Optimization versus cost reduction: is your supply chain managed effectively?

Home Digital transformation Optimization versus cost reduction: is your supply chain managed effectively?

Chances are you are not optimally reducing your costs. Here's how to do it.

When we think about today's highly demanding and competitive business climate, we see that the balance between revenue growth and cost efficiency is not an easy point to reach. The optimization that is necessary to reach this balance should no longer occur within separate business areas, because when one sector reduces costs in this way, it is often to the detriment of the performance of another sector of the company. Herein lies the difference between cost reduction and cost optimization, a difference that determines the final product outcome. While cost reduction is about tightening expenses, cost optimization involves a more holistic and integrated solution.
Why the cheapest option is not always the most optimal one
All companies work at some point on a solution to reduce supply chain costs. They may find the solution in operating costs, transportation and logistics expenses, buffer stocks, tracing revenue leakage, and so on. Complex supply chains are often divided into multiple tiers, by geography, business units, systems and fragmented processes. Each of these tiers work according to its own incentives and needs, they operate to meet its own objectives and reduce its own costs.
For example, logistics professionals focus on getting orders from point A to point B at the lowest possible cost, while those working in e-commerce push for the highest margins on their products. Another example would be the case of how the manufacturing and procurement areas are driven by cost and availability, while the reverse supply chain area is not driven by cost, as they can spend millions of dollars just to retain customers and build customer loyalty. Each area is concerned with what benefits its own group, rather than thinking about what is ultimately most profitable for the company as a whole. For example, if they chose to avoid a distribution center, this might increase the transportation expense, but it would reduce the overall cost of the operation.
Most organizations do not realize the extent to which this fragmentation affects their bottom line. If companies work in an isolated way, they cannot optimize the value chain. When they use the Order Management System (OMS) to select the "best" inventory and the "best" location, they are using limited data because end-to-end visibility across the value chain is lacking. Thus, the OMS estimates costs, but is not generating optimization. No matter how advanced the systems are independently, they are unable to account for all costs and all constraints, and thus prevent process convergence. They accumulate systems, accumulate capabilities and layers of integration, in a method that is not very cost-effective. Without global visibility, there is no way to get the big picture that is so necessary.

The benefits of a holistic solution
A solution for a supply chain to map the entire order lifecycle is a game changer. A technology that can do that optimizes not within independent areas, but across them. For example, a Supply Chain Orchestration platform like Omnix's offers global Control Tower capabilities that unify those fragmented systems into a single platform, exposing the harmful processes and behaviors occurring in each area. This technology also holistically optimizes all inbound, outbound and reverse flows, offering TMS ("Transport Management System"), OMS, reverse logistics and omnichannel fulfillment capabilities, all in one place. Platforms such as the one offered by Omnix allow for a global view of the value chain in real time, so as to integrate it.
This type of technology allows supply chain leaders to focus on optimization, but also to take into account priorities other than cost. According to Gartner, "cost optimization is about balancing service delivery with the best customer experience at the right cost level". Omnix automates processes, corrects scheduling and manages contingencies, so that the customer gets the order in their hands in a timely manner.
To implement such a system, executives must rethink success and performance indicators across their business units, motivating efforts toward a common holistic goal. This radical change also requires unifying all supply chain systems that otherwise reinforce and perpetuate fragmented areas. It needs a holistic solution that provides visibility across the entire chain, providing logistics capabilities, order management, reverse order management and fulfillment capabilities in an omnichannel format.
A platform that succeeds in orchestrating the supply chain must capture costs at each touch point in an integrated manner, spanning the entire order lifecycle. With a complete view, those responsible for managing the chain can optimize overall operations, and even offer customers dynamic options that improve customer service levels.
Another major benefit of such a platform is that it is a quarter of the cost of purchasing separate systems for each function. This technology also simplifies operations by eliminating integration fees and upgrade costs. According to a PwC study, optimized supply chains typically have 15% lower overall costs, less than 50% inventory holdings, and a cash cycle that is three times faster. The Omnix platform has been able to deliver 20% operational efficiency gains to its customers, in part also because it manages global inventory in real time by orchestrating it.
With the growth of a company's business, and its competitiveness, and with the goal of recovering revenue and gaining customer loyalty, supply chain leaders must make a vital decision. They must decide whether to invest in systems and processes that can manage across different areas, balance priorities, and optimize the end-to-end supply chain. These points are critical to managing costs holistically and effectively. Capacity optimization and real-time data integration, services provided by platforms such as Omnix, are necessary to achieve this goal.

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