The hidden costs that could damage profits
TFC’s Keith Kentish highlights some unseen supply chain costs and explains how manufacturers can avoid them.
According to MoneySuperMarket millions of people are overpaying on their mobile phone contracts, whether it’s for data, minutes or texts that they don’t use. Hidden costs can be found everywhere, including your supply chain, where they could be seriously eroding your profit margins.
The Covid-19 pandemic has made it more difficult for manufacturers to source the parts they need, and an April 2020 PwC poll advised that a quarter of UK manufacturing management were concerned about the impact of lockdown on the continuity of their supply chains. Now, as ever, the priority for most supply chain managers is keeping operations running while minimising costs – some of which may be hidden.
In many supply chains, a lot of time is spent keeping track of inventory and even more is spent making and processing the required orders. This issue is often exacerbated when companies work with multiple suppliers because each supplier comes with its own paperwork requirements. According to a report by Zencargo, a digital freight forwarder, more than 100 million hours of time is wasted by UK businesses in procurement, supplier management and freight administration annually. This creates an annual cost in excess of £1.5 billion.
It would be far more valuable to reduce the amount of administration required and move staff into more productive roles. Vendor reduction and rationalisation is a good way to achieve this, as it means fewer orders, and far less paperwork. An even better approach would be a vendor managed inventory (VMI) system. VMI benefits include, but are not limited to, technology to trigger automatic stock replenishments, supplier onsite stocking and consolidated invoicing. This can reduce the required administration and management time of c-class components.
In addition, smaller companies may find it hard to get good value without significant purchasing leverage, particularly if they change suppliers. According to a recent poll, at least 10% of companies have changed suppliers as a result of the pandemic. The key here is relationships — maintaining long-term partnerships with trusted suppliers. Smaller companies can benefit from the leverage of a larger VMI service partner. For example, we regularly purchase on behalf of numerous businesses, consolidated demands, from our UK, European and Far East partners and can pass on the cost reduction from buying in bulk to our customers.
While stockpiles of spare parts are a useful buffer against uncertainty, they are also a hidden cost. According to McKinsey & Company, warehouse operations cost companies around €300 billion each year and this continues to grow as supply chains become more complex. Here, the three main costs facing manufacturers are space, labour and equipment. Specifically, you will need to pay for a building to keep inventory safe, employees to move parts around and equipment to process them.
Understocking is even more problematic; if you don’t have the parts you need, when you need them, you risk having to halt production, and downtime is expensive. Working with your VMI service partner to understand how much inventory you will need, and how often, means you can find a balance that suits your production schedule and still ensure a reduction in on-site stock and enjoy the subsequent cash flow benefits this brings.
Millions of consumers are overpaying for their phone contracts, but let’s not let the same be true of manufacturers and their supply chains.
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