Third-party Logistics best practices
Variable vs. Fixed Costs
for the Supply Chain:
A Sound Approach to Future Growth
As the economy begins to improve, a myriad of benefits can be gained
with a strategic 3PL partnership to facilitate upticks in demand and volume
By Antony Francis and Irv Grossman
utting costs without compromising service is a standing (3PL) partner with specific industry expertise should be closely
C challenge for any manufacturer, regardless of industry. While
the economy has been challenging, to say the least, in recent
quarters, there are glimmers of hope that the beginning stages of
considered by forward-thinking organizations.
With a 3PL partner, the supply chain cost structure can be
transitioned from primarily fixed to variable, avoiding the fixed
a potential recovery could be on the horizon. Even though there investment in material handling equipment, real estate and IT
is still caution, experts from the Manufacturers Alliance (MAPI) systems that are inherent to an “in-sourced” operation. Plus, the
stated in their June industrial production analysis that “we believe a expense of labor, along with overhead, can be reduced without
turning point is near for the beleaguered manufacturing sector.” In compromising the ability to fulfill customer obligations.
addition, the Institute for Supply Management’s “Manufacturing Leveraging a 3PL for expert workforce, equipment, facilities
Report on Business” cited encouraging trends, with seven of 18 and advanced technologies can eliminate fixed costs and
industries reporting growth in June 2009. dramatically reduce variable operational expenses, thus vastly
While firm indicators of a recovery remain somewhat elusive, improving a manufacturer’s bottom line. This cost transition can
there are promising indications of a reversal of current trends.
The state of the economy, and potential rejuvenation, presents
an opportunity for manufacturers to be well positioned when
markets return to full strength. Beyond recovery, the challenge
remains to keep costs lean, even with an uptick in demand.
With the lessons learned from recent hardships, now more
than ever, manufacturers should look to outside relationships for
non-core operations to reduce costs and increase cash flow. This
is especially true for companies that have reduced expenditures
on personnel and resources because of shrinking demand. Scaling
back might have saved money in the short term, but when
consumers begin to reengage the marketplace, some companies
might be left behind without the capacity to meet this surge.
Even so, enlightened companies should seek to keep costs low
going forward while still preparing to meet demands. This can
allow manufacturers to weather storms without enduring harsh
reductions in force or “fire sales” of assets to generate revenue.
To become market leaders, companies need to keenly focus on
improving core capabilities, such as research and development, increase shareholder value and offer a company the flexibility to
managing sales channels and maximizing customer loyalty. react to a dynamic economy and consumer demand.
Committing resources beyond these core areas can serve as a
distraction from the most critical operational issues. The Variable Model Defined
Supply chain management is an extremely complex function Implementing an advanced closed-loop supply chain operation
that commands a significant amount of resources, requiring mandates an extensive time commitment, coupled with large
sophisticated equipment and technology processes, backed by CAPEX