By Andrew Corr, Managing Director – Supply Chain and Operations at Accenture Strategy
Supply chain executives are hitting a wall on cost initiatives. And it is not because they have turned a blind eye to systemic supply chain issues – companies are, in fact, doing cost optimization across the supply chain. But most are not achieving sustainable results. In fact, according to Accenture Strategy research, only one-third of operations executives strongly agree that they see the results of their cost reduction initiatives in the P&L statement.
These shortfalls come as headwinds facing companies are rising. Growth is slowing in consumer markets. Competition is intensifying. Product life cycles are speeding up. Consumers are expecting more. These forces are creating rising pressure for companies to free up cash and drive new levels of innovation and growth. But the majority of companies are stuck in the endless short-term approach to backward looking savings goals without a clear approach to future proofing their supply chain. The main challenge? Many companies employ outdated and inefficient strategies to shave off only a small amount of the costs of goods and services (COGS) involved in production. Mired in backward-looking cost optimization that forces no-win compromises between growth, profitability and sustainability, supply chain executives are stuck constantly trying to eke out 3 to 4 percent in category reductions year after year. But many never make a sustainable bottom-line impact on COGS, as costs are squeezed from one end to the other end of the cost balloon, with most companies seeing no or minimal change in COGS-to-revenue ratios over time.
Complicating the matter, many organizations work in functional and geographic silos that make it impossible to know where the top performing operations exist across their networks. This is why cost optimization efforts rarely identify the root causes of performance and cost issues and the best solutions to overcome them. Nor do they determine the “should cost” of supply chain categories that anticipate supply chain needs and technologies for shifts and disruptions in the future.
BREAKING FREE OF OLD WAYS: A NEEDED NEW APPROACH
As cost pressures mount, operations executives need a fundamentally new approach to cost management to reduce spend and drive growth in 2018. Enter ZBSC – the zero-based supply chain, part of a zero-based mindset (ZBx) – a way to drive profitability that emphasizes the future over the past. Whereas old methods rely on cost targets based on yesterday’s realities, ZBSC is a sustainable reset of a company’s cost baseline. It accounts for opportunities from top performers across existing networks AND change and improvements based on emerging technology and capabilities to determine “should costs” and develops a path to realize them.
ZBSC fosters new levels of integration within companies by encouraging executives to collaborate across the enterprise to identify and target opportunities at intersections of the supply chain business, where best practices are most often hidden. Armed with this new visibility into the supply chain baseline, executives can then build a forward-looking view into future supply chain capabilities and costs – with bold new approaches and levers to cost reduction and targets that can help meet or exceed industry-leading performance. This approach pays off: Accenture Strategy experience reveals that ZBSC approaches 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.
Not to mention, ZBSC drives sustainability by applying unique approaches in supply chain categories such as utilities, raw materials and packaging. Take the case of a clothing company that recently adopted ZBSC and designed a line of clothing using materials from old shoes and shirts, transforming them into new, high performance gear. The company was able to use 82% recycled polyester fabric and 13% recycled bottles. These alterations in materials and supply chain manufacturing allowed the company to dramatically affect the costs of raw materials across various product lines to reduce costs and drive profitability, while meeting growing consumer calls to improve their environmental footprint.
PUTTING ZERO-BASED PRINCIPLES TO ACTION
To reverse current trends and see cost intervention initiatives produce noticeable, sustainable changes to the bottom line, supply chain executives can start with these fundamentals:
- Create true visibility. Leverage financial and operational data to achieve visibility at a granular level to understand the current state against internal and external practices.
- Focus on the intersections. Identify and target opportunities at intersections of the business where best practices and emerging trends are often hidden.
- Stretch past incremental improvements. Embrace technology, analytics and sustainability opportunities to set zero quartile goals and future-proof the supply chain.
- Embed a change mentality. Drive support from the top all the way through the organization.
As a supply chain executive, it is possible to invest in growth and innovation while taking a responsible, sustainable approach to cost cutting. The solution requires striking a subtle balance between cost optimization, new technology, untethered growth and innovative sustainability. ZBSC provides companies with a starting point that will help to harmonize these tactics, all while fueling growth and increasing competitiveness. It’s a win-win for your supply chain and your company’s bottom line.
Andrew Corr, Managing Director – Supply Chain and Operations