It’s the costs, stupid

Logistics Manager’s exclusive survey reveals the intense pressure to control supply chain costs – but companies are also planning for growth. Malory Davies reports.

When he fought the 1992 presidential election, Bill Clinton reputedly kept a sign on his desk that read: “It’s the economy, stupid”. And, if the pundits are to be believed, it was that focus on the key issue that won the election against George Bush senior who at the start of the campaign had a seemingly unassailable lead.

It’s apparent from our exclusive Supply Chain Challenges survey that the equivalent card on a supply chain professional’s desk should probably read “It’s the costs, stupid”.

Almost three quarters of the supply chain leaders in our survey say controlling costs is a critical issue for them in the coming year – and the other quarter describe it as an important issue.

In fact, 42 per cent describe controlling costs as the single most important challenge they face over the coming year.

Allied to this, supply chain professionals are also focused on increasing profitability with 56 per cent describing it as “critical”, and 40 per cent as “important”.

However, the survey also shows that growth is firmly on the agenda for many supply chain professionals over the coming year. Two thirds say they expect the level of activity in their supply chain to increase. Some 46 per cent reckon managing growing business volumes will be a critical issue for them, while 45 per cent describe it as “important”.

Those figures are reflected in investment plans – 41 per cent expect to increase investment in their supply chain over the coming year, while less than ten per cent expect to see a fall in investment.

Our survey supports the view that the level of supply chain activity is growing – 46 per cent say the current level of activity was higher than last quarter, against 28 per cent who say it is lower. Of course, the last quarter included the run-up to Christmas – a particularly busy time for many organisations.

Compared to a year ago 55 per cent say activity is higher now, while 23 per cent say it is lower. Hardly surprising then, that 55 per cent say they expect activity to rise next quarter while eight per cent predict a fall. Looking forward into next year, 67 per cent say they expect activity to rise while only seven per cent expect it to fall.

Costs

The focus on controlling costs is a sign of the times. Companies have weathered a tough recession in which conserving cash has been critical to the survival of many businesses.

And external costs have been rising. Fuel costs have been reaching record levels, while the government imposed a VAT increase at the start of the year and factory gate prices in the Far East have been rising.

Some 47 per cent of our supply chain professions report higher costs than last quarter – although 15 per cent say they are lower. Perhaps surprisingly, 22 per cent say costs are lower than a year ago although 54 per cent have seen a rise.

In the short term, the split is almost 50:50 between those who expect costs to rise and those expecting them to remain the same or fall. But look further ahead and 63 per cent are expecting to face higher supply chain costs next year.

There is practical evidence that this focus on costs is paying dividends. Over the past couple of months there has scarcely been a single major corporation that has not highlighted supply chain savings in its results.

For 2010 Unilever has reported 1.4bn euros (£1.2bn) of savings in supply chain costs and indirect costs – There has scarcely been a single major corporation that has not highlighted massive supply chain savings in its results.

well ahead of the 1bn euros (£860m) the group was targeting at the start of the year. Chief financial officer Jean-Marc Huet said: “This comes after savings of a further 1.4bn euros (£1.2bn) in 2009 – nearly 3bn euros (£2.57bn) taken out of our cost base in two years.”

At office supplies group Staples, full year 2010 operating income rate increased 44 basis points to 6.65 per cent compared to the full year 2009, mainly as a result of improvements in product margins and supply chain efficiencies. “I’m proud of all that we achieved in 2010,” said Ron Sargent, Staples’ chairman and CEO.

Heinz has also reported big supply chain savings. Chairman, president and CEO William R Johnson said: “Heinz is on track to meet its previously announced goal of ‘delivering better than $1bn (£620m) in cost savings over the next five years through our global supply chain initiatives’.”

Annual results at Nestle show that its Continuous Excellence programme produced savings of CHF 1.5bn (£964m). This programme focuses on the cost of goods sold, distribution and administrative costs.

And Sara Lee, the US food and consumer goods giant made savings of $194m (£121m) since the start of its 2009 financial year through Project Accelerate, a company-wide cost savings and productivity initiative focused on outsourcing actions, supply chain efficiencies and organisational simplification.

Even so there are still some big rewards out there. In December 2009 consultants Booz and Company calculated that the amount of excess working capital sloshing around in British companies was £110bn.

Challenging year ahead

Some 46 per cent of supply chain professionals reckon managing growing business volumes will be a critical issue for them, while 45 per cent describe it as “important”. There is an apparent paradox that at the same time a quarter of them say that managing falling business volumes will be a critical issue for them while 40 per cent say it is important.

Of course, it is entirely possible, that a supply chain will have to respond to rising sales in one product sector at the same time that sales in another sector is declining.

The fact that boosting profitability was given such a high priority suggests that companies are increasingly recognising the importance of supply chain – not simply as a cost centre but as a lever for boosting profitability. Some 56 per cent say it is “critical”, and 40 per cent “important”.

The survey also shows that supply chain professionals believe there is more to be done in terms of managing risk and improving the resilience of the supply chains. Some 35 per cent describe this as a critical issue and 60 per cent as important.

Sustainability and environment has forced its way onto the supply chain agenda over the past few years so it is no surprise that it is regarded as an important issue by 68 per cent of senior supply chain professionals and critical by 17 per cent.

Supporting online sales growth was regarded as either critical or important by 44 per cent.

This survey reflects the views of 171 senior UK-based supply chain and logistics professionals at retailers, manufacturers and distributors. It does not includes third party logistics providers or suppliers of logistics equipment. It was carried out in late February and early March 2011.