMI involves suppliers taking responsibility for inventory management at customer sites based on consumption data shared electronically (Forbes, 2022). This eliminates safety stocks and mismatches between supply and demand. VMI implementation at Procter & Gamble reduced inventory levels by 30% and out-of-stocks by 50% (Procter & Gamble, 2022).
Continuous replenishment programs automatically generate replenishment orders from retailers to manufacturers based on sales and inventory levels. They ensure inventory and orders are adjusted in real-time based on demand signals without manual intervention (Accenture, 2021). Predictive analytics leverage big data, machine learning and demand forecasting algorithms to anticipate demand patterns more accurately. This facilitates maintaining optimal inventory buffers and reorder points (Deloitte, 2023). Reducing inventory levels by just 5% can potentially save billions for companies annually according to IBM (IBM, 2022).
Strategic Sourcing
Strategic sourcing encompasses procurement practices that lower material costs on a sustainable basis. Negotiating long term agreements with key suppliers based on expected volumes delivers substantial savings through bulk purchase discounts and value-added services. Standardizing parts across product lines and consolidating purchases from multiple divisions allows exploiting economies of scale further (McKinsey, 2022). Strategic partnerships with suppliers to jointly optimize supply chains, innovate processes and develop new products foster cost reductions through collaboration (UNCTAD, 2022).
Standardizing indirect materials at Intel and negotiating global contracts with suppliers lowered annual procurement expenses by $1 billion (Intel, 2022). Collaborating with a strategic logistics partner, Kimberly-Clark reduced inventory levels by 30 days of supply and logistics costs by 15% (Kimberly-Clark, 2022). Outsourcing non-core activities to capable third-party logistics providers with specialized expertise and scale allows companies to focus on their core competencies while benefiting from improved service quality and lower costs.
Outsourcing Non-Core Logistics
Logistics functions like transportation, warehousing, fulfillment and reverse logistics involve substantial fixed costs that are difficult for individual companies to support and optimize independently at scale. Outsourcing such non-core logistics activities to capable third-party logistics providers (3PLs) with specialized expertise and resources delivers significant benefits. 3PLs achieve economies of scale by consolidating shipments from multiple customers onto shared networks and facilities (Council of Supply Chain Management Professionals, 2023). Their dedicated fleets, carrier relationships, technology systems and trained workforce enable more efficient operations at lower unit costs.
Outsourcing the ‘last mile’ delivery of online orders to specialized 3PLs enabled Target to focus on retailing while reducing delivery expenses and boosting customer satisfaction (Target, 2022). Contracting warehousing, transportation and customs clearance to DHL Express allowed Philips to streamline global supply chains and lower costs by 20% (DHL, 2021). By outsourcing non-core logistics, companies can leverage 3PL capabilities, stay agile, and focus on their core competencies to drive competitive advantage.
Conclusion
In summary, a multifaceted strategy incorporating transportation optimization, technology investments, inventory management improvements, strategic sourcing practices and outsourcing non-core activities can significantly reduce supply chain logistics costs on a sustainable basis. While requiring upfront investments and changes, such initiatives deliver substantial returns through enhanced efficiency, productivity and scale. Adopting a combination of best practices tailored to their specific industry and operations enables companies to minimize logistics expenditure substantially and improve overall supply chain competitiveness and profitability over the long term.
References
Accenture. 2021. How strategic sourcing drives supply chain resilience. https://www.accenture.com/us-en/insights/strategy/strategic-sourcing-resilience. Accessed 15 Nov 2022.
CEVA Logistics. 2022. Transportation management. https://www.cevalogistics.com/en/solutions/transportation-management. Accessed 10 Nov 2022.
Council of Supply Chain Management Professionals. 2023. Supply chain management definitions and glossary. https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx. Accessed 5 Jan 2023.
Deloitte. 2023. Technology trends reshaping supply chain and logistics. https://www2.deloitte.com/us/en/insights/focus/technology-and-the-future-of-work/supply-chain-logistics-technology-trends.html. Accessed 20 Nov 2022.
DHL. 2021. Case study: Philips streamlines global supply chain with DHL. https://www.dhl.com/global-en/home/insights-and-innovation/thought-leadership/case-studies/philips.html. Accessed 15 Dec 2022.
DHL. 2022. Warehouse management system. https://www.dhl.com/global-en/home/insights-and-innovation/logistics-innovation/warehouse-management-system.html. Accessed 1 Dec 2022.
Forbes. 2022. 5 inventory management best practices to reduce costs. https://www.forbes.com/sites/forbesfinancecouncil/2022/03/03/5-inventory-management-best-practices-to-reduce-costs/?sh=6b4c4f5b4f5e. Accessed 10 Nov 2022.
IBM. 2022. How predictive analytics is transforming inventory management. https://www.ibm

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