Do you need to reduce costs in the midst of increasing material prices and labor costs? This is challenging, but the good news is that there is a solution. By not just looking at product price, but also improving efficiency in processes and inventory, you will be able to lower your TCO in challenging times.
If cost reduction were only about the price of the product, it would be a one-dimensional approach to saving costs. However, with integrated tail supply – where price, inventory, and processes are optimized together – TCO reductions of up to 27% are not only possible but proven. And this is achievable even in times of inflation, rising material costs, and increasing labor expenses.
Paradox: Reducing Costs While Business Costs Rise
If we rewind to a few years ago, during the height of the COVID pandemic, lead times were long, and we were simply relieved to have products available. Now that lead times have stabilized, we see that boardroom discussions are turning toward cost savings.
The paradox of trying to save money in times of rising costs – something many supply chain managers face – was the key topic in the second episode of our podcast Tail Supply Conductors, which focuses entirely on cost-saving strategies during challenging times.
In this episode, our CEO, Bauke Zeinstra, addresses this paradox:
“Yes, this paradox exists, and it can be challenging, but it is something you need to manage. Savings are possible when you look at the bigger picture – purchasing, processes, and inventory need to work together like a symphony. And you organize this with a service provider specialized in these areas, like MAG45.”
So, tackling this paradox requires taking a broader perspective – one that goes beyond the obvious ‘hard’ savings like reduced purchase prices or transportation costs.
The real potential for cost reduction lies in optimizing inventory and processes. This allows companies to manage their resources and capital more effectively. Examples are reducing inventory levels, making better use of available space, and automating workflows like ordering and invoicing.
These changes not only cut down on manual labor and errors but also lead to significant savings in areas like working capital and operational expenses.
How Much TCO Savings Are Possible with Integrated Tail Supply?
The amount of savings depends on several factors, but reductions of 5-10% are realistic. In some cases, even greater savings are achievable, as shown in this case study.
The level of savings is also influenced by how well a company is organized. For example, well-managed data can significantly boost savings potential by optimizing decision-making and identifying key cost drivers.
Examples of TCO Savings in Procurement, Processes, and Inventory
To understand where cost savings are made, let’s explore three critical areas: procurement, processes, and inventory.
Procurement
In procurement, one of the key ways to reduce costs is by consolidating orders. At MAG45, we not only consolidate demand across multiple clients who require the same tail parts, but we also look for consolidation opportunities within a single client’s operations. For example, we explore whether a single supplier can deliver to multiple global sites, instead of using different suppliers for the same item across various locations. This approach achieves economies of scale and significant buying volume advantages.
Alternative products
We also explore cost-effective alternative products. Are there alternative items available that offer the same quality at a better price? This approach can lead to substantial cost savings without compromising on quality.
Buying volumes
Another important strategy is optimizing buying volumes. We purchase tail parts based on their risk profile. For instance, if a particular item is likely to be assembled in a machine for several years, we buy in larger quantities upfront, securing better prices and reducing the need for frequent reorders.
Processes
Process optimization is another area where substantial cost savings can be achieved. At MAG45, we implement EDI (Electronic Data Interchange) connections with our clients to enable seamless data exchanges, reducing manual processes and administrative work, which can lead to cost reductions of up to 40% – a hidden gem in cost savings.
Additionally, kitting is a key example of process optimization, where we pre-assemble components into ready-to-use kits, streamlining production and further improving efficiency.
Supplier events to discover cost savings together
We also host collaborative events where our clients showcase the latest technologies to each other. By adopting these technologies, clients are able to optimize their internal processes and lower costs. These innovations not only drive cost efficiency but also enhance the overall performance of their supply chains.
Inventory
In inventory, savings are often found in optimizing transportation and sourcing strategies. As supply chains become increasingly global, transit costs rise. We counter this by exploring local alternatives, sourcing closer to the end destination to reduce shipping costs and lead times, providing both cost and time savings for our clients.
TCO savings via VMI & stock-at-hand systems
Additionally, significant inventory savings are achieved by ensuring items are available exactly where they are needed, through solutions like Vendor Managed Inventory (VMI) and stock-at-hand systems. We also optimize packaging to minimize space and weight during transit, further contributing to savings, especially in high-volume shipments.
