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Cost reduction programs in Supply Chain often miss out on major profit improvement opportunities.
A lot of companies are embarking on cost reduction programs. These initiatives typically look at various cost elements, as captured in their cost accounting books, and look at ways to cut them down through ‘Efficiency’ improvements. Some teams also use Value Stream Mapping of Lean to identify non-value added activities and eliminate them.
We should proceed on such initiatives with caution. I have seen some companies cut down the protective capacity of their bottlenecks, which adversely affects their flexibility and responsiveness, besides increasing supply lead time in scenarios with fluctuating demand.
Since lost sales are completely missed out in cost accounting books, there is no attempt to improve product availability, capture more of demand, and accelerate sales.
We must decide whether we want to embark on cost reduction or profit improvement. There is a significant difference between the two approaches.
Would love to hear your thoughts and experiences in this regard…