Whatever we think of the Supermarkets, the one thing for certain is that they understand their business and they think very hard and carefully about their costs - particularly in the supply chain. The danger is if their trading partners are not as well prepared or do not have the ability to analyse changes in the supply chain requested by the Supermarkets. Most suppliers know how to negotiate to a base price; however, do you know what that base price is? Especially when you take the various elements into account.
Today's supply chains are complex. Not only is the world becoming smaller and hence sources of supply becoming more accessible, but the supply chain options are more numerous and offer a massive opportunity to gain or lose a very large percentage of the margin of a product.
Let's consider some of the changes that have taken place in the last few years, all of which have affected the total cost of supplying a product to the customer:
This is just scratching the surface and many of these have been around for a long time, yet how many companies really understand the true cost implications of them?
Let us take one of the simplest changes that may be requested - a change in case size.
I'm sure that the packaging buyer knows the difference in the cost of the case, the factory manager the cost of the case filling, the logistics manager the cost of transport and the warehouse manager the cost of picking, but how often are all these costs considered as a whole and then communicated to the Sales Team for them to negotiate correctly with the retailer? How often does the supplier model the savings in stockholding, shrinkage and shelf space at the store versus the added cost of picking, shipping and shelf filling when discussing this change?
We all know that most businesses are run in silos and nowhere more so than in supply chain costing, where everyone has their own spreadsheet, budget and way of working. Very rarely does each department take into account the impact of other departments on them or their impact on others.
I recently discussed supply chain costs with a major fashion retailer who informed me it did not have a supply chain department or specialist, that the buyers did this and that they understood their costs! How much money do you think could be saved in that retailer? However, I am not critical of them - at least they're not fooling themselves.
Other retailers have "specialists" who know these things, yet they do not give them the tools to truly understand the supply chain costs. Decisions are based on broad estimates of costs or averages such as "cost per case" derived from financial accounts.
The ability to use these to model changes is like using a very blunt weapon to open an intricate box. It is easy to be smug and claim that you have modelled the supply chain costs; most consulting companies will take your money for doing this. However, by the time you have the results the picture has changed. Changes in volumes, supplier base, location of supply or any other of the million changes in the supply chain that occur daily will affect profitability.
Today's supply chain cost analysis solutions are powerful enough to be used as operational tools and can monitor cost changes and drive continuous improvement. Yet still we persist in complaining that those big nasty Supermarkets are killing our business. The technology is there today to understand your costs and those of your trading partner, to model changes and to collaboratively work towards removing costs from the supply chain rather than passing them up and down. This is not a question of Brawn, it is one of using one's Brain.
