Supply Chain Blog

Reducing Cost in FMCG, Brewing, Pharma Businesses

Posted by Dave Jordan on Mon, May 23, 2011

Picture the scene in many a boardroom; a note has come from HQ telling the boss to reduce costs as globally the annual set of results is not going to look pretty. Why do all the board directors then look at their Supply Chain colleague? Of course there are significant costs associated with a modern Supply Chain but you cannot make significant savings from that infrastructure overnight.  Supply Chain budgets very rarely contain any discretionary spend unlike the bank busting sums in the pockets of Sales and Marketing!

Cost reduction resized 600As is usually the case, let us assume the SC team is constantly looking at ways to reduce costs in factories, logistics networks, 3PLP, planning etc. What other costs could be challenged without causing discontinuity in the company?  The SC usually leads any cost efficiency projects which I think is fair enough as the discipline is familiar with cost control and challenge.

Here are 5 areas I feel are always worthy of visiting when looking for “low-hanging cost fruit”.   

  1. Old promotions, soon to expire stock, old label stock, slow movers. All companies (particularly FMCG) will have some or all of this and for various reasons. If you do not routinely address this you will be hit with an unexpected loss at year end or the nest stock count. Bring the list to the board meeting and hold the correct people accountable for creating the stock in the first place. Sell it and stop paying for storage too!
  2. Promotional activity. Is it all really necessary and does it actually payback? Do you know how much of that pristine packaging assembled in the factory is destroyed in the name of the latest promotional whim? Plastic film, out cases and trays litter the floors of repacking operations everywhere. You have paid for that original packaging and now you are paying someone to destroy it and fresh packaging. Just think of all those Dollars/Euros that could be spent in a much more customer focussed way or simply saved? When you take into account all the extra labour and packaging just how much value is really generated for your business?
  3. How many skus do you need? Do you know how many your business has when you include all the promos and specials? Every single sku costs money to source, transport and store. Plus, the more you have the more likely you will generate the problem discussed in point 1 above. Analyse your current portfolio and see what is really driving value in your company. Conversely, see what is sucking value out of the business. Every extra low value sku clogs up the wheels of your Sales & Operational Planning (S&OP) process.
  4. Telephones and internet. Always a difficult area as it can be perceived to be petty but it is usually an uncontrolled drain on cash. If you have provided staff with internet access on laptops or Blackberrys you can be sure you are funding personal surfing time. Unless free telephone calls are part of the remuneration package why should the employee not pay for them? In my experience significant cash can be saved through just a little prudence in this area. Do you leave your telephone network open at night with unlimited international dialing access? Also, the next time you see 2 people in the same office talking to each other on company mobile phones…….
  5. Discretionary spend. Don’t make it discretionary! If budgets exist for team building and entertainment you can bet your life those funds will be used up. Do you really need to “team build” every year? These occasions tend to be considered as a perk of the job and I am not convinced of their value when they happen so often. If team building sessions are to go then you should ensure this applies to all departments. Letting the marketing “team building” slip through will simply demotivate the rest of the company.

Achieving visible buy-in at the top table which is cascaded to teams will generate the best initiatives. Paying consistent attention to these and other cost areas might save you from the ultimate saving of issuing redundancy notices, possibly your own!

Tagss: SKU, Dave Jordan, S&OP, Cost Reduction, Inventory Management & Stock Control