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Five Easy Steps to Reducing Supply Chain Costs

Ian Alberts, CPA 08.09.2017 | Berdon Industry Insights

An effective supply chain — the sequence of processes involved in the production and distribution of merchandise — will not only help get a product produced and in front of customers in a timely fashion, but, with careful management, it can also increase profitability.  By enhancing efficiency, supply chain costs — such as shipping, storing, and retrieving supplies — can be reduced, resulting in huge returns.  Costs can be managed through every step of a well-developed supply chain process, which must also be adaptable to meet growing customer needs.  In order to increase efficiency, proper analysis of the supply chain is essential — allowing companies to review costs and ensure that variables, such as overhead costs, are minimized and that customer service and demand are appropriately considered. 

Five effective ways companies can create an efficient supply chain process and help their businesses become more profitable are as follows:

1. Increase Space and Property Utilization

Underutilized assets, such as warehouse space and inventory, lead to inefficiencies throughout the supply-chain process and can result in a poor return on investment.  For example, companies that experience a spike in sales during certain seasons of the year should consider renting additional space under a short-term lease.  By doing this, companies can accommodate fluctuations in sales within their respective supply chains, and avoid low warehouse utilization during less busy times of the year.

2. Analyze Customer Order History

Reviewing customer demand can help a company ensure inventory turnover is not lower than projected.  Proper forecasting of supply ordering, based on recent analysis of customer demand, will increase inventory turnover and reduce costs of storing inventory.

3. Update Ordering Procedures

Companies should ensure that a proper internal approval process is in place for ordering products from suppliers.  Without this process, companies can become exposed to situations where personnel using different platforms may inadvertently place duplicate orders, resulting in increased supply chain cost.  An effective approval process should feature high-level approvals, standardized time of week/month for recurring orders, and organized pre-order calls/meetings to finalize quantities.  It is also important to have current inventory and sales information in a centralized location, so that everyone involved in the ordering process has the most up-to-date picture of the company's needs.  By having a proper ordering process in place, staff will be appropriately tasked, which, in turn, ensures that excess inventory is not unnecessarily purchased.

4. Minimize Product Handling

Ordering products too far in advance can incur unwanted warehouse costs, as well as increase the risk of products becoming damaged or lost in the process.  By implementing direct shipment-the process of delivering goods from the supplier directly to the customer-companies will avoid unnecessary costs associated with warehousing products.  Another strategy some companies are employing is 'Just in Time' (JIT), where goods are ordered only when needed. Although this method will reduce warehouse costs, if a supplier is unable to deliver on time, a company can be faced with production delays.

5. Use Multiple Suppliers

By using several suppliers, companies can avoid exorbitant delays in obtaining goods or products, eradicating the disadvantages associated with certain strategies such as JIT.  Additionally, if one supplier does not have a particular product, another may have it in stock and fill the order timely.  Also, using multiple suppliers can shelter companies from spending on subpar service as well as provide leverage to ensure fair and competitive pricing from all suppliers.

By taking an active role in streamlining supply chain activities, companies will not only add to their bottom lines, but may also enhance their reputations in the market by consistently providing their customers with well-priced, in-stock items.

QUESTIONS? Contact your Berdon advisor or Ian Alberts, CPA - Berdon LLP New York Accountants

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