Supply Chain

Costs

Procurement
Costs

Supply Planning Cost; Purchasing

Cost; Supplier Quality Cost

Inventory
Costs

Raw material / Input W/H Cost;

Finished Goods W/H Cost

Delivery (Supply
to Customer) Cost

Demand Planning Cost; Design &

Engg. Cost; Making Cost;
Demand Fulfillment Cost

Logistic
Costs

Inbound Cost; Outbound Cost;

Reverse Logistic Cost

Processing
Costs

Order Processing Cost; Customer

Servicing Cost; IT operating Cost

Finance Cost

Accounts Receivable Cost;

Accounts Payable Cost; Financing
Cost

Misc. Cost

Obsolescence Cost; Shrinkage

Cost ; Opportunity Cost ; Disposal
Cost

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Supply Chain Costs

COST SAVING OPPRTUNITIES IN PROCUREMENT

Means of Achieving
Price Negotiations

SAVING OPPRTUNITIES IN PROCUREMENT

Contract Terms Review

Reduction in
Cost per Unit

Transport Negotiation
Warehousing / Stocking
Reduced Lifecycle Costs
Tax Planning

Improved
Operating
Efficiency

Price Reduction; Volume Rebates; Payment term discounts

Payment terms Credit; Schedules; Warrantees
Free services/Supervisions/ commissioning
Responsibility- Incoterms; Mode of transport Sea/ Rail /
Road; Risk - Transit Insurance, Transfer of Title
Warehousing
VMI (Vendor Managed Inventory)
Maintenance costs; Operating, energy and other costs
Disposable costs
Applicability of Taxes & Duties Excise Duty /
VAT / CST / Service Tax Best option

Change in Consumption/
Volume

Eliminate / Postpone Demand (Requirement); Reduce

Consumption / Schedule Frequency; Encourage substitution
Low Cost Alternate; Change product mix

Specifications Review

Eliminate gold-plating (Higher Specifications)

Standardization - Alter / Simplify specifications; Alternative
products

Improve Supply Base;

Cycle Time Reduction

Expand Supply Base Order Consolidation; Pre-design

Supplier Involvement, Operational
Alignment; Supplier
Partnerships, Supplier Alliances, Integrated Supply, JIT-II,
Supplier City, Supplier Outsourcing, Distributor Cooperatives,
and Lead Supplier

Reduced Procurement
Related Operating
Expense

PO Processing Systems & Procedures; Accounts Payable

Receipt/Warehousing; Standardized Procurement Process;
Improvements in Cycle Time Reduction, Speed & Accuracy;
Responsiveness;
Spend
Transparency;
Savings
Measurement; Contract Compliance; Regulatory Compliance
etc

Demand Side
Management

Supply Side
Management

Examples

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Broad Areas

Inventory Cost
Reasons for Inventory
To create a buffer against uncertainties in supply & demand
To take advantage of lower purchasing and transportation cost
associated with high volume
To take advantage of economies of scale associated with
manufacturing products in batches
To build up seasonal demand for promotional sales
To accommodate product flowing from one location to another (work in
process or in transit)
To exploit speculative opportunities for buying and selling commodities
and other products
Cost of capital
Storage, Handling & Maintenance
Obsolescence, Damage and Deterioration
Pilferage/Shrinkage
Insurance, Taxes, Depreciation
Management costs Ordering, IT Operation, Processing, Staffing
Opportunity Cost

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Inventory Costs

Inventory Cost Reduction

(Inventory
Reduction is
Recognized
as a Cost
Reduction)

By Developing Better Forecasting Methods; Promoting Better

Communication

Lower Lead Times

Negotiate to Reduce Supplier Lead Times; Develop Local Vendors; Select

Right Mode of Transport

Reduce Variety &

Standardize

Reduce Number of Items Carried / Variety; Substitute for Standard Parts;

Consolidate Common Part Numbers

Consolidate Inventory;
Reduce Surplus and
Obsolete Inventory

Maintain Combined Inventory of Different Units; Use it elsewhere; Return it

to the Supplier; Sell to other companies ; Sell at a Discounted Price or Scrap
it

Improve Supplier's
Quality & Time Delivery
Performance

Reward Suppliers Superior Performance for Quality & On-Time Delivery. It

will Reduce Cost of Rejections, Rework, Warranty, Inspection and Excessive
Expediting; Lead Time & Inventory

Review EOQ
Improve Consumption
Turn Over
Supplier Managed
Inventory
Involve All Concerned

Review EOQ with revised Lead Time; Reduce Qty

Frequency; Re-negotiate Supplier Min. Order Qty (MOQ)

Lifting & Increase

Right Scheduling of Requirement;

Vendor Managed Inventory (VMI); Point of Sale (POS); Consignment Stocking

Involve Suppliers, Buyer, Engineering, Manufacturing / User, Finance

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Inventory
Cost
Reduction

Improve Accuracy of
Forecasts

Logistic Fields & Costs

Main Fields of Logistics :
Procurement logistics
Production logistics
Distribution logistics
After-sales logistics
Disposal logistics
Reverse logistics
Global logistics
Domestics logistics

Cost Reduction Opportunities :

Logistic Planning : Schedule, Mode of Transport, Rates
Consolidation
: Consolidate Consignments if Possible

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Main Areas of Logistic Costs :

Logistic Planning, Selection & Processing Cost
Costs of Physical Flow of Material (Leasing, Depreciation, Insurance,
Cost of Fuel / Energy, Labour costs, Costs of transport services,
Other costs
of flow)
Costs of Inventory (Cost of inventory leasing, Costs of inventory
workers, Costs of Stock Losses, Other costs (insurance))

Plan Logistics To Reduce Costs

Cost
Transit Time

Airways
Seaways

Volume
Railways

Capability
Accessibility
Traceability

Location
Nature of
Cargo

Road
Pipelines

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Reliability

Conveyers
6

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Inventory & Logistics Costs

The Impact of Increasing the

Number of Warehouses
Improve service level due to reduction of average service time
to customers
Increase inventory costs due to a larger safety stock
Increase overhead and set-up costs
Reduce transportation costs in a certain range
Reduce outbound transportation costs

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Increase inbound transportation costs