Roger Urban is president
i f Urban Wallace Associates
(78 I) 862-0033
Reducing Supply Chain Costs:
Spend More to Save More
anagers who want to reduce sup- er, are causing some companies to buy tory and calculating changes in inven-
ply chain costs need to spend transportation for the lowest possible tory carrying costs are much more dif-
more on transportation. The key to price and neglect inventory manage- ficult tasks. Companies often fail to go
lower supply chain costs is holding less ment. Mismanagement and mismea- after inventory savings simply because
inventory. Buying more transportation surement are two factors encouraging they cannot measure the amount of
lets you reduce inventory safely. this dysfunctional behavior. inventory in their supply chain.
The greatest mistake that manufac- Most companies concentrate on Companies can lower their supply
turers make today is equating trans- reducing transportation costs because chain costs by using new management
portation cost reductions with total that goal fits how they manage. Even strategies to reduce inventory safely.
available supply chain savings. In fact, today, most transportation depart- First, they must stop treating trans-
transportation savings do not even cor- ments are cost centers that are not portation as a management “silo” that
relate with overall supply chain sav- involved with inventory management. is separate from inventory manage- .
ings. The largest economies come from For them, success is defined as negoti- ment. Second, companies should in-
inventory reductions that often result ating greater discounts from carriers. stall technologies that provide detailed
from buying more transportation. Companies that concentrate on inventory visibility throughout their
optimizing transportation discounts supply chain. These are the prerequi-
Inventory is the Issue sites for lowering inventory and achiev-
Inventory levels, not transportation The largest economies ing supply chain cost reductions.
costs, drive supply chain savings. For
most manufactured products, trans- come from inventory Avoiding False Savings
portation is only two to five percent of The largest required management
total cost. In contrast, raw materials, reductions that o change is a willingness to pay higher
components, and subassemblies typi- result from buying transportation costs in exchange for
cally constitute 55 to 75 percent of lower inventory levels and carrying
total cost. This reality helps explain more transportation. costs. To succeed, managers must focus
why large cost savings result from on the total cost of the supply chain
complete supply chain solutions that miss out on larger inventory savings. rather than just transportation costs.
reduce raw material and finished These companies often trade down To avoid false savings, managers must
goods inventories. on service levels. The most common measure and manage all costs together.
Actual experience in managing sup- strategies are to ship less often or to Transportation decisions that do not
ply chains highlights the strong corre- switch to slower, less-reliable modes. account for changes in inventory will
lation between total supply chain Each of these actions increases often result in overall cost increases
costs and inventory carrying costs. inventory holdings. The costs of this while delivering apparent savings. It is
The 2001 Logistics Cost Survey con- extra inventory more than offset any imperative that companies broaden
ducted by Herbert W. Davis found transportation savings. Thus, cutting their performance measures to include
that “the difference between the 20 transportation costs is a sub-optimiza- inventory investment and carrying
percent of companies that reduced tion that produces false savings. costs so that total expenses are man-
cost and the 50 percent that had an Another reason why companies aged. Then, buying fast, reliable trans-
increase was almost fully explained by focus on reducing transportation costs portation will allow managers to oper-
the inventory level performance.” is that changes are easily measured. In ate supply chains with the lowest pos-
Current economic pressures, howev- contrast, measuring amounts of inven- sible safety stocks.
34 Inbound Logistics