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Are the cost reduction projects harming your business?
Supply Chain teams often undertake cost reduction projects across the entire value chain. These could be in the areas of purchase, manufacturing, logistics, and planning. While each such project is justified individually, their actual business impact may be quite different, and often worse, than the projections.
Let’s take a couple of scenarios.
Some projects aim at functional optimisation. Reduce unit cost of purchase by purchasing in bulk. Reduce production cost by taking large batches. Club dispatches to save on freight. While the projects envisage a cost saving, it could shift the cost to another function. Reducing unit cost of purchase and production may lead to higher obsolescence. Clubbing dispatches may lead to stockouts. Unless these are considered in totality, it’s risky to undertake these projects.
Secondly, opportunity cost of lost sales is rarely considered, as it is outside the formal books of accounts. Similarly, deep discounting on near-expiry stocks is often treated as lower revenue realisation rather than cost of obsolescence.
My suggestion is to think through and consider all the implications before undertaking such projects.