Supply Chain Logistics Management: The Future of Business

Inflationary pressure, the high cost of fuel, and escalating wages drive persistently high logistics spend. With logistics costs accounting for a significant portion of the overall supply chain management expenditure (nearly 80% at some companies, according to Gartner research), it’s not surprising that global chief supply chain officers are asked to identify and implement ways to optimize supply chain operations. But external cost optimization opportunities are hard to find in a business environment characterized by transport capacity constraints and stubbornly high rates. Faced with budgetary increases year over year, a looming recession and increasing expectations from supply chain leaders, logistics managers must get smarter at supply chain cost optimization.

This starts with differentiating cost reduction and cost optimization opportunities. Cost reduction in logistics management involves eliminating spend and saving money. Examples of cost reduction activities in the logistics organization include: negotiating lower transport rates and better third-party logistics contracts; deferring technology upgrades/automation; and identifying cost leakage such as incorrect invoicing, excessive waiting times and demurrage.

On the other hand, cost optimization activities, such as eliminating wasteful and redundant processes and creating self-service tools, are designed to drive efficiency, productivity and innovation from logistics management.

Mature logistics organizations combine both cost reduction and cost optimization initiatives to achieve the best outcomes. Segment and prioritize cost optimization opportunities using varying time horizons, such as short-, medium- and long-term, and expected deliverables (e.g., rework upstream order policies; establish a control tower operation; produce cost-to-serve analysis). Bear in mind that cost optimization initiatives may require an initial increase in expenditure through added investment.

Depending on whether the logistics function is seeking to reduce cost by operating better or deliver more sustainable cost optimization by altogether transforming how it does things, logistics managers must manage stakeholder expectations. Demonstrate trade-offs between cost control and service excellence using metrics such as days to deliver; on-time, in full; and cost to serve. Note that some compromise around service and performance may be necessary to achieve cost optimization in supply chain logistics management.

Cost optimization in supply chain logistics management must seek to balance service delivery with the best customer experience, at the right level of cost to be effective. It must also engage elements of cost reduction to respond to the immediate needs of the business when that business is facing economic challenges.