Companies are always keen to cut costs, but none enjoy making the tough cuts that result in just a small percentage of category reductions. This comes as new competition, rapid product lifecycles, and mega industry shifts are making it increasingly urgent for companies to free up cash to accelerate growth, whether through acquisitions, product innovation or digital technologies. In short, companies need to rethink their approaches to cost reduction – and fast.
The problem? Companies are chasing incremental savings when they could be radically shifting cost curves and creating new value to fuel sustained growth. This is forcing supply chain executives into an endless loop. They constantly try to eke out 3 to 4 percent in savings year after year, but most never see this materialize on the bottom line for cost of goods sold (COGS). In fact, research from Accenture Strategy found that only 1 in 3 operations executives strongly agree they see the results of cost reduction initiatives on their P&L statements.
A needed solution lies in the zero-based supply chain (ZBSC) – part of a new, zero-based mindset (ZBx) aimed at helping companies capture supply chain value in the wake of cost pressures, challenges to profitability and industry disruption. Experience finds that a zero-based approach can drive 5 to 10 percent rapid COGS savings and a COGS to revenue ratio of up to 600 to 800 basis points over time.
“Always be on the hunt for isolated savings that can be reincorporated into the budget.”
Whereas old methods rely on cost targets based on yesterday’s realities, ZBSC is a sustainable reset of a company’s cost baseline. Rather than drawing from years-old data, it identifies COGS “should costs” as well as cost reduction opportunities across price, performance and value engineering, while optimizing product and service complexity. ZBSC is more than hunting down old costs in new ways. It requires a complete mindset shift, and efforts that span an entire organization.
Here are a few building blocks that can make zero-based supply chain a reality for your organization:
CLOSED LOOP: Adopt a “closed-loop” approach, using forensic analytics and insight from company and industry best practices to address true – not perceived – gaps, and to enable continuous renewal.
VISIBILITY: Take a single, granular view of all cost elements and overall performance, using an integrated set of optimization levers, analytics, and AI. This heightened level of visibility can help better understand where opportunities may lie and enable companies to focus initiatives in areas that greatly reduce variable manufacturing and logistics costs as well as fixed costs.
COST-CONSCIOUS CULTURE: Always be on the hunt for isolated savings that can be reincorporated into the budget. Establish accountability, transparency, and incentives to create a cost-conscious culture.
FUTURE FOCUSED: Rather than reducing costs by an arbitrary percentage based on historical data, start at a zero base, determining cost targets based on market realities and future needs.
STRETCH PERFORMANCE: And finally, create benchmarks using digital technologies and sustainability strategies, which can allow you to stretch organizational performance to new heights and align targets with growth goals.
As 2018 ushers in a new set of shifts and headwinds, companies can no longer push for the next percent of “hoped-for” savings. They must embed a new way of working that constantly fosters new ideas about where and how to capture value, which can constantly be funneled back to growth. In the year ahead, applying the principles of ZBSC can provide a needed new way for companies to deliver superior performance at the right cost – while fueling growth and increasing competitiveness